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tax_exempt_organizations - 1 TAX 6845 Tax Planning...

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1 TAX 6845 – Tax Planning & Consulting (December 1) Topic: Tax-exempt organizations updated: November 23, 2010 I. Exempt organizations – overview: A. Governmental agencies are generally exempt from taxation under the U.S. Constitution. B. Other organizations are tax exempt because they perform services that would have to be performed by the government if the organizations did not perform them. These organizations include educational organizations, churches, social clubs, chambers of commerce, and others. From the House Report on the Revenue Act of 1938: “The exemption from taxation of money or property devoted to charitable and other purposes is based on the theory the Government is compensated for the loss of revenue by its relief from the financial burden which would otherwise have to be met by appropriations from public fund, and by the benefits resulting from the promotion of the general welfare.” C. Conditions necessary for exempt status include: 1. For the common good – means that the organization must benefit the general public or a broad subgroup of individuals and not a narrowly defined group such as members of a single family. 2. Not-for-profit – means that if revenue exceeds expenses the difference is plowed back into the organization rather than being distributed in the form of dividends. 3. Net earnings do not inure to the benefit of any private individual – net earnings should be used for the organization’s exempt purpose. Should the organization liquidate, assets must normally be passed on to other exempt organizations. Excess salary payments to executives can be a problem for exempt organizations & is an issue frequently in the news. 4. Not political – Political activity is prohibited for churches and private foundations. Other exempt organizations, at their election, are permitted to engage in limited amounts of lobbying and grass roots political activity, but are subject to a tax under Sec. 4911. Note: Campaigning for specific candidates is precluded even for electing organizations. Lobbying includes both expenditures to influence legislation and expenditures to influence public opinion. Grass roots political activity is permitted, but the distinction between electioneering and grass roots activity is often difficult to make.
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2 5. Not contrary to public policy – Although not clearly defined, discrimination by a private university (Bob Jones University v. U.S., 52 AFTR2d 83-5001, 83-1 USTC ¶ 9366 (USSC, 1983)) caused it to lose its tax exempt status. D. Organizations exempt from Federal income taxation are not automatically exempt from social security taxes, state taxes, sales tax, or local taxes. In addition, the exempt status may be limited; the organization may engage in some activities that are subject to tax (e.g., tax on unrelated business income, tax on excess lobbying expenditures, or excise taxes on private foundations engaged in certain prohibited transactions).
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