Recent Developments Affecting 501(c)(3) Organizations

501(c)(3) organizations are facing more scrutiny from the government when they do business with private individuals and companies. A recent court case ruled that if a tax-exempt organization works with a professional fundraiser, they could lose their tax-exempt status. Another ruling says that tax-exempt hospitals can’t give their facilities to for-profit partners without consequences. Congress also passed a law that penalizes people who benefit from breaking the rules. These changes make it harder for tax-exempt organizations to do business with private parties. Section 501(c)(3) of the Tax Code says that for a charity to be tax-exempt, it can’t give its money or assets to any private person or shareholder. This is called the private inurement rule. It applies when an organization’s money or assets go to someone because of their relationship with the organization, not to help the charity. This rule applies to people like the founders or people who control the organization, as well as anyone who can influence the organization to do something that benefits them. In a court case, a fundraising company was considered an insider and the charity lost its tax-exempt status because the company got a lot of money from the charity. The IRS took away UCC’s tax-exempt status because they said the organization was giving money to a private person, W&H. UCC argued that W&H wasn’t an insider and didn’t have control over UCC, so the rule shouldn’t apply. But the Tax Court said W&H did have a lot of control and received too much money from UCC. This means that now, even if a nonprofit organization works with an outside company, they have to make sure the company doesn’t get too much benefit or they could lose their tax-exempt status. The ruling looked at two situations where a non-profit organization and a for-profit corporation formed a joint venture to run a hospital. In the first situation, the non-profit organization kept its tax-exempt status, but in the second situation it lost its tax-exempt status. The key differences were in how much control the non-profit organization had over the joint venture and whether the charitable purpose of the hospital was the top priority in the venture’s documents. In the first situation, the non-profit had more control and the charitable purpose was top priority, but in the second situation, the non-profit had less control and the charitable purpose was not as important. If a non-profit organization wants to partner with a for-profit company to run a hospital, they need to make sure they have control over the hospital, have a clear plan to do good, and are in charge of managing the hospital every day. If they don’t do these things, they could lose their non-profit status. This rule applies to all types of healthcare partnerships, so non-profit organizations should pay attention to these rules to stay in good standing. In 1996, a law called the Taxpayer Bill of Rights 2 was passed, which allows the government to impose taxes on individuals and organizations that benefit too much from a non-profit organization. This is called an “excess benefit transaction,” which happens when someone gets more from a non-profit than they give back. The law is meant to stop people from taking advantage of non-profit organizations for their own gain. When someone in a position of power at a nonprofit or charity gets an unfair benefit, they have to pay a tax. The first tax is 25% of the extra benefit, and if they don’t fix it in time, they have to pay an extra 200%. People who approve the unfair transaction also have to pay a 10% tax, but it can’t be more than $10,000 in total. There are rules to follow to make sure the benefit is fair, like getting approval from unbiased people and having evidence to support the decision. If a nonprofit organization is entering into a deal with someone, they need to make sure they keep control and make decisions based on accurate information. If they follow certain guidelines, the managers of the organization can avoid being personally responsible for any mistakes. But they should still be careful and make sure they follow the rules. The government is keeping a closer eye on nonprofit organizations and the people who influence them. They want to make sure that the organizations aren’t doing things that benefit certain individuals too much. If they find that this is happening, they can penalize the people who are benefiting. This means that nonprofit organizations need to be careful about the transactions they enter into. It’s not always clear what is allowed, but there are certain rules they should follow to make sure they’re still able to do their charitable work. The IRS has rules about how much money people involved in non-profit organizations can make. If someone is in charge of the organization, they might be considered a “disqualified person” and could have to pay extra taxes if they get paid too much. The organization can use a “presumption of reasonableness” to show that the pay is fair. This means they can assume the pay is okay unless someone can prove it’s not. To teach its members to do their job well, be fair to the public, and make the legal system better.

Source: https://www.floridabar.org/the-florida-bar-journal/recent-developments-affecting-501c3-organizations/