Legal Aspects of 501(c)3 Organizations: Maintaining Tax Exempt Status Marlea Maschmeyer
University of Texas Arlington
This paper discusses some of the main legal restrictions that nonprofit organizations face when maintaining their 501(c)3 tax-exempt status. The full extent of boundaries is vast in scope, but topics explored within this paper include restrictions on endorsing candidates for public office, limitations on lobbying, restrictions on business activities, and excess benefit transactions. Knowing, understanding, and following these legal restrictions is imperative for nonprofit organizations in order to maintain their tax-exempt status.
Nonprofit organizations have a deep history in serving the public in ways that the government and for-profits organizations traditionally have not helped society. Because of this inherent good nature and desire to fill gaps in societal needs, the Internal Revenue Service, the government agency responsible for tax collection and tax law enforcement, has granted nonprofits the opportunity to acquire tax-exempt status. This beneficial status is not awarded lightly or undeservedly. Organizations must meet certain requirements before being considered eligible to apply for tax-exempt status, and even after acquiring tax-exempt status, nonprofits must adhere to certain guidelines in order to maintain their status. Discussion
Nonprofit organizations must annually submit certain forms to maintain tax-exemption. Each year, almost all nonprofits must file annual returns with the IRS, known as series 990 forms. There are different form versions for different organizations. The returns must state the items of income, receipts, and expenditures. If a nonprofit fails to file a return, it may face financial penalties or have its tax-exempt status revoked (Annual Filings for Tax-Exempt Charitable Organizations, 2012). Over the past three years alone, 275,000 nonprofits in the United States had their tax-exempt status revoked for failing to file an annual return (Blackwood, 2011). Many other restrictions for maintaining tax-exempt status are similar to the requirements that organizations must meet in order to qualify for 501(c)(3) status in the first place, such as not being able to endorse candidates for public office, limitations on lobbying, restrictions on business activities, not providing excess benefits to employees, and other restrictions. Obtaining necessary permits and licenses is also important, but these violations usually result in less severe forms of punishment. Nonprofit management must educate all staff and volunteers about these rules so that the nonprofit organization’s tax-exemption will be secure. Endorsing candidates for public office is strictly prohibited for nonprofit organizations. The Board of Directors and staff may never campaign in the nonprofit’s name for a political candidate. This IRS code has especially become relevant due to the current political atmosphere and presidential election. The IRS is currently investigating whether or not a Texas church violated this code by displaying a sign that read, “Vote for the Mormon, not the Muslim!” Although the sign did not specifically show the names of the presidential candidates, the sign did imply their identities. Since churches are nonprofit organizations, by law, churches cannot endorse political candidates (Siddiqui, 2012). If the IRS finds that the church violated the restriction on endorsing candidates, it could lose the tax-exempt status that it heavily relies upon. Branch Ministries, Inc. v. Charles O. Rossotti is a historic court case involving this particular IRS code. The Branch Ministries Church urged Christians not to vote for Bill Clinton because of his position on certain moral issues. As a result, the IRS revoked the church’s tax-exemption and required it to pay back taxes. The church appealed the IRS ruling, claiming that the First Amendment protected free speech, which...
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