Tax-Exempt Organizations

We often advise clients and community leaders who consult with us for advice regarding the creation of a new non-profit organization to address a specific charitable, religious or educational purpose. The legal entity created may be a non-profit, non-stock corporations or a charitable trust, and the tax provisions in the Code and Regulations governing the structure and operation of these entities require significant evaluation before the commitment is made. We truly appreciate the opportunity to provide legal and tax counsel to clients who wish to create a new non-profit organization or private foundation, as well as to those who operate established non-profit organizations.

FORMATION OF TAX-EXEMPT ENTITIES

The formation of a public non-profit organization (NPO) is a challenging process that calls for specialized knowledge and experience in the applicable tax laws and procedural requirements of the IRS. The initial step is to clarify the charitable purpose of the entity and the source of funding, which in turn leads to the proper category of the organization. The appropriate entity (a non-profit corporation or trust) is then created by the organizers, and the laborious process of completing the application for recognition as a tax-exempt organization begins. Receipt of the IRS determination letter (recognition of tax-exempt status) does not end the role of counsel, since tax-related legal issues are encountered regularly in the operation of an NPO, and a specialized income tax return must be filed annually.

PRIVATE FOUNDATIONS

Some high net worth clients make the commitment to establish their own private charitable foundation, rather than make substantial contributions to a public charity without the certainty that those funds will be used as they intend. This structure allows clients to specify the charitable, religious or educational organizations and causes to be supported by their private foundation, as well as to appoint the directors who will honor their intentions well into the future. Due to the complexity of the Internal Revenue Code and Treasury Regulations governing the creation and operation of private foundations, a thorough exploration of the purpose, procedures and cost of administration of this level of tax-exempt organization must be completed so that clients may make an informed decision.

COMPLIANCE FOR TAX-EXEMPT ENTITIES

The IRS Form 1023, Application for Recognition of Tax-Exempt Status, is the key to official determination that a new entity is a tax-exempt organization under IRC Section 501(c)(3), as it affects all aspects of the organization, including the solicitation of charitable contributions from the public, as well as the manner in which it conducts activities, pays employees, and invests the contributed funds. The Form 1023 also serves as an effective informational guide during the process of planning for and creating a new NPO.

Non-profit organizations must file an annual informational income tax return (Form 990), which enables the Service to examine the reported transactions for evidence of unlawful private benefit to the officers or of income arising from unrelated business activities (on which charities must pay tax).

Private foundations must file an IRS Form 990-PF each year to verify that the required amount of charitable distributions were made, in addition to reporting the income earned and the absence of self-dealing between the charity and its officers and directors. Given the potential for severely negative consequences, including revocation of tax-exempt status, it is recommended that these tax returns be reviewed, if not prepared, by experienced tax professionals engaged by the charity.