Thursday, May 3, 2012

The Wide Weird World of Tax-Exempt Status

What do the National Football League, Karl Rove's Crossroads GPS, and your local church have in common? They are all classified by the IRS as tax-exempt organizations under federal tax codes.

This means that the NFL, like all organizations in the 501(c) category, is exempt from federal income tax (and under state status from property taxes). The league, a designated 501(c)(6), describes itself as a "trade association promoting the interests of its 32 member clubs." I'm sure you'll be thrilled to know that the NFL commissioner's 2009 salary was $11,544,000 - which gives new meaning to the word "nonprofit." Rest assured, however, that the NFL teams themselves aren't tax-exempt.

Your classic 501(c)(3) is defined by the IRS as "religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international sports competition, or prevention of cruelty to children or animals organizations." In order to qualify for this category, your agency must be formed and operated specifically for these stated purposes, none of your earnings can go to enrich your grandmother, you are prohibited from campaign activity to support or oppose political candidates, and influencing legislation cannot be a "substantial" part of your activities.

Some of your favorite (and not so favorite) government agencies have established nonprofit conglomerates in order to raise money they no longer receive through the federal budget. The CDC, NASA, and FDA all have them - and FEMA has an application in process. The CIA's foundation, In-Q-Tel, had 2010 revenues totaling $56.4 million. This raises an interesting question about the ethics of forming foundations that compete with nonprofits that have historically partnered with government in delivering services - and the ramifications of shifting funding for these services away from government.

This tax-exempt category has one big plus: donations to 501(c)3) organizations are tax-deductible. That's why the American Legislative Exchange Council (ALEC) insists it deserves its 501(c)(3) status - despite the fact that the New York Times has called it "a conservative nonprofit that acts as a stealth lobbyist."

Note that 501(c)(4) status - which includes affiliate organizations funneling money directly to super PACS - doesn't get your donors a tax deduction. It does allow lobbying that is germane to the organization's purpose (while prohibiting direct or indirect involvement in political campaigns) - but this cannot be the organization's primary activity. The big plus here is that campaign donors can remain anonymous; public disclosure of donors to 501(c) organizations is not required.  By the way, the Tea Party of Dayton Ohio recently applied for 501(c)(4) status but withdrew its application in a huff, claiming political harassment, after the IRS started asking probing questions about what it really does.

For your entertainment purposes, check out these 27 other 501(c) categories: labor and horticultural organizations, business leagues (here's where you find the NFL), social and recreation clubs, civic leagues (the category for Crossroads GPS as well as Obama's Priorities USA), fraternal beneficiary societies, benevolent life insurance associations, teachers' retirement fund associations, state-chartered credit unions, mutual insurance companies, employee funded pension trusts, military organizations, black lung benefit trusts, and  state-sponsored organizations prodding health cover for high-risk individuals and workers' compensation. 

And here are my two personal favorites: trusts with multiple parents and cemetery companies. Don't you just love the IRS?