Nonprofit & Tax-Exempt Law
501(c)(3) qualification, Form 990 compliance, UBIT, charitable solicitation, and governance.
Overview
Nonprofit and tax-exempt organization law governs the formation, governance, tax treatment, and regulatory compliance of organizations operating for charitable, educational, religious, scientific, and other exempt purposes. Section 501(c)(3) of the Internal Revenue Code provides federal income tax exemption for organizations organized and operated exclusively for exempt purposes, and donations to these organizations are generally tax-deductible under Section 170.
Obtaining tax-exempt status requires applying to the IRS using Form 1023 (or Form 1023-EZ for smaller organizations) and demonstrating that the organization meets the organizational and operational tests. Exempt organizations must comply with ongoing requirements including annual information returns (Form 990), restrictions on private benefit and inurement, limits on lobbying activity, and an absolute prohibition on campaign intervention. Private foundations face additional rules under Chapter 42 of the IRC, including mandatory distribution requirements, restrictions on self-dealing, and excise taxes on investment income.
Unrelated business income tax (UBIT) applies to income from a trade or business regularly carried on that is not substantially related to the organization's exempt purpose. State-level regulation includes charitable solicitation registration requirements (active in about 40 states), state tax exemptions (which must be applied for separately from federal exemption), and nonprofit corporation law governance requirements.
Key Statutes
| Statute | Citation | Summary |
|---|---|---|
| Internal Revenue Code Section 501(c)(3) | 26 U.S.C. § 501(c)(3) | Provides federal income tax exemption for organizations operated exclusively for charitable, religious, educational, scientific, or other specified exempt purposes. |
| Internal Revenue Code Section 4941–4945 (Private Foundation Rules) | 26 U.S.C. §§ 4941–4945 | Imposes excise taxes on private foundations for self-dealing, failure to distribute income, excess business holdings, jeopardizing investments, and taxable expenditures. |
| Pension Protection Act of 2006 — Nonprofit Provisions | Pub. L. 109-280, §§ 1201–1245 | Enhanced oversight of tax-exempt organizations, including stricter rules on donor-advised funds, supporting organizations, and executive compensation. |
| Volunteer Protection Act of 1997 | 42 U.S.C. §§ 14501–14505 | Provides limited liability protection for volunteers of nonprofit organizations acting within the scope of their responsibilities. |
Key Cases
Bob Jones University v. United States
461 U.S. 574 (1983)
Held that the IRS could deny tax-exempt status to a university with racially discriminatory policies, establishing that exempt organizations must not violate fundamental public policy.
Americans United for Separation of Church and State v. Reagan
786 F.2d 194 (3d Cir. 1986)
Addressed the prohibition on political campaign intervention by 501(c)(3) organizations, clarifying the scope of impermissible political activity.
Regan v. Taxation With Representation of Washington
461 U.S. 540 (1983)
Upheld the constitutionality of the lobbying limitation on 501(c)(3) organizations, holding that Congress may choose not to subsidize lobbying.
Key Regulations
IRS Exempt Organizations Regulations
Internal Revenue Service (26 CFR Parts 1.501–1.509)
Treasury regulations implementing the tax exemption provisions, including organizational test, operational test, and private foundation rules.
Form 990 Reporting Requirements
Internal Revenue Service
Annual information return requirements for tax-exempt organizations, including financial data, governance practices, compensation, and public disclosure requirements.
State Charitable Solicitation Registration Requirements
State Attorneys General / Charity Regulators
State registration and reporting requirements for charitable organizations soliciting donations, including annual financial filings and disclosure obligations.
Common Issues
- 501(c)(3) application and IRS determination process
- Maintaining tax-exempt status and avoiding private inurement
- Lobbying limitations and political campaign intervention prohibition
- Unrelated business income tax (UBIT) liability
- Form 990 preparation and public disclosure compliance
- Board governance, conflicts of interest, and fiduciary duties
- Charitable solicitation registration across multiple states
- Fiscal sponsorship arrangements and donor-advised fund rules
State Variations
Nonprofit law varies significantly by state. Each state has its own nonprofit corporation act governing formation, governance, mergers, and dissolution. About 40 states and the District of Columbia require charitable solicitation registration, each with different thresholds, exemptions, and filing deadlines. State attorneys general have varying levels of enforcement authority over charitable organizations. State tax exemptions (property tax, sales tax, income tax) must be obtained separately from federal exemption and have different qualifying criteria. Some states have enacted specific standards for nonprofit executive compensation. Cy pres doctrines (allowing courts to redirect charitable assets) vary by jurisdiction.
Resources
IRS Exempt Organizations Division
IRS division responsible for determining tax-exempt status, auditing exempt organizations, and providing guidance on compliance.
National Council of Nonprofits
National network of state nonprofit associations providing advocacy, research, and operational resources for charitable organizations.