Nonprofit Law for Colleges and Universities: Essential Questions and Answers for Officers, Directors, and Advisors

628 Pages·2011·3.64 MB·English

by  Bruce R. Hopkins

Nonprofi t Law
for Colleges and
Universities
Nonprofi t Law
for Colleges and
Universities
Essential Questions and
Answers for Offi cers,
Directors, and Advisors
BRUCE R. HOPKINS
VIRGINIA C. GROSS
THOMAS J. SCHENKELBERG
John Wiley & Sons, Inc.
Copyright © 2011 by Bruce R. Hopkins, Virginia C. Gross, and Thomas J. Schenkelberg.
All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data
Hopkins, Bruce R.
Nonprofi t law for colleges and universities : essential questions and answers
for offi cers, directors, and advisors / Bruce R. Hopkins, Virginia C. Gross, Thomas J.
Schenkelberg.
p. cm.—(Wiley nonprofi t authority series ; 10)
Includes bibliographical references and index.
ISBN 978-0-470-91343-7 (pbk.); ISBN 978-1-118-08855-5 (ebk);
ISBN 978-1-118-08856-2; ISBN 978-1-118-08857-9 (ebk)
1. Universities and colleges—Finance—Law and legislation—United States—
Miscellanea. I. Gross, Virginia C. II. Schenkelberg, Thomas J. III. Title.
KF4234.H67 2011
346.73'064—dc22
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
To the trustees and offi cers
of, and advisors to, the nation’s nonprofi t colleges and
universities, who must function in an increasingly
complex, challenging, and sometimes
mysterious law environment.
Contents
Preface xliii
About the Authors xlvii
CHAPTER 1 Nonprofi t Organizations Law Generally 1
Nonprofi t Law Basics 1
1.1 What is a nonprofi t organization? 1
1.2 Sometimes the term not-for-profi t organization is used instead of nonprofi t
organization. Are the terms synonymous? 2
1.3 What are the types of nonprofi t organizations? 3
1.4 What is the appropriate form of nonprofi t organization? 3
1.5 How is a nonprofi t organization started? 3
1.6 How does a nonprofi t organization incorporate? 4
1.7 What is a registered agent? 4
1.8 What does the registered agent do? 5
1.9 Does the registered agent have any liability for the corporation’s affairs? 5
1.10 Who are the incorporators? 5
1.11 How does a nonprofi t organization decide in which state to incorporate? 5
1.13 How does a nonprofi t organization qualify to do business in another state? 6
1.12 What constitutes doing business in a state? 6
1.14 How is a nonprofi t trust started? 6
1.15 How is a nonprofi t unincorporated association started? 7
1.16 Who owns a nonprofi t organization? 7
1.17 Who controls a nonprofi t organization? 7
1.18 How many directors must a nonprofi t organization have? 8
1.19 Can the same individuals serve as the directors, offi cers, and incorporators? 8
1.20 Can the same individual serve as a director, offi cer, incorporator,
and registered agent? 9
1.21 What is the legal standard by which a nonprofi t organization
should be operated? 9
1.22 What is the legal standard for an organization that is tax-exempt
and charitable? 9
1.23 What is the rationale for this standard for charities? 10
1.24 What does the term fi duciary mean? 10
1.25 What is the legal standard underlying fi duciary responsibility? 10
vii
viii | Contents
1.26 What is the meaning of the term reasonable? 10
1.27 Who are the fi duciaries of a charitable organization? 11
1.28 What does the term ex offi cio mean? 11
1.29 What does the term ultra vires act mean? 11
1.30 What are the rules regarding the development of chapters? 12
1.31 Do chapters have to be incorporated? 12
1.32 Is the concept of chapters relevant in the higher education context? 13
Federal Tax Law Basics 13
1.33 What is the organizational test? 13
1.34 What is the operational test? 13
1.35 What does the term primarily mean? 14
1.36 What is the commensurate test? 14
1.37 What is the commerciality doctrine? 15
1.38 What are the categories of charitable organizations? 16
1.39 What are the other categories of tax-exempt organizations? 17
1.40 What is a governmental unit? 18
1.41 Can a nonprofi t organization be affi liated with a governmental unit? 18
1.42 How is this type of affi liation established? 18
1.43 What are the federal tax law consequences for a nonprofi t organization
that is affi liated with a governmental unit? 19
1.44 When can a college or university that is operated by a government
qualify under the conventional rules for tax exemption? 19
1.45 Can a state college or university be considered a political subdivision for
federal tax law purposes? 20
1.46 How is the IRS structured in connection with its oversight of tax-exempt
organizations? 21
1.47 Does the IRS communicate what its efforts and priorities are in connection
with its administration of the law of tax-exempt organizations? 21
1.48 What is the role of a lawyer who represents one or more
nonprofi t organizations? 22
1.49 What is the role of a lawyer who represents a nonprofi t college or university? 22
CHAPTER 2 Nonprofit Educational Organizations 25
Education Law Basics 26
2.1 What is the defi nition in law of the term education? 26
2.2 What is the defi nition in law of the term educational? 26
2.3 What, then, is the opposite of the concept of educational? 27
2.4 Please provide some illustrations of these distinctions. 28
2.5 Please expand on the constitutional law principles in this context. 28
2.6 What is the state of this aspect of the law today? 29
2.7 What is the methodology test? 30
2.8 How are the courts applying the methodology test today? 31
2.9 Has the IRS applied the methodology test in recent years? 31
2.10 What is the defi nition in law of an educational organization? 31
School Law Basics 32
2.11 What is the defi nition in law of a college? 32
2.12 What is the defi nition in law of a university? 32
2.13 What is the defi nition in law of a school? 32
2.14 What are the federal tax law requirements for qualifi cation as a school? 33
Contents | ix
2.15 What is a private school? 33
2.16 What is a public school? 34
2.17 What is a primary school? 35
2.18 What is an elementary school? 35
2.19 What is a secondary school? 35
2.20 What is a postsecondary school? 35
2.21 What is the defi nition in law of an institution of higher education? 36
2.22 What is a school district? 36
2.23 What is a school system? 36
2.24 What is a school year? 36
2.25 What is the defi nition of the term faculty? 36
2.26 What is the defi nition of the term curriculum? 36
2.27 What is a student? 37
2.28 What is an undergraduate student? 37
2.29 What is a graduate student? 37
2.30 What is a fellow? 38
2.31 What is the defi nition of the term bachelor’s degree? 38
2.32 What is the defi nition of the term master’s degree? 38
2.33 What is the defi nition of the term doctor’s degree? 38
Demographics 39
2.34 What is a small institution of higher education? 39
2.35 What is a medium-size institution of higher education? 39
2.36 What is a large institution of higher education? 39
2.37 How many students are in attendance at colleges and universities
on a full-time basis? 39
2.38 How many students are in attendance at colleges and universities
on a part-time basis? 40
2.39 How many full-time faculty are there? 40
2.40 How many part-time faculty are there? 40
2.41 Overall, how many are employed at colleges and universities? 40
2.42 What is the average student–faculty ratio at colleges and universities? 40
2.43 What are the undergraduate annual full-time tuition rates? 40
2.44 What are the undergraduate annual full-time tuition rates at the private
institutions? 41
2.45 What are the undergraduate annual full-time tuition rates at the public
institutions? 41
2.46 What are the net average tuition discount rates? 41
2.47 What is the average value of gross assets of colleges and universities? 42
2.48 What is the average amount of annual gross revenue received
by colleges and universities? 42
2.49 What is the average amount of annual expenses incurred by colleges
and universities? 42
2.50 What is the average amount of annual net revenue received by colleges
and universities? 42
2.51 What percent of colleges and universities conduct distance learning activities? 42
2.52 What percent of colleges and universities conduct educational
programs outside the United States? 43
2.53 What percent of colleges and universities maintain campuses, offi ces, and/or
employees in at least fi ve countries other than the United States? 43
x | Contents
2.54 Colleges and universities have related organizations. How is the word
related defi ned in the law? 43
2.55 What percentage of colleges and universities have at least one type of
related organization? 43
2.56 What percent of these types of related organizations were tax-exempt
organizations? 44
2.57 What percent of these types of related organizations were entities taxable
as a corporation or trust? 44
2.58 What percent of these types of related organizations were treated,
for federal tax purposes, as a partnership? 44
2.59 What percent of these types of related organizations were treated,
for federal tax purposes, as a disregarded entity? 44
2.60 What percent of colleges and universities are controlling organizations? 45
2.61 How frequently are management fees paid to colleges and universities from
controlled entities? 45
2.62 How many colleges and universities are utilizing the special exception
available to tax-exempt organizations in this setting? 45
Nonprofi t Law Basics 46
2.63 What aspects of the federal tax law must a private college or university
satisfy to be tax-exempt? 46
2.64 What aspects of the federal tax law must a public college or university
satisfy to be tax-exempt? 46
2.65 What are the federal tax consequences where a public college or
university has a determination from the IRS that it also qualifi es as an
organization described in Internal Revenue Code section 501(c)(3)? 47
2.66 What is the tax status of entities that are affi liated with public
colleges and universities? 47
2.67 Can a college or university, public or private, be the benefi ciary
of a supporting organization? 48
2.68 Can a college or university, public or private, have a separate fundraising
foundation? 48
2.69 Can a college or university, public or private, have one or more separate
endowment funds? 49
2.70 Can colleges and universities, public or private, utilize other types of
related funds? 49
2.71 Can a college or university be the benefi ciary of a charitable remainder trust? 49
2.72 Can a college or university be the benefi ciary of a pooled income fund? 50
2.73 Can a college or university be the benefi ciary of a charitable lead trust? 50
2.74 Can a college or university participate in a charitable
gift annuity arrangement? 50
CHAPTER 3 Acquiring and Maintaining Tax-Exempt Status 53
Nonprofi t and Tax-Exempt Entities 54
3.1 Are all nonprofi t organizations tax-exempt organizations? 54
3.2 Are all tax-exempt organizations nonprofi t organizations? 54
3.3 Concerning tax exemption, what taxes are involved? 55
3.4 How many categories of tax-exempt organizations are provided
for in the federal income tax law? 55
3.5 What are the federal tax law rules concerning qualifi cation as a tax-exempt
educational organization? 56
Contents | xi
3.6 What are the federal tax law rules concerning qualifi cation as a tax-exempt
charitable organization because the entity advances education? 56
3.7 In connection with the provision of housing as advancement of education,
are college and university fraternities and sororities charitable entities? 57
3.8 In connection with the granting of scholarships and fellowships as
advancement of education, can fraternities and sororities make these grants? 57
3.9 What is the public policy doctrine and its impact on colleges and universities? 57
Exemption Application Basics 58
3.10 How does a nonprofi t organization become a tax-exempt organization? 58
3.11 Is a nonprofi t organization required to apply to the IRS
for tax-exempt status? 58
3.12 What does recognition of tax exemption mean? 59
3.13 Are certain types of organizations that wish to be tax-exempt required
by law to seek recognition of exempt status from the IRS? 59
3.14 What are the advantages of obtaining recognition of exempt status
from the IRS? 60
3.15 Are there any exemptions from the recognition requirement? 60
3.16 What is the procedure for seeking recognition of tax-exempt status? 60
3.17 What is the content of these applications? 61
3.18 Where are these applications fi led? 61
3.19 What is the formal defi nition of the term determination letter? 61
3.20 What is the formal defi nition of the term ruling? 62
3.21 How long does the IRS take to process an application for recognition
of exemption? 62
3.22 Is there a process by which an applicant organization can request
the IRS to expedite the processing of its application? 62
3.23 Are copies of applications for recognition of exemption publicly available? 63
3.24 Does the IRS share this information with state offi cials? 63
3.25 How long does an exemption determination letter or ruling remain in effect? 63
3.26 Once a determination letter or ruling is obtained, should the organization
review its application periodically to determine whether one or more
changes in the facts have occurred? 63
3.27 What happens if there is a substantial change in an organization’s character,
purposes, or methods of operation? 64
3.28 Will the IRS issue a determination letter or ruling to an organization in
advance of its operations? 64
General Procedures 65
3.29 How much information must be provided to the IRS in these applications? 65
3.30 What happens if the IRS decides an application for recognition of
exemption is incomplete? 65
3.31 Should these applications be treated as business plans? 66
3.32 What is a substantially completed application? 66
3.33 Is the application for recognition of exemption an important
document for a tax-exempt organization? 67
3.34 How long does it take to prepare an application for recognition
of tax exemption? 67
3.35 Is there a charge for the processing of an application for recognition of
exemption? 68
3.36 Can an application for recognition of exemption be referred to the National
Offi ce of the IRS? 68
xii | Contents
3.37 Can an applicant organization seek the assistance of the National Offi ce? 68
3.38 Can an application for recognition of exemption be withdrawn? 69
3.39 What happens when the IRS concludes an applicant organization
does not qualify for tax exemption? 69
3.40 What is the appeal procedure? 69
3.41 What is the protest procedure? 70
3.42 What is the role of the IRS Appeals Offi ce in this regard? 70
3.43 If an organization is denied recognition of exemption, may it reapply? 70
3.44 What is the effective date of a determination letter or ruling? 71
3.45 To what extent can an organization rely on its determination letter or ruling? 71
3.46 How does an organization remain tax-exempt? 71
3.47 When might an organization’s tax exemption be revoked? 72
3.48 Can tax-exempt status be retroactively revoked? 72
3.49 When should a tax-exempt organization consider the establishment
of a related foundation? 73
3.50 Does a lack of fi ling of annual information returns have any impact on an
organization’s tax-exempt status? 74
Application Form 1023 74
3.51 What is required in Part I of Form 1023? 74
3.52 What is required in Part II of Form 1023? 75
3.53 What is required in Part III of Form 1023? 75
3.54 What is required in Part IV of Form 1023? 76
3.55 What is required in Part V of Form 1023? 76
3.56 What is required in Part VI of Form 1023? 78
3.57 What is required in Part VII of Form 1023? 78
3.58 What is required in Part VIII of Form 1023? 79
3.59 What is required in Part IX of Form 1023? 79
3.60 What is required in Part X of Form 1023? 80
3.61 What is required in Part XI of Form 1023? 80
3.62 What happens when the requested ruling as to tax-exempt
status is not granted? 80
Form 1023, Schedule B 81
3.63 What organizations are required to fi le Schedule B of Form 1023? 81
3.64 Do government-operated schools fi le Schedule B? 81
3.65 What other questions about a school’s general operations are
asked on Schedule B? 81
3.66 What are the questions concerning a school and racial discrimination? 82
3.67 What are the questions concerning the establishment of a racially
nondiscriminatory policy? 83
Group Exemption 84
3.68 What is the group exemption procedure? 84
3.69 How is a group exemption initially established? 84
3.70 How is the group exemption maintained? 85
3.71 How are the annual information return reporting requirements satisfi ed? 86
3.72 Do the central organization and the subordinate organizations have
to have the same tax-exempt status? 86
3.73 Are the subordinate organizations in a group required to have
the same tax-exempt status? 86
3.74 Can the same organization be involved in more than one group? 86