Blog and Legal News

A Nonprofit Organization is Not Necessarily a “Charitable” Organization

Very often when speaking of corporations established for laudable purposes people incorrectly equate the word “nonprofit” with “charitable.” While this may be a distinction without a difference in casual discussions, when it comes to a federal tax return, the two are not synonymous. This misconception during the initial stages of planning and establishment of a nonprofit corporation can result in a costly mistake by organizers hoping to fund their activities with donations.

Specifically, although all charitable organizations are also nonprofit corporations, the converse is not always true. The difference is due to the fact that the term “nonprofit” derives from state law, whereas “charitable” is a term that has acquired a specific and technical meaning under the federal tax law.

State vs. Federal Law

Under Michigan State law, a “nonprofit corporation” is a “corporation no part of the income or profit of which is distributed to its members, directors or officers.” Nonprofit corporations may be organized for any lawful purpose or purposes and are not restricted to activities that are charitable.

However, the deduction in the federal tax code is solely for contributions or gifts which are “charitable.” Thus, while a nonprofit corporation is usually created for one or more worthy causes, a determination as to whether it will be organized and operated for charitable reasons is crucial if the funding plan relies on deductible public donations.

The Test

In order to be a deductible “charitable contribution,” the donation must be a contribution to a corporation “organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition…or for the prevention of cruelty to animals.” We’ll refer to these as “charitable purposes.” Section 501(c)(3) of the Internal Revenue Code recognizes these types of organizations (“501(c)(3)s”) as exempt from federal income tax. The three 501(c)(3)s that are most commonly known are educational, religious, and charitable organizations.

To satisfy the test above, the articles of organization must limit the organization’s purpose to one or more of the charitable purposes and not expressly empower the organization to engage in activities which do not further those purposes. The existence, therefore, of a substantial non-charitable purpose is fatal to qualification as a 501(c)(3). In addition, and common to nonprofit corporations, no part of the net earnings may “inure[] to the benefit of any private shareholder or individual,” nor can the corporation engage in lobbying or political campaigning.  

The assets of the corporation must also be dedicated to the charitable purpose detailed in the articles of organization. For example, an organization does not meet the test if its articles or the law of the State in which it was created provide that the assets would, upon dissolution of the nonprofit, be distributed to its members or shareholders.

What is “charitable?”

Where this all may get confusing is in the regulations interpreting what is “charitable,” which describe the term to include:

  1. Relief of the poor and distressed or of the underprivileged;
  2. Advancement of religion;
  3. Advancement of education or science;
  4. Erection or maintenance of public buildings, monuments or works;
  5. Lessening of the burdens of government; and
  6. Promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.   

While the first four expressed purposes are readily understood, whether an organization’s objectives and goals are deemed to lessen the burdens of government, or to promote social welfare in a way that is charitable is less clear.

For example, before an organization can be classified as having the charitable purpose of lessening the burdens of government, it must be able to demonstrate that the State and/or a local government accepts the activities to be conducted as its, or their, own responsibility, and the government recognizes the organization as acting on its behalf. The fact that an organization is engaged in an activity that is sometimes undertaken by the government is insufficient to establish a burden of government.

Likewise, while an association or civic league that is operated for the promotion of social welfare may qualify for tax exemption under another section of the tax code, such an organization must also be considered as designed to accomplish charitable purposes in order to qualify as a 501(c)(3) organization, donations to which are tax deductible. Not all wholesome activities for the social improvement and welfare of the community are charitable; for example, providing free services to the public is not necessarily charitable unless, for example, it also is providing relief to the poor and distressed, or is advancing education or combating community deterioration and juvenile delinquency.   

Adding to the conundrum is that the Internal Revenue Service agrees the meaning of “charitable” is not to be construed as limited by these expressed purposes; rather, it recognizes there are other tax-exempt purposes that are charitable, many of which have been sanctioned by judicial decisions over the years.

The Complexities of Being Charitable  

All this is to make the point that what is “charitable” is not always intuitive. Accordingly, if you are creating a nonprofit company and hope to fund it with tax-deductible donations from the public, it is important to realize that your non-profit organization must also qualify as a Section 501(c)(3) charitable organization in order for contributions to be tax-deductible. Therefore, during the initial stages of planning and establishment of a nonprofit corporation, attention to whether the purposes for which you are organizing meet the criteria for what is “charitable” under federal tax law, as well as being not-for-profit, is essential if the goal is for the organization to be funded in whole, or in part, through public contributions.

Finally, please note that the focus of this blog is to outline what it means to be organized for a charitable purpose or purposes under the federal income tax law. It is also imperative that your organization is operated for a charitable purpose or purposes in order to qualify as a Section 501(c)(3) organization. Further, your organization will not be regarded as satisfying these tests unless it serves a public, rather than a private, interest.

Is there a storm brewing over your property purchase?

When you purchase a piece of property, you want to make sure that no one can come knocking on your door saying they have a right to it. As part of the purchase process, your mortgage lender may have required you to obtain a title search before agreeing to give you any money. 

You may have wondered what this was but shrugged it off as just part of the deal. Then, you find out that someone else may actually have a legal claim to the property you want to buy. What do you do now?

Dark clouds have gathered over the property

These claims, which can include old mortgages, heirs of a prior owner who never received notice of the death or old tax liens, could place “clouds” on the title. These clouds can prevent you from truly owning the property, and you would more than likely not be able to receive title insurance as a result.

Quieting the storm

This is where a quiet title action comes into play. In such a court proceeding, you ask the court to “quiet” all other claims to the property. Essentially, the court rules that, from the entry date of the order, any prior claims of ownership to the property no longer exist.

Going through this process can be especially important after a tax or foreclosure sale. Previous owners, lenders and taxing authorities may be able to come back at a later time and stake a claim to the property otherwise. A successful quiet title action ensures that you have complete legal ownership of the property.

Facilitating the winds of change

Nearly every quiet title action involves the following steps:

  • The filing of a petition with the court
  • Notification of all defendants
  • Wait for the defendants’ response time to run

If no one responds to the action, the court clears your title by default. You may wonder how much it will cost you to have this done. It will vary, depending on the circumstances and your location. However, the upfront costs of settling these matters are often much less than dealing with a problem that could arise in the future.

Once you receive an order from the court, you may need to take additional steps in order to clean up the real estate records to reflect the court’s order.

Clear skies

Once you take these steps, you can proceed with your purchase, knowing that you will come out of it with full, unchallenged ownership of the property. That is, if you handled everything properly. In order to help ensure that nothing goes wrong, you may want to bring in someone experienced in real estate matters and quiet title actions.

Divorce as an older adult and Social Security benefits

There are many critical issues that older people have to address before, during and after their divorce. Life changes in many ways when a marriage is brought to an end and these changes are often especially difficult later in life. Aside from issues involving children and the division of marital property, older adults have many other unique considerations, such as Social Security benefits. In fact, many people are able to receive benefits on their former spouse’s record, so long as certain conditions are met.

For starters, people become eligible to receive Social Security benefits when they reach the age of 62. Some people assume that filing for a divorce will disqualify them from receiving any Social Security benefits from their former spouse’s record. However, if a marriage lasted for at least 10 years, people are often able to obtain these critical benefits and move forward in their lives. Moreover, many people are able to gain access to Social Security survivor benefits after their former spouse passes away.

Social Security benefits are a lifeline for many older adults. Some are no longer able to work and they need this income to help with medical costs, bills and many other expenses that arise. This is just one issue that older adults must look into when bringing their marriage to an end. Unfortunately, some people do not realize that they are eligible to receive these benefits, which highlights the importance of careful research and planning with respect to the divorce process. Explore our website to read about other issues that affect older adults during a divorce.

Guardianship Abuse and Neglect

With baby boomers hitting the retirement age in droves, this is something that is extremely important for friends and family members. State appointed guardians are paid to protect the elderly person/s that they represent. Too often however, we have people running into a situation where these people are stealing from and/or neglecting the very people that they are supposed to be taking care of. In this article, you will see examples of elderly people being taken for all they’re worth, being torn from their family and friendship circles. or just flat out neglected. If you or someone you know has an elderly parent, friend, or loved one, you should do whatever you can to ensure that their guardian is a close family member or friend. Avoiding the state appointed options at all cost is in the best interest of everyone involved.

Unmarried Individuals Sharing Assets and Cohabiting

This was a great article addressing the rise in unmarried couples, over the age of 50, who are cohabiting. As the number rises, we need to be stress the importance of still being prepared for your retirement through setting goals and planning whether your personal life has taken a turn or not. When unmarried people are living together and sharing assets, there can be a rise in family tension upon the death or illness to one of the two individuals. Avoiding the loss of assets and having specific beneficiaries selected for specific roles and entitlements is a good practice to ensure that your family and hard earned assets stay within your estate.