When Organizations Stretch the Meaning of “Nonprofit”

A nonprofit is meant to carry out a charitable, educational, religious, literary, or scientific purpose  — and not to personally benefit its directors, contributors, or other participants — in return for which, the IRS and state tax authorities don’t require it to pay taxes on profits it makes from its activities.

But the issue of what activities are “charitable,” and what constitutes personal gain, make for unending investigations and opinions from the IRS. These can be looked at as either an object lesson in how not to go wrong — or as comfort for nonprofits trying to operate in an above-board fashion, given that some groups are obviously trying to get away with a tax exemption they don’t deserve!

beerRecent cases highlighted in Bruce Hopkins’ Nonprofit Counsel letter, for example, include revocations of tax exemption for:

  •    the parents of a cheerleading squad, who worked at concession stands and used their pay for “scholarships” for their cheerleading children, based directly on how much work they put in. That was too much “private inurement” for the IRS’s taste.
  •    a bar (that’s right, the kind serving alcoholic beverages), which claimed to have been promoting “fellowship among all living beings.” (What were they drinking when they came up with this idea?)
  • a group that, when questioned as to why it hadn’t been filing its annual information returns, claimed that it was the integrated auxiliary of a church — but the church itself had no idea of this supposed arrangement.

The lines aren’t always so brightly drawn, however. To make sure that your group continues to qualify for its tax exemption, see the Nonprofits section of Nolo’s website.