Over at Keepapitchinin, Amy Tanner Theriot has a wonderful post talking about family associations, and providing some guidelines for how to put together a successful association. In the post, she mentions that family associations can qualify as 501(c)(3) tax-exempt entities. At the mention of Code sections (and revenue rulings!), my ears perk up, and I thought I’d give a little more information about the tax side of such organizations. But before you read my post, you need to read Amy’s.[fn1] Because everything I know about family associations I learned reading her post, then doing a little Westlaw research. Because of that, basically nothing I write here will mean much unless you’re familiar with what Amy wrote.
Tax Exempt Family Associations
As Amy points out, at least some family associations qualify for tax exemption under section 501(c)(3) of the Internal Revenue Code. As I’ve said before, 501(c)(3) does two things: first, it means that the entity itself does not pay (most[fn2]) taxes. In addition, any itemizing taxpayer can deduct donations she makes to a 501(c)(3) organization from her taxes. Which means that, if you form a family association that qualifies under 501(c)(3), you’ll be able to deduct donations you make to that organization as you figure out your tax liability.
How, though, does a family association qualify? It’s not clear under the Code, which provides exemption for entities operated exclusively for “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition. . ., or for the prevention of cruelty to children or animals.” Under the Treasury regulations, “operated exclusively” means that it must engage primarily in activities that accomplish the listed purposes, and not more than an insubstantial portion of its activities don’t further an exempt purpose.
Note that, on their face, family associations don’t further any of the exempt purposes. So how can they be tax-exempt?
As Amy pointed out, the IRS issued a revenue ruling in 1971 that allowed (certain) family associations to qualify for tax-exempt status. But they’re tax-exempt, not by virtue of being family associations, but by virtue of advancing religion. The revenue ruling, though not mentioning Mormonism explicitly, is clearly issued to a Mormon family association doing genealogical research to submit names to the temple.[fn3]
And that part of a family association is essential to the tax-exempt analysis. In at least two cases,[fn4] courts held that (non-Mormon) family associations did not qualify as tax-exempt, notwithstanding the revenue ruling, because the were formed for the private benefit of family members, not for general public benefit (even if hundreds, or even thousands, of family members would benefit from the association). The courts differentiated those cases from the revenue ruling because, in the revenue ruling, the genealogical research ultimately was used to perform ordinances in the temple, to the benefit/support of the LDS church.
Being tax-exempt carries with it some administrative duties. Only churches are automatically tax-exempt; any other organization needs to apply to the IRS. The application is fairly long and needs to be completed in full; failing to respond fully and accurately will, at best, lead to delays in obtaining tax-exempt status (if I remember right—I haven’t personally filed an application for tax-exempt status in years).
What’s more, once your family association become tax-exempt, it needs to file an information return (on Form 990) every year.[fn5] Failure to file the return can lead to a revocation of tax-exempt status. Basically, that means that your family association should probably engage a tax attorney or accountant (though compliance may not be terribly expensive: for the Milo Andrus Family Organization, its tax filing expense was about $130).
None of this means you shouldn’t form a family association—I found Amy’s post pretty compelling that such associations are a good idea. In forming your association, though, you need to be aware of some of the rules with which your association will need to comply. That said, have at it, and enjoy your cake, ice cream sandwiches, potato salad, and punch!
[fn2] It does, of course, pay its share of withholding taxes for employees. And it pays taxes on certain business income that it earns.
[fn3] The revenue ruling lays out an interesting, clearly-recognizable Mormon theology, though I’d differ on a few points.
[fn4] Callaway Family Assoc. v. Comm’r, 1 TC 340 (1978) and Price Geneological Assoc. v. IRS, 1979 WL 1346. I didn’t do exhaustive research on this point, but I’m pretty convinced that any other court that looked at the question would come to the same conclusion.
[fn5] Forms 990 are public, and you can look at them. The Milo Andrus Family Organization, for example, is a 501(c)(3) organization. You can find its last four Form 990s here (though you need to register—for free—to see them at Guidestar).