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!
[fn1] Actually, it’s probably fair to say you should read virtually everything on Keepapitchinin. And follow it on Facebook and Twitter.
[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).
You might want to qualify that last “cake . . . and punch” line, Sam. If someone gets the idea that a family association is a way to make tax-deductible contributions to a party fund, that would take them down a troubled path. See, for example, Treas. Reg. 1.501(c)(3)-1(c)(1) explaining the operational test.
Also, without doing any research, I suspect that many family associations (fully qualified by virtue of doing genealogical research to submit names to the temple) will be private foundations rather than public charities, by virtue of the way they are funded. There are additional and sometimes burdensome rules and restrictions on private foundations.
I should have started with thanks for the clear, useful, and (so far as anything I know) accurate post. And recognize that in the body of the post you are absolutely clear about the “operated exclusively” requirement and the genealogical research into temple ordinances that makes Mormon family associations work (sometimes). It’s just that last line that might give the wrong impression.
Chris, good points. The last line is purely quoting the title of the post that inspired this post, not suggesting that you could have a tax-exempt party fund. And I’m almost certain that they’d be private foundations (still exempt under 501(c)(3)), rather than public charities, with, as you point out, additional administrative obligations that I don’t go into.
From the Washington Post seven years ago:
“Health and Human Services Secretary [and former Utah governor] Mike Leavitt and his relatives have claimed millions of dollars in tax deductions through a type of charitable foundation they created that until recently paid out very little in actual charity, tax records show.
“Instead, much of the foundation’s money has been invested or lent to the family’s business interests and real estate holdings, or contributed to the Leavitt family genealogical society.
“The Leavitts used nearly $9 million of their assets to set up the foundation in 2000 under an obscure provision of the federal tax code. But unlike standard private foundations, which are required to give away at least 5 percent of their assets to charitable causes, the Leavitt organization donated less than 1 percent of its assets in 2002, 2003 and 2004. The donations jumped to 6.3 percent of total assets last year, after the sale of family water interests that also allowed the foundation to increase its lending to Leavitt business interests.”
“Actually, it’s probably fair to say you should read virtually everything on Keepapitchinin. And follow it on Facebook and Twitter.”
Hear, hear, Hunter!
Thank you, Sam, for all this additional information on family associations. What a curious, dusty little corner of tax law.
Sam, what differentiates a family association that primarily does genealogical research (which is historical in nature) from a subject-specific historical museum (say, the Juab County Historical Museum) or a subject-specific historical research organization (like, say the Daughters of the Utah Pioneers). Are the latter also not eligible to be 501(c)(3) charities? Is historical research not considered an “educational purpose?”
I would have assumed that family associations would qualify with an “educational purpose” as long as they were doing primarily historical research regardless of the religious component.
What keeps a family association from essentially being a historical research organization?
Kent, good question. It looks like it’s the public benefit requirement—the courts found that genealogical research primarily benefitted the person’s descendants, not the public at large (although the associations had argued education and broad benefit). I don’t know a lot about DAR, but presumably its efforts and educational efforts seem to have broad public benefit.