Nonprofit Tax & Legal Requirements Flashcards

A nonprofit's bylaws differ from its articles of incorporation primarily because bylaws:

Answer: Govern internal operations including board procedures, elections, and meeting rules

Bylaws are internal governing documents that set operational rules for the organization, while articles of incorporation are externally filed documents that create the legal entity.

Under IRS UBIT rules, which of the following types of income is generally EXCLUDED from unrelated business income?

Answer: Passive royalty income from licensing the organization's name

Passive royalty income from licensing intellectual property such as mailing lists or trademarks is specifically excluded from UBIT under the 'passive income modifications' rules.

A board member of a 501(c)(3) has a fiduciary 'duty of care,' which requires them to:

Answer: Act in good faith with the diligence a prudent person would exercise

The duty of care requires board members to make decisions with the care and diligence that a reasonably prudent person would exercise under similar circumstances.

Which IRS form is used by organizations seeking recognition of 501(c)(3) tax-exempt status with gross receipts normally under $50,000?

Answer: Form 1023-EZ

Form 1023-EZ is a streamlined application for small organizations with gross receipts normally under $50,000 and assets under $250,000 seeking 501(c)(3) recognition.

A nonprofit receives an inheritance from an estate where the donor's will specifies the gift must be maintained in perpetuity as an endowment. This is classified as:

Answer: Permanently restricted net assets

A donor-imposed restriction requiring the principal to be maintained permanently classifies the gift as permanently restricted net assets (or 'net assets with donor restrictions — permanent').

The 'public support test' for 501(c)(3) public charities is primarily used to:

Answer: Demonstrate that the organization receives broad financial support from the public rather than a few sources

The public support test ensures an organization qualifies as a public charity rather than a private foundation by demonstrating diverse, broad-based public financial support over a rolling five-year period.

Under the Hart-Scott-Rodino Act, a nonprofit considering a merger with another organization may need to:

Answer: File a premerger notification with the FTC and DOJ if the transaction meets size thresholds

The Hart-Scott-Rodino Antitrust Improvements Act requires premerger notification to the FTC and DOJ for transactions exceeding certain asset and transaction size thresholds, which can apply to nonprofit mergers.