The Form 990 is a very public document and it is becoming more public. Today an organizationÂ’s Forms 990 for the past three years must be shown to anyone who wants to see them. In addition, copies of these forms must be given to anyone who requests them (either in person or in writing) and who pays a reasonable fee -- $1 for the first page and 15 cents for every page thereafter and postage, if applicable. Furthermore, most Forms 990 beginning with the year 1997 are being posted on the Internet by the National Center for Charitable Statistics and Guidestar, two nonprofit groups in the Washington D.C., area. Finally, it is only a matter of time before all charities will be required to file their Forms 990 electronically. Thus, virtually every Form 990 is or soon will be accessible by anyone in the world.
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Use the Form 990 information to determine a host of things about your historical group or museum: Who is being paid?, How much?, What are the sources of income?, What are the types of expenditures, What is the value of assets?, Is money really going to the organization's stated projects, Is enough money being spent on the right projects?, etc.

John, thanks for doing such a good job spelling out the difference between non-profit and tax-exmept entities. Although it does not apply to most RR preservations groups, a letter of determination is not needed if you regularly have less than $5000 annual income. I can speak from experience that getting a non-profit incorporated and getting an IRS 501c(3) determination letter is two very different tasks. I can have your non-profit corporate charter this afternoon from the Tennessee Secretary of State, but completing the IRS application takes considerable time and generally the advice of a good tax attorney. Additionally, it can take as long as six months get a determination from the IRS, and usually they find a reason to decline your request on the first go-around. Fortunately, I was able to cover all the bases and had a letter of determination within a mere six weeks (a successful approval). I very strongly disagree with the assertion that the term non-profit means tax-exempt, though one is certainly tied to the other in some cases, it is not necessarily true in reverse.

Mike

> The Internal Revenue Code acknowledges two
> broad categories of tax-exempt, non-profit
> entities: Public Charities and Private
> Foundations. A non-profit is assumed by the
> IRS to be a Private Foundation (and thus
> subject to, for example, disbursing 5% of
> its asset value annually) unless it can meet
> a "Public Support Test." Depending
> on the type of structure asserted by the
> Charity (see IRC sections 509(a)(1) through
> 509(a)(3), the public support test may
> differ slightly.

> As to earning revenue, a non-profit may be
> tax exempt on earnings related to its
> mission (i.e. ticket revenues, gift shop,
> shop services, etc.). It may also engage in
> non-related businesses - for example, a
> railroad museum may own a number of
> fast-food restaurants and use the profits to
> fund museum activities. In this case,
> however, profits from the fast-food business
> are subject to Unrelated Business Income Tax
> (UBIT).

> Finally - "non-profit" and
> "tax-exempt" are two separate
> things. Anyone can create a new corporation
> and declare it non-profit. All this means
> is, as was said above, any profits won't be
> disbursed to owners (shareholders).

> Only the IRS can declare that entity
> tax-exempt, after it has proven to the IRS
> that it meets certain criteria for serving
> the public good.

> JAC


Tennessee Valley Railroad Museum
newriver400@cs.com

> The short answer is "yes".
> Non-profits absolutely can engage in
> profit-making activities. The rule is that
> the profits from such activities must be
> reinvested in the stated
> "educational" or nonprofit
> activities of the organization. Doing wheel
> work for profit (as at TVRM) is no different
> than turning a profit on your gift shop: all
> you need to do is make sure the resulting
> profit is reinvested in the educational or
> preservation mission.

> There are ultimate limits to this, to
> prevent nonprofits from metasticizing into
> entites which compete head to head with
> taxed, for-profit companies, and then you
> get into having to file certain activities
> as "Unrelated Business Income,"
> and pay taxes on them, but that's another
> story.

> For a fuller answer, skim the summary below:

Gentle People,

Whoa! Where ever Eric got his short and long answers, they are misleading. And, what a convoluted string this has turned into! That isn't surprising in light of a survey two years ago that found that 75 percent of the informational tax returns (Form 990) submitted by nonprofit organizations to the IRS contained material errors and/or omissions.

Since then, the IRS and a coalition of major foundations that make grants to nonprofits have been cooperating to help nonprofits better understand and report on their requirements and obligations to be accountable to the public for implementation of their mission. There has been some progress, including a somewhat easier to understand and complete IRS Form 990, but a lot remains to be done.

For starters, here is my disclaimer. I am not a CPA or an attorney. However, I do have a masters degree in not-for-profit (or "nonprofit" - the terms are used interchangably) organization management. I have led a nonprofit start-up, advised other nonprofit start-ups, served on several nonprofit boards, and currently do nonprofit organization management consulting on a pro bono basis.

My suggestion is to start again at the very center and work outward. For-profit organizations exist for one purpose: to make money for their owners (nothing wrong with that). Nonprofit organizations also exist for one purpose: to fulfill a mission acknowledged to be a public good (preserving and educating the public about their rail heritage for example). Everything flows from a nonprofit's mission which is a public trust.

Fundamental differences in the nature of nonprofit missions and the exigencies of generating resources to implement those missions in the real world combine to define different paths for different nonprofits for accountability and opportunities and limitations on types of income.

This leads to the "Rule of Thirds." Each year in its Form 990, a nonprofit must submit figures to demonstrate that it met a (1) "one third support test" and (2) a "not-more-than one third support test."

These tests apply differrently depending on the nature of the nonprofit's mission. The defining question is, "How does the public support the nonprofit's mission?"

If the nonprofit's mission is to make grants or extremely low interest loans to good causes (for example, the Ford Foundation) then the nonprofit's clients cannot be expected to pay for this service to the extent of financing the nonprofit's mission (if they could, the organization rightly would be called a bank - and hardly nonprofit). So, the law provides that foundations can fund their mission predominantly from other sources NOT related to mission (for example interest and dividends on investment of their endowment in financial markets). For foundations, that income is exempted from taxes because it is going to be used to fund their nonprofit mission (the grants they make). To hold foundations accountable to fulfilling their public trust mission, they are required to disburse a minimum percentage of their income in grants each year.

On the other hand if the clients of the nonprofit can and do support its nonprofit mission financially (for example buy a ticket to the symphony or to ride the train) then the reverse definition applies. "Mission-related" income is the basis for tax exemption. Every nonprofit rail heritage-related group that I know about is in this subcategory of the IRS 501(c)(3) designation, which is 509(a)(2). Check because if your organization is not, it probably should be (I know one rail preservation group that had to change its original filing with the IRS).

This does not mean that a 509(a)(2) nonprofit cannot earn income unrelated to its mission. In my opinion, a healthy nonprofit of this type that is practicing good financial management SHOULD be earning significant income unrelated to its mission within the scope of the "rule of thirds."

Basically, here is how the "rule of thirds" applies for 509(a)(2) organizations such as those near and dear to railway preservation. To demonstrate that the public supports your nonprofit misison, you must show that at least one third of your organization's income is "mission-related." Some examples are mission-related donations; ticket receipts from an historic train ride; special event receipts (like an annual convention to advance the mission - i.e., the particular rail focus of the nonprofit); and sale of books, photos, reproductions, models, etc. that advance the mission.

The same nonprofit can earn not more than one third of its annual income from sources unrelated to its mission. Although this must be reported as taxable income, the opportunity is there to provide a way to balance the nonprofit's sources of income over the long term. When you think about it, that is a reasonable provision by Government to help nonprofits stabilize funding for their public trust mission. The one third cap limits abuse. For example, you might reasonably operate and profit from the taxable income from a convenience store in the underserved area of your nonprofit's site within the limit of the not-more-than one third provision. But, don't expect to run Exxon-Mobile as a cash cow. Some nonprofits have taken advantage of this opportunity quite efffectively. Ever stay at a Knights Inn? Knights Inn motels are owned by nonprofit Knights of Columbus.

Determining whether income is or should be mission-related or unrelated requires careful study and decision making. Generally, 509(a)(2) nonprofits, such as rail history groups and museums, want to maximize mission-related income, not just because it is exempt from federal income tax but, also, because it contributes to demonstrating the "at least one third" dollar and cents proof of public support of mission.

Most such rail groups have no trouble coming in waaay above this threshold (80-90 percent range) but, is that really evidence of good financial management? Are they diligent or lax about developing permitted levels of unrelated income to balance their sources of revenue? Diligent management in this regard demonstrates good stewardship of mission.

Determining whether an income producing activity is mission related or unrelated can be a close call. For that purpose, you can request a ruling from your local IRS office before you start the activity. This is a wise step.

In my experience, the IRS people welcome such questions and will try to be helpful. They don't have nearly enough staff to go around and would much rather help you do it right than clean up a mess after the fact. Also in my experience, should you discover a tax reporting or status problem after the fact, it does not hurt and could help to have become known to the IRS as an organization that tries to get it right. The organization mentioned above that went through the embarassment of having to request a change in its status had previously demonstrated conscientiousness in dealing with the local IRS people. Whether or not that was a factor, the IRS was very understanding and responsive to the request for change.

The recommendations about IRS publications in this string are worth following up, but don't expect an easy read. In my opinion, past versions of Form 990 and IRS publications related to nonprofits can be hard to understand (until last year, you were expected to correctly interpret a double negative in a critical section of Form 990). This is getting better, but the road is long.

In my experience, it has proven hard to find CPA's who will keep themselves currently educated on tax regulations affecting nonprofits and provided acceptable quality work at a reasonable price to nonprofit clients. Some nonprofits that I have advised on management who went to their CPA with questions that imposed a higher standard later found that fees had gone up. My observation has been that some accountants have become decidedly less willing to take nonprofit clients when they learn that slipshod work no longer cuts it with the IRS or nonprofits.

Good and conscientious CPA's who welcome nonprofit clients can be found. They ask and deserve higher fees than the other kind. One solution is to search your membership diligently for accounting professionals. If they won't provide service themselves (not all are free to do so) they often can point you to the right person. This is why one nonprofit that I advise always has been in the 25 percent who get their Form 990 right.

Lastly, if you have not done so, go to www.guidestar.org and click into your nonprofit's tax return. Completed Forms 990 are public documents available to anyone on demand. The IRS provides 990's on disc to Guidestar who, as their nonprofit mission, puts them on the web for public access. Check the financial summary of your organization: I've seen Guidestar get this wrong. But, you can get that corrected and Guidestar also provides an opportunity for your organization to create a free mini-page about your activities with a link to your website. Smart nonprofits are using such opportunities and well-prepared 990's as demonstrations of good management to the public and grant makers.

Regards to all,

Phil Padgett

ebt4evr@aol.com

I would also point out that the IRS has gotten more critical on reviewing 501c3 applications in the last 5 years.

There are two ways to make the application: at the creation of your nonprofit corporation or after the fact. Having done both types in the last two years for two rail related groups, I found the pre-determination ruling went quicker and easier than the other. However, the IRS puts you in a five year "probation" period if your ruling is a pre-determination.

Erie Lackawanna Dining Car Peservation Society
tstuy@eldcps.org

> completing the IRS application takes
> considerable time and generally the advice
> of a good tax attorney.

I disagree. I belong to a non-rail group that used a local CPA to do the filing and it was successful, without any rejections. I've also seen EA's (enrolled agents) do it-both professions are admitted to practice before theIRS.

>Additionally, it can
> take as long as six months get a
> determination from the IRS, and usually they
> find a reason to decline your request on the
> first go-around.

All the more reason to get the letter! You want any objections with regard to your purpose dealt with at inception not upon audit when they can say no matter how you've run the organization, it doesn't have a valid purpose or its defective.

Also, once again, any substantial donor is likely to request a copy (especially if their 1040/1120 is audited by the IRS)

My professional experience with was with pension plans-exempt under 501(a)- but the principle was the same-one less thing to sweat when you have a letter-better than gold.

> Well there is something that I don't expect
> to see on this board and don't care to see
> it again. Lets leave the legalese elsewhere.

Like it or not, it is the LAW OF THE LAND and if you fail to comply, there are consequences. The purpose of this site is to provide information of value to rail preservationists. Legal information falls within this mission. However, when discussing legal matters, it must be remembered that every situation is different and that the law varies from jurisdiction to jurisdiction. I am interested in the restoration and preservation of diesel locomotives. However I am now involved in the startup of a not for profit corporation and find this thread timely and interesting. If you are offended by legal matters, skip the threads which mention it, but remember this, knowledge of these laws is just as vital to rail preservation as knowing how to set the valve timing on a 567 or how to roll the tubes on a boiler.


jjbx@twcny.rr.com