Obtaining and Preserving Tax-Exempt Status under Section 501 (c)(3): Judicially Developed Factors for Detecting the Presence of Substantial Nonexempt Activities.

In order to obtain and maintain tax-exempt status under Code Section 501 (c)(3), an organization must not engage in any nonexempt activity in a substantial way. Since no definitive legislative or administrative guidelines have been delineated to determine if this constraint has been violated, the courts have been forced to arbitrate this matter. The objective of this research is to extract and evaluate the criteria used by the courts to gauge the presence of substantial nonexempt activities. An analytical review of the leading cases in this area was conducted. A total of nine separate factors were found to have been applied consistently by the judiciary. These factors may be utilized as a device to forewarn an exempt entity of the presence of substantial nonexempt activities. Additionally, the model can serve as a tool in identifying and evaluating the issues that the courts will examine if litigation becomes necessary.