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    Q. Americans like supporting charitable causes ... and receiving tax deductions in return. But if an organization runs afoul of tax laws and regulations, it could jeopardize its tax-exempt status and donors' tax deductions. Which of the following can cause an agency to owe taxes, or have its tax-exempt status suspended or revoked?

    a. A children's charity displaying a political candidate's posters in its windows.
    b. A group publishing material for a foundation suspected of having ties to terrorism.
    c. An agency for the prevention of animal cruelty receiving significant income from pet boarding and grooming services.
    d. All of the above.

The answer is d,
All of the above

Tax-exempt organizations are prohibited from engaging in most forms of political activity, especially where the campaign of an identifiable candidate is the recipient. So the example of the children's charity displaying a political candidate's posters in its windows could jeopardize its tax exempt status.

Charities can provide voter education and encourage the public to register to vote. But tax-exempt organizations need to steer clear of endorsements. (For more about what charities can and cannot do in the political arena, read IRS Revenue Ruling 2007-41.)

What about a group publishing material for a foundation suspected of having ties to terrorism? Donations of cash or property to tax-exempt agencies which are deemed by the IRS to support or engage in terrorist activity are not deductible for federal tax purposes. As part of the Military Family Tax Relief Act of 2003, groups that are related to terrorism can have their tax-exempt status suspended or revoked. To learn more, read IRS Announcement 2007-113, which is based on the activities of one 501(C)3 organization that lost its tax-exempt status because of a connection to terrorism.

The final scenario involving a animal rescue group receiving income from boarding and grooming services would not necessarily result in the loss of its tax-exempt status, but it could require the not-for-profit to pay taxes on income that is not related to its stated mission. In this case, the activities of pet boarding and grooming do not further the purpose of preventing animal cruelty, therefore the income derived from those activities may be taxable. More information about can be found in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.