ITG FAQ #3 Answer-Can a federally recognized tribe qualify as a charitable organization exempt from taxation under IRC section 501(c)(3)?
A federally recognized tribe that exercises sovereign powers generally will not qualify for exemption as a charitable organization under IRC section 501(c)(3) because the exercise of sovereign powers is not a charitable purpose as defined by IRC section 501(c)(3).
IRC section 501(c)(3) describes a charitable organization as one that is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or the for prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
A tribe may choose to create, through separate organizing documents, an entity separate from the tribe that does not have sovereign powers and that is organized exclusively for purposes as described under IRC section 501(c)(3). This type of entity will generally qualify for exemption from taxation on its earnings from charitable activities. Application for IRS determination of IRC section 501(c)(3) exemption is made on Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. An exempt organization created in this manner will be subject to the same reporting requirements as any other taxpayer exempt under IRC section 501(c)(3). Though its income from those activities for which it obtained its IRC section 501(c)(3) exemption is exempt from Federal income tax, income from unrelated business activities (activities not directly related to its exempt purpose) is not exempt and is subject to income tax. More information about qualifying for exemption under section 501(c)(3) as an exempt organization can be found in Publication 557, Tax-Exempt Status For Your Organization. Information regarding unrelated business income can be found in Publication 598, Tax on Unrelated Business Income of Exempt Organizations.
Additional assistance in completing Form 1023 can be obtained by visiting the Charities and Non-Profits website.