Many state and local jurisdictions accept the Internal Revenue Service’s determination for their own exemption requirements, or require exemption from federal income tax under IRC 501(c)(3) as a prerequisite to granting exemption under state or local provisions.

To promote efficient enforcement of the respective tax laws, IRC 6104(c) provides an exception to the general confidentiality provisions of IRC 6103 that allows the Service to share information with appropriate state officials regarding organizations that have been denied recognition of exemption under IRC 501(c)(3) or that have had recognition of exemption under IRC 501(c)(3) revoked.

Most organizations exempt under IRC 501(c)(3) are eligible to receive deductible charitable contributions, as the provisions that govern deductibility of charitable contributions from income tax (IRC 170(c)), estate tax (IRC 2055(a)(2) and IRC 2106), and gift tax (IRC 2522(a)(2)), contain language substantially similar to IRC 501(c)(3).

A ruling or determination letter recognizing the exemption of an organization under IRC 501(c)(3) should discuss the organization’s status under these provisions as well.

Before January 1, 1984, services performed for an IRC 501(c)(3) organization were often exempt from taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).

The Social Security Act Amendments of 1983, Public Law 98–21, extended mandatory social security coverage (FICA) to all employees of nonprofit organizations beginning January 1, 1984. The rules regarding FUTA remain unchanged. Some organizations may also enjoy exemption from certain federal excise taxes.

Section 134.5 of the United States Postal Service Regulations, 39 U.S.C. 3626–27 (1970), includes religious, educational, scientific, and philanthropic (charitable) organizations among those eligible to mail at preferred postal rates.

Not all IRC 501(c)(3) organizations are eligible for preferred postal rates, however, so exemption from federal income tax is evidence of qualification for preferred postal rates but is not controlling.

Organizations exempt under IRC 501(c)(3) can offer employees the benefit of special annuity tax provisions under IRC 403(b). This helps them attract and retain qualified personnel.

Section 1107 of the Tax Reform Act of 1986 amended IRC 457 to allow any exempt organization to offer its employees qualified IRC 457 unfunded deferred compensation plans adopted after December 31, 1986. Previously, IRC 457 plans were available only to employees of state and local governments.

Exempt organizations may not maintain qualified IRC 401(k) plans adopted after July 2, 1986. IRC 401(k) plans provide a cash or deferred payment option. Plans adopted before that date are not affected by the amendment, which was made by section 1116 of the Tax Reform Act of 1986.

For plan years beginning after December 31, 1985, an exempt organization can adopt a qualified profit-sharing plan under IRC 401(a)(27) for its employees. This semantic anomaly of "profit" being produced by a nonprofit organization was authorized by section 1136 of the Tax Reform Act of 1986, which amended IRC 401(a)(27) to provide that the determination of whether an employee plan is a profit sharing plan is made without regard to current or accumulated profits of the employer and without regard to whether the employer is a tax-exempt organization. The Service held in one case that maintaining a qualified profit-sharing plan would not adversely affect the exemption of the organization.

All organizations exempt under IRC 501(c)(3) are subject to the unrelated business income tax imposed by IRC 511. This included churches as of 1976, except for any business carried on by a church or a convention or association of churches that was carried on before May 27, 1969.

The Tax Reform Act of 1969 repealed IRC 503 and 504 with respect to organizations described in IRC 501(c)(3), for taxable years beginning after December 31, 1969. These sections concerned prohibited transactions and unreasonable accumulations of income.

An organization that was organized after October 9, 1969, must satisfy the notice requirements of IRC 508(a) or it will not qualify under IRC 501(c)(3). The requirements of IRC 508(a) are discussed in IRM 7.25.3.14.

An organization’s assets will be considered properly dedicated, for example, if on dissolution, they would, by reason of a provision in the organization’s articles, be distributed:

An organization’s assets are not properly dedicated if its articles or the law of the state in which it was created provide that its assets would, on dissolution, be distributed to its members or shareholders.

The following language illustrates a dissolution provision that properly dedicates an organization’s assets: "Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose."

If an organization’s articles do not expressly provide for proper distribution of its assets on dissolution, state law may intervene to provide for distribution. If assets are properly dedicated by operation of law, no amendments to the articles are needed.

Rev. Proc. 82–2, 1982–1 C.B. 367, identifies four areas of state law, depending on the form of entity, that can provide for dissolution:

The cy pres doctrine is a principle of law that courts use to save a charitable trust from failing when a charitable objective is originally, or later becomes, impossible or impracticable to fulfill. Cy pres, which comes from French law and means "so near" or "as near as possible" , is based on the theory that a court has the power to revise a charitable trust if the maker (also called the creator, settlor, or—if under a will—testator) had a charitable intent to meet unexpected emergencies or changes in conditions that threaten the trusts existence. The court may substitute another charitable object it believes will approach the original charitable purpose as closely as possible.

Courts do not automatically apply the cy pres doctrine to charitable trusts. They usually first need to find that the testator had a general charitable intent in creating the trust. If it appears that the testator wanted only to accomplish a particular purpose and did not have a general intent to benefit charity, the majority of courts will presume that the testator would prefer to have the trust fail if the particular purpose is or becomes impossible to accomplish.

In contrast, the majority of courts apply the cy pres doctrine when a testator makes a general bequest for charity, or for general charitable purposes, without specifying a particular purpose or beneficiary. In such a case, the court will choose a particular purpose for the disposition of the property consistent with the testator’s general charitable intent. The following example shows how a state court might apply cy pres: X bequeathed his residuary estate to Hospital A for the benefit of tubercular children. When X died, Hospital A no longer existed. His heirs filed suit claiming that the legacy lapsed and the residuary estate passed to them by intestacy. The court held that the gift to Hospital A was a charitable bequest because the gift was not intended for a particular institution, but for the benefit of tubercular children as a class with the hospital as trustee. As the trust’s purpose (treatment of tubercular children) still existed, even though the hospital did not, the legacy did not lapse because cy pres applied. The court awarded the legacy to another local hospital as trustee for the benefit of tubercular children.

Assisting low income individuals or families to obtain adequate housing can be a charitable activity. Thus, an organization formed to construct new housing and to renovate existing housing for sale to low income families on long-term, low payment plans was recognized as exempt under IRC 501(c)(3). (See Rev. Rul. 70–585, 1970–2 C.B. 115, and Rev. Rul. 67–138, 1967–1 C.B. 129.)

Rev. Rul. 69–441, 1969–2 C.B. 115, provides that an organization that assists low income individuals and families with individual financial counseling, and assists them in establishing budget plans where necessary, may be exempt.

A statewide association of local public housing tenant groups that advises its member groups on topics such as the rights and responsibilities of tenants and the laws and regulations concerning public housing, and that represented local groups before State and federal housing authorities, was held to be charitable by relieving the poor in Rev. Rul. 75–283, 1975–2 C.B. 201.

Operating a day care center for children of needy working parents was held to be exempt under IRC 501(c)(3) in Rev. Rul. 68–166, 1968–1 C.B. 255, and Rev. Rul. 70–533, 1970–2 C.B. 112.

Self-help programs are often used to ameliorate the problems of poverty. Supplying materials and services for use in these programs can also be a charitable activity. How the organization operates is usually a critical factor in determining whether it is charitable rather than a commercial venture. For example, in Rev. Rul. 68–16, 1968–1 C.B. 255, an organization created to market the cooking and needlework of needy women was held to be exempt even though it received a small commission on each sale. The organization served a charitable class, and operated in a noncommercial manner. The women it served could not otherwise find an outlet. In addition, the commissions it charged were insufficient to support the organization and it relied on public contributions.

IRC 501(c)(3) does not limit exemption to organizations relieving the poor and distressed in the United States. Rev. Rul. 68–117, 1968–1 C.B. 251, and Rev. Rul. 68–165, 1968–1 C.B. 253, hold domestic organizations providing technical and material assistance to foreign self-help programs to be exempt under IRC 501(c)(3).

Rev. Rul. 67–138, 1967–1 C.B. 129, held an organization that helped low-income families construct or rehabilitate housing to be operated for exclusively charitable purposes.

It is now generally recognized that the aged, apart from considerations of financial distress, have special needs because of their advanced years. Satisfying those needs can be a charitable activity.

An organization operating a home for the aged may be exempt under IRC 501(c)(3) as a charitable organization if it operates in a manner designed to satisfy the three primary special needs of aged persons. These are the need for—

The needs for housing and health care will generally be satisfied if two conditions exist. (See Rev. Ruls. 72–124, 1972–1 C.B. 145 and 79–18, 1979–1 C.B. 194.)

A publicly supported organization that operates a rural rest home to provide, at a nominal charge, two-week vacations for elderly poor people from nearby metropolitan areas was recognized as exempt under IRC 501(c)(3) in Rev. Rul. 75–385, 1975–2 C.B. 205.

An organization that establishes a service center providing information, referral, and counseling services relating to health, housing, finances, education, and employment, as well as a facility for specialized recreation for a particular community’s senior citizens, who need not become members to obtain the services or participate in the activities, was held to qualify for exemption under IRC 501(c)(3) in Rev. Rul. 75–198, 1975–1 C.B. 157.

A nonprofit employment agency operated free of charge for the elderly was held to be charitable based on the finding that it performed its services primarily for those of limited means in Rev. Rul. 66–257, 1966–2 C.B. 212.

An organization providing, upon request, low cost bus transportation to senior citizens and handicapped persons in a community where public transportation is unavailable or inadequate was recognized as exempt under IRC 501(c)(3) in Rev. Rul. 77–246, 1977–2 C.B. 190.

An organization whose stated purpose was to provide training, jobs, and recreation for senior citizens by operating retail stores did not qualify for exemption under IRC 501(c)(3). Although it incidentally served the needs of senior citizens, the evidence indicated that the retail sales operation was an end in itself. Proceeds from the business were used almost exclusively for its perpetuation. Thus, the organization’s primary activity was the operation of the retail store, which was not devoted exclusively to charitable purposes. Senior Citizens Stores v. United States, 602 F.2d 711 (5th Cir. 1979).

In Federation Pharmacy Services, Inc. v. Commissioner, 625 F.2d 804 (8th Cir. 1980), aff’g 72 T.C. 687 (1979), the appellate court held that a nonprofit pharmaceutical service was not exempt as a charitable organization because it was operated for the substantial commercial purpose of providing pharmacy services to the general public. Although it provided special discount rates for handicapped and senior citizens in its area, it was not committed to providing any drugs below cost or free to indigent persons. Therefore, although its services did improve health in the area, it was primarily a commercial venture operated in competition with other area pharmacies.

An organization ministering to the nonmedical needs of patients in a proprietary hospital may be exempt under IRC 501(c)(3). Nonmedical needs include reading to patients, writing letters for them and providing other similar personal services. See Rev. Rul. 68–73, 1968–1 C.B. 251.

A hospice, providing both inpatient and outpatient care to alleviate the physical and mental distress of the terminally ill was held to be operated exclusively for charitable purposes within the meaning of IRC 501(c)(3) in Rev. Rul. 79–17, 1979–1 C.B. 193.

A nonprofit organization that provides specially designed housing for physically handicapped persons at the lowest feasible cost and maintains in residence those tenants who subsequently become unable to pay its monthly fees was held to be operated exclusively for charitable purposes within the meaning of IRC 501(c)(3) in Rev. Rul. 79–19, 1979–1 C.B. 195.

An otherwise qualifying organization that subsidizes private hospital rooms for patients who can benefit medically from a private room but who cannot afford the expense of such a room was held exempt under IRC 501(c)(3) as a charitable organization in Rev. Rul. 79–358, 1979–2 C.B. 225.

Rev. Rul. 81–28, 1981–1 C.B. 328 recognized an organization that provides housing, transportation, and counseling to hospital patients’ relatives and friends who travel to the locality to assist and comfort the patients as exempt under IRC 501(c)(3).

Providing fire, rescue, or emergency services for the general community is a charitable purpose because it lessens the burdens of government. It also serves the social welfare. However, many volunteer fire companies also provide recreational facilities or social events. Whether those activities preclude the organization from being operated exclusively for the charitable purpose of providing fire, rescue or emergency services is a question of fact.

Rev. Rul. 74–361, 1974–2 C.B. 159, considered the qualification for exemption of a volunteer fire company that provided fire and ambulance services to a community. Except for two full-time firefighters, the organization was staffed by volunteers who were on call to perform duties as firefighter, ambulance driver, or paramedic when needed. This organization maintained regular recruiting and training programs. It maintained recreational facilities available to its volunteers, whether on or off-duty, but not available to the general public. It also held weekly public dances conducted by volunteers drawn from its membership. All income was spent for exempt purposes. Rev. Rul. 74–361 held that the organization qualified for exemption under IRC 501(c)(3), and noted that it could have applied for and been recognized as a social welfare organization under IRC 501(c)(4). Under the particular facts, the social and recreational activities did not disqualify the organization under IRC 501(c)(3).

Rev. Rul. 70–590, 1970–2 C.B. 116, holds that an organization operating a drug rescue center and a telephone drug crisis hot line for persons with drug problems is operated for charitable purposes.

Providing legal services to persons financially incapable of paying for them is a form of relief of the poor and distressed. Thus, a non-profit legal aid society providing free legal services to indigent persons may be exempt under IRC 501(c)(3). See Rev. Rul. 69–161, 1969–1 C.B. 149. Rev. Rul. 69–161 was amplified in Rev. Rul. 78–428, 1978–2 C.B. 177, which provides that an organization providing legal services to indigents for a fee may qualify for exemption under IRC 501(c)(3) if the fees are based on the indigent clients’ ability to pay rather than the type of services rendered.

An organization that provides substantial free legal services to low income residents of economically depressed communities by subsidizing recent law graduates who have been admitted to the bar was held to be exempt under IRC 501(c)(3) in Rev. Rul. 72–559, 1972–2 C.B. 247. Similarly, in Rev. Rul. 78–310, 1978–2 C.B. 1973, an organization that assisted a school’s law students, chosen on the basis of merit and interest, to obtain practical experience with exempt public interest law firms and legal aid societies by supplementing the nominal salaries paid