Table of Contents
- Introduction
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Contributions to 501(c)(3) Organizations
- Application for Recognition of Exemption
- Political activity.
- Private delivery service.
- Amendments to organizing documents required.
- How to show reasonable action and good faith.
- Not acting reasonably and in good faith.
- Prejudicing the interest of the Government.
- Procedure for requesting extension.
- More information.
- Organizations Not Required To File Form 1023
- Articles of Organization
- Educational Organizations and Private Schools
- Organizations Providing Insurance
- Other Section 501(c)(3) Organizations
- Private Foundations and Public Charities
- Lobbying Expenditures
An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes.
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Religious.
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Charitable.
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Scientific.
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Testing for public safety.
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Literary.
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Educational.
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Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment; however, see Amateur Athletic Organizations , later in this chapter).
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The prevention of cruelty to children or animals.
To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.
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Nonprofit old-age homes,
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Parent-teacher associations,
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Charitable hospitals or other charitable organizations,
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Alumni associations,
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Schools,
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Chapters of the Red Cross,
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Boys' or Girls' Clubs, and
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Churches.
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Contributions to 501(c)(3) organizations,
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Applications for recognition of exemption,
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Articles of Organization,
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Educational organizations and private schools,
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Organizations providing insurance,
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Other section 501(c)(3) organizations,
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Private foundations and public charities, and
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Lobbying expenditures.
Forms (and Instructions)
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1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
See chapter 6 for information about getting publications and forms.
Contributions to domestic organizations described in this chapter, except organizations testing for public safety, are deductible as charitable contributions on the donor's federal income tax return.
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The organization directly or indirectly pays, or previously paid, a premium on a personal benefit contract for the transferor, or
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There is an understanding or expectation that anyone will directly or indirectly pay a premium on a personal benefit contract for the transferor.
This discussion describes certain information to be provided upon application for recognition of exemption by all organizations created for any of the purposes described earlier in this chapter. For example, the application must include a conformed copy of the organization's articles of incorporation, as discussed under Articles of Organization , later in this chapter. See the organization headings that follow for specific information your organization may need to provide.
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The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (religious, charitable, etc.) specified in the introduction to this chapter.
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No part of the organization's net earnings will inure to the benefit of private shareholders or individuals. You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests.
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The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. See Political activity, next, and Lobbying Expenditures , near the end of this chapter.
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DHL Express (DHL): DHL “Same Day” Service.
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Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
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United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.
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Automatic 12-month extension. Organizations will receive an automatic 12-month extension if they file an application for recognition of exemption with the IRS within 12 months of the original deadline. To get this extension, an organization must add the following statement at the top of its application: “Filed Pursuant to Section 301.9100-2.”
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Discretionary extensions. An organization that fails to file a Form 1023 within the extended 12-month period will be granted an extension to file if it submits evidence (including affidavits) to establish that:
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It acted reasonably and in good faith, and
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Granting a discretionary extension will not prejudice the interests of the government.
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The organization requests relief before its failure to file is discovered by the IRS.
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The organization failed to file because of intervening events beyond its control.
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The organization exercised reasonable diligence (taking into account the complexity of the return or issue and the organization's experience in these matters) but was not aware of the filing requirement.
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The organization reasonably relied upon the written advice of the IRS.
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The organization reasonably relied upon the advice of a qualified tax professional who failed to file or advise the organization to file Form 1023. An organization cannot rely on the advice of a tax professional if it knows or should know that he or she is not competent to render advice on filing exemption applications or is not aware of all the relevant facts.
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It seeks to change a return position for which an accuracy-related penalty has been or could be imposed at the time the relief is requested.
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It was informed of the requirement to file and related tax consequences, but chose not to file.
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It uses hindsight in requesting relief. The IRS will not ordinarily grant an extension if specific facts have changed since the due date that makes filing an application advantageous to an organization.
The interests of the Government are ordinarily prejudiced if the tax year in which the application should have been filed (or any tax year that would have been affected had the filing been timely) are closed by the statute of limitations before relief is granted. The IRS can condition a grant of relief on the organization providing the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced.
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A statement showing the date Form 1023 was required to have been filed and the date it was actually filed.
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Any documents relevant to the application.
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An affidavit describing in detail the events that led to the failure to apply and to the discovery of that failure. If the organization relied on a tax professional's advice, the affidavit must describe the engagement and responsibilities of the professional and the extent to which the organization relied on him or her.
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This affidavit must be accompanied by a dated declaration, signed by an individual who has personal knowledge of the facts and circumstances, who is authorized to act for the organization, which states, “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete.”
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Detailed affidavits from individuals having knowledge or information about the events that led to the failure to make the application and to the discovery of that failure. This includes the organization's return preparer, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer on the application. The affidavits must describe the engagement and responsibilities of the individual and the advice that he or she provided.
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These affidavits must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete.”
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The organization must state whether the returns for the tax year in which the application should have been filed or any tax years that would have been affected by the application had it been timely made are being examined by the IRS, an appeals office, or a federal court. The organization must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the organization's request for relief is pending.
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The organization, if requested, has to submit copies of its tax returns, and copies of the returns of other affected taxpayers.
Some organizations are not required to file Form 1023. These include:
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Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men's or women's organization, religious school, mission society, or youth group.
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Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later).
These organizations are exempt automatically if they meet the requirements of section 501(c)(3).
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During its first tax year the organization received gross receipts of $7,500 or less,
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During its first 2 years the organization had a total of $12,000 or less in gross receipts, and
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In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less.
Your organization must include a conformed copy of its articles of organization with the application for recognition of exemption. This may be its trust instrument, corporate charter, articles of association, or any other written instrument by which it is created.
The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. These conditions for exemption are referred to as the organizational test.
Section 501(c)(3) is the provision of law that grants exemption to the organizations described in this chapter. Therefore, the organizational test may be met if the purposes stated in the articles of organization are limited in some way by reference to section 501(c)(3).
The requirement that your organization's purposes and powers must be limited by the articles of organization is not satisfied if the limit is contained only in the bylaws or other rules or regulations. Moreover, the organizational test is not satisfied by statements of your organization's officers that you intend to operate only for exempt purposes. Also, the test is not satisfied by the fact that your actual operations are for exempt purposes.
In interpreting an organization's articles, the law of the state where the organization was created is controlling. If an organization contends that the terms of its articles have a different meaning under state law than their generally accepted meaning, such meaning must be established by a clear and convincing reference to relevant court decisions, opinions of the state attorney general, or other appropriate state authorities.
The following are examples illustrating the organizational test.
Example 1.
Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). These articles appropriately limit the organization's purposes. The organization meets the organizational test.
Example 2.
An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. The organization will not be properly limited as to its purposes since all research is not scientific. The organization does not meet the organizational test.
Example 3.
An organization's articles state that its purpose is to receive contributions and pay them over to organizations that are described in section 501(c)(3) and exempt from taxation under section 501(a). The organization meets the organizational test.
Example 4.
If a stated purpose in the articles is the conduct of a school of adult education and its manner of operation is described in detail, such a purpose will be satisfactorily limited.
Example 5.
If the articles state the organization is formed for charitable purposes, without any further description, such language ordinarily will be sufficient since the term charitable has a generally accepted legal meaning. On the other hand, if the purposes are stated to be charitable, philanthropic, and benevolent, the organizational requirement will not be met since the terms philanthropic and benevolent have no generally accepted legal meaning and, therefore, the stated purposes may, under the laws of the state, permit activities that are broader than those intended by the exemption law.
Example 6.
If the articles state an organization is formed to promote American ideals, or to foster the best interests of the people, or to further the common welfare and well-being of the community, without any limitation or provision restricting such purposes to accomplishment only in a charitable manner, the purposes will not be sufficiently limited. Such purposes are vague and may be accomplished other than in an exempt manner.
Assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the Federal Government or to a state or local government for a public purpose. If the assets could be distributed to members or private individuals or for any other purpose, the organizational test is not met.
If your organization wants to obtain recognition of exemption as an educational organization, you must submit complete information as to how your organization carries on or plans to carry on its educational activities, such as by conducting a school, by panels, discussions, lectures, forums, radio and television programs, or through various cultural media such as museums, symphony orchestras, or art exhibits. In each instance, you must explain by whom and where these activities are or will be conducted and the amount of admission fees, if any. You must submit a copy of the pertinent contracts, agreements, publications, programs, etc.
If you are organized to conduct a school, you must submit full information regarding your tuition charges, number of faculty members, number of full-time and part-time students enrolled, courses of study and degrees conferred, together with a copy of your school catalog. See also Private Schools , discussed later.
The term educational relates to:
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The instruction or training of individuals for the purpose of improving or developing their capabilities, or
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The instruction of the public on subjects useful to individuals and beneficial to the community.
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The presentation of viewpoints unsupported by facts is a significant part of the organization's communications.
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The facts that purport to support the viewpoint are distorted.
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The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of emotion than of objective evaluations.
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The approach used is not aimed at developing an understanding on the part of the audience because it does not consider their background or training.
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An organization, such as a primary or secondary school, a college, or a professional or trade school, that has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled student body in attendance at a place where the educational activities are regularly carried on,
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An organization whose activities consist of conducting public discussion groups, forums, panels, lectures, or other similar programs,
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An organization that presents a course of instruction by correspondence or through the use of television or radio,
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A museum, zoo, planetarium, symphony orchestra, or other similar organization,
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A nonprofit children's day-care center, and
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A credit counseling organization.
Every private school filing an application for recognition of tax-exempt status must supply the IRS (on Schedule B, Form 1023) with the following information.
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The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. (This information also must be projected, so far as may be feasible, for the next academic year.)
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The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards.
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A list of the school's incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations.
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A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed.
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The public school district and county in which the school is located.
To qualify as an organization exempt from federal income tax, a private school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and that it does not discriminate against applicants and students on the basis of race, color, or national or ethnic origin. Also, the school must circulate information that clearly states the school's admission policies. A racially nondiscriminatory policy toward students means that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administering its educational policies, admission policies, scholarship and loan programs, and athletic and other school-administered programs.
The IRS considers discrimination on the basis of race to include discrimination on the basis of color or national or ethnic origin.
The existence of a racially discriminatory policy with respect to the employment of faculty and administrative staff is indicative of a racially discriminatory policy as to students. Conversely, the absence of racial discrimination in the employment of faculty and administrative staff is indicative of a racially nondiscriminatory policy as to students.
A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance is not discrimination on the basis of race when the purpose and effect of this policy is to promote establishing and maintaining the school's nondiscriminatory policy.
A school that selects students on the basis of membership in a religious denomination or unit is not discriminating if membership in the denomination or unit is open to all on a racially nondiscriminatory basis.
If this method is used, the notice must meet the following printing requirements.
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It must appear in a section of the newspaper likely to be read by prospective students and their families.
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It must occupy at least 3 column inches.
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It must have its title printed in at least 12 point bold face type.
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It must have the remaining text printed in at least 8 point type.
The following is an acceptable example of the notice:
| NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS |
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| The M School admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. |
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First, if for the preceding 3 years the enrollment of a parochial or other church-related school consists of students at least 75% of whom are members of the sponsoring religious denomination or unit, the school can make known its racially nondiscriminatory policy in whatever newspapers or circulars the religious denomination or unit uses in the communities from which the students are drawn. These newspapers and circulars can be distributed by a particular religious denomination or unit or by an association that represents a number of religious organizations of the same denomination. If, however, the school advertises in newspapers of general circulation in the community or communities from which its students are drawn and the second exception (discussed next) does not apply to the school, then it must comply with either of the publicity requirements explained earlier. |
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Second, if a school customarily draws a substantial percentage of its students nationwide, worldwide, from a large geographic section or sections of the United States, or from local communities, and if the school follows a racially nondiscriminatory policy as to its students, the school may satisfy the publicity requirement by complying with the instructions explained earlier under Policy statement . |
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Records indicating the racial composition of the student body, faculty, and administrative staff for each academic year.
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Records sufficient to document that scholarship and other financial assistance is awarded on a racially nondiscriminatory basis.
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Copies of all materials used by or on behalf of the school to solicit contributions.
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Copies of all brochures, catalogs, and advertising dealing with student admissions, programs, and scholarships. (Schools advertising nationally or in a large geographic segment or segments of the United States need only maintain a record sufficient to indicate when and in what publications their advertisements were placed.)
The racial composition of the student body, faculty, and administrative staff can be determined in the same manner as that described at the beginning of this section. However, a school cannot discontinue maintaining a system of records that reflect the racial composition of its students, faculty, and administrative staff used on November 6, 1975, unless it substitutes a different system that compiles substantially the same information, without advance approval of the IRS.
The IRS does not require that a school release any personally identifiable records or personal information except in accordance with the requirements of the Family Educational Rights and Privacy Act of 1974. Similarly, the IRS does not require a school to keep records prohibited under state or federal law.
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Substantially the same information has been included in a report or reports filed with an agency or agencies of federal, state, or local governments, and this information is current within 1 year.
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The school maintains copies of these reports from which this information is readily obtainable.
An organization described in sections 501(c)(3) or 501(c)(4) may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance.
However, this rule does not apply to state-sponsored organizations described in sections 501(c)(26) or 501(c)(27), which are discussed in chapter 4, or to charitable risk pools, discussed next.
A charitable risk pool is treated as organized and operated exclusively for charitable purposes if it:
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Is organized and operated only to pool insurable risks of its members (not including risks related to medical malpractice) and to provide information to its members about loss control and risk management,
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Consists only of members that are section 501(c)(3) organizations exempt from tax under section 501(a),
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Is organized under state law authorizing this type of risk pooling,
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Is exempt from state income tax (or will be after qualifying as a section 501(c)(3) organization),
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Has obtained at least $1,000,000 in startup capital from nonmember charitable organizations,
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Is controlled by a board of directors elected by its members, and
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Is organized under documents requiring that:
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Each member be a section 501(c)(3) organization exempt from tax under section 501(a),
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Each member that receives a final determination that it no longer qualifies under section 501(c)(3) notify the pool immediately, and
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Each insurance policy issued by the pool provide that it will not cover events occurring after a final determination described in (b).
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In addition to the information required for all organizations, as described earlier, you should include any other information described in this section.
If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. Some examples of this type of organization are those organized for:
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Relief of the poor, the distressed, or the underprivileged,
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Advancement of religion,
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Advancement of education or science,
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Erection or maintenance of public buildings, monuments, or works,
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Lessening the burdens of government,
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Lessening of neighborhood tensions,
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Elimination of prejudice and discrimination,
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Defense of human and civil rights secured by law, and
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Combating community deterioration and juvenile delinquency.
The rest of this section contains a description of the information to be provided by certain specific organizations. This information is in addition to the required inclusions described in chapter 1, and other statements requested on Form 1023. Each of the following organizations must submit the information described.
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Criteria used for selecting recipients, including the rules of eligibility.
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How and by whom the recipients are or will be selected.
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If awards are or will be made directly to individuals, whether information is required assuring that the student remains in school.
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If awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer—
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Whether any preference is or will be accorded an applicant by reason of the parent's position, length of employment, or salary,
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Whether as a condition of the award the recipient must upon graduation accept employment with the company, and
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Whether the award will be continued even if the parent's employment ends.
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A copy of the scholarship application form and any brochures or literature describing the scholarship program.
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The names of the active and courtesy staff members of the proprietary hospital, as well as the names of your medical staff members after the transfer to nonprofit ownership, and
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The names of any doctors who continued to lease office space in the hospital after its transfer to nonprofit ownership and the amount of rent paid. Submit also an appraisal showing the fair rental value of the rented space.
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A description of the facilities and services,
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To whom the services are offered, such as the public at large or a specific group,
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How charges are determined, such as on a profit basis, to recover costs, or at less than cost,
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By whom administered and controlled,
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Whether any of the professional staff (that is, those who perform or will perform the clinical services) also serve or will serve in an administrative capacity, and
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How compensation paid the professional staff is or will be determined.
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An explanation of the circumstances under which such loans are, or will be, made.
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Criteria for selection, including the rules of eligibility.
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How and by whom the recipients are or will be selected.
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Manner of repayment of the loan.
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Security required, if any.
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Interest charged, if any, and when payable.
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Copies in duplicate of the loan application and any brochures or literature describing the loan program.
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How the litigation can reasonably be said to be representative of a broad public interest rather than a private one.
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Whether the organization will accept fees for its services.
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A description of the cases litigated or to be litigated and how they benefit the public generally.
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Whether the policies and program of the organization are the responsibility of a board or committee representative of the public interest, which is neither controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in this chapter.
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Whether the organization is operated, through sharing of office space or otherwise, in a way to create identification or confusion with a particular private law firm.
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Whether there is an arrangement to provide, directly or indirectly, a deduction for the cost of litigation that is for the private benefit of the donor.
To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines.
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That the particular religious beliefs of the organization are truly and sincerely held.
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That the practices and rituals associated with the organization's religious belief or creed are not illegal or contrary to clearly defined public policy.
Therefore, your group (or organization) may not qualify for treatment as an exempt religious organization for tax purposes if its actions, as contrasted with its beliefs, are contrary to well established and clearly defined public policy. If there is a clear showing that the beliefs (or doctrines) are sincerely held by those professing them, the IRS will not question the religious nature of those beliefs.
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The organization is described both in sections 501(c)(3) and 509(a)(1), 509(a)(2), or 509(a)(3).
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It is affiliated with a church or a convention or association of churches.
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It is internally supported. An organization is internally supported unless both of the following are true.
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It offers admissions, goods, services, or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for a small part of the cost).
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It normally gets more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses.
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You must show that your organization's research will be carried on in the public interest. Scientific research will be considered to be in the public interest if the results of the research (including any patents, copyrights, processes, or formulas) are made available to the public on a nondiscriminatory basis; if the research is performed for the United States or a state, county, or municipal government; or if the research is carried on for one of the following purposes.
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Aiding in the scientific education of college or university students.
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Obtaining scientific information that is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public.
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Discovering a cure for a disease.
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Aiding a community or geographical area by attracting new industry to the community or area, or by encouraging the development or retention of an industry in the community or area.
Scientific research, for exemption purposes, does not include activities of a type ordinarily incidental to commercial or industrial operations such as the ordinary inspection or testing of materials or products, or the designing or constructing of equipment, buildings, etc.
If you engage or plan to engage in research, submit all of the following.
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An explanation of the nature of the research.
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A brief description of research projects completed or presently being engaged in.
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How and by whom research projects are determined and selected.
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Whether you have contracted or sponsored research, or contemplated doing so, and, if so, names of past sponsors or grantors, terms of grants or contracts, together with copies of any executed contracts or grants.
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Disposition made or to be made of the results of your research, including whether preference has been or will be given to any organization or individual either as to results or time of release.
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Who will retain ownership or control of any patents, copyrights, processes, or formulas resulting from your research.
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A copy of publications or other media showing reports of your research activities. Only reports of your research activities or those conducted on your behalf, as distinguished from those of your creators or members conducted in their individual capacities, should be submitted.
If your organization is established to operate a book store or engage in publishing activities of any nature (printing, publication, or distribution of your own material or that printed or published by others and distributed by you), explain fully the nature of the operations, including whether sales are or will be made to the general public, the type of literature involved, and how these activities are related to your stated purposes.
There are two types of amateur athletic organizations that can qualify for tax-exempt status. The first type is an organization that fosters national or international amateur sports competition but only if none of its activities involve providing athletic facilities or equipment. The second type is a Qualified amateur sports organization (discussed below). The difference is that a qualified amateur sports organization can provide athletic facilities and equipment.
Donations to either type of amateur athletic organization are deductible as charitable contributions on the donor's federal income tax return. However, no deduction is allowed if there is a direct personal benefit to the donor or any other person other than the organization.
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Exclusively to foster national or international amateur sports competition, and
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Primarily to conduct national or international competition in sports or to support and develop amateur athletes for that competition.
Examples of activities that may qualify this type of organization for exempt status are:
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Preventing children from working in hazardous trades or occupations,
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Promoting high standards of care for laboratory animals, and
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Providing funds to pet owners to have their pets spayed or neutered to prevent overbreeding.
It is important that you determine if your organization is a private foundation. Most organizations exempt from income tax (as organizations described in section 501(c)(3)) are presumed to be private foundations unless they notify the IRS within a specified period of time that they meet the requirements of section 509(a) to be treated as other than a private foundation. This notice requirement applies to most section 501(c)(3) organizations regardless of when they were formed.
Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in sections 509(a)(1), 509(a)(2), 509(a)(3), or 509(a)(4)). In effect, the definition divides these organizations into two classes, namely private foundations and public charities. Public charities are discussed later.
Organizations that fall into the excluded categories are generally those that either have broad public support or actively function in a supporting relationship to those organizations. Organizations that test for public safety also are excluded.
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The corporation will distribute its income for each tax year at a time and in a manner as not to become subject to the tax on undistributed income imposed by section 4942 of the Internal Revenue Code, or the corresponding section of any future federal tax code.
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The corporation will not engage in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
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The corporation will not retain any excess business holdings as defined in section 4943(c) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
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The corporation will not make any investments in a manner as to subject it to tax under section 4944 of the Internal Revenue Code, or the corresponding section of any future federal tax code.
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The corporation will not make any taxable expenditures as defined in section 4945(d) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
Any other provisions of this instrument notwithstanding, the trustees shall distribute its income for each tax year at a time and in a manner as not to become subject to the tax on undistributed income imposed by section 4942 of the Internal Revenue Code, or the corresponding section of any future federal tax code.
Any other provisions of this instrument notwithstanding, the trustees will not engage in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor retain any excess business holdings as defined in section 4943(c) of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor make any investments in a manner as to incur tax liability under section 4944 of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor make any taxable expenditures as defined in section 4945 (d) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
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Require it to act or refrain from acting so as not to subject the foundation to the taxes imposed on prohibited transactions, or
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Treat the required provisions as contained in the foundation's governing instrument.
A private foundation is any organization described in Section 501(c)(3), unless it falls into one of the categories specifically excluded from the definition of that term in section 509(a), which lists four basic categories of exclusions. These categories are discussed under the Section 509(a)(1), 509(a)(2), 509(a)(3), and 509(a)(4) Organizations headings that follow this introduction. See Section 509(a)(1) Organizations, etc.
If your organization falls into one of these categories, it is not a private foundation and you should state this in Part X of your application for recognition of exemption (Form 1023).
If your organization does not fall into one of these categories, it is a private foundation and is subject to the applicable rules and restrictions until it terminates its private foundation status. Some private foundations also qualify as private operating foundations; these are discussed near the end of this chapter.
Generally speaking, a large class of organizations excluded under section 509(a)(1) and all organizations excluded under section 509(a)(2) depend upon a support test. This test is used to assure a minimum percentage of broad-based public support in the organization's total support pattern. Thus, in the following discussions, when the one-third support test (see Qualifying as Publicly Supported , later) is referred to, it means the following fraction normally must equal at least one-third.
Section 509(a)(1) organizations include:
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A church or a convention or association of churches,
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An educational organization such as a school or college,
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A hospital or medical research organization operated in conjunction with a hospital,
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Endowment funds operated for the benefit of certain state and municipal colleges and universities,
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A governmental unit, and
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A publicly supported organization.
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Receive, hold, invest, and administer property for a college or university, and
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Make expenditures to or for the benefit of a college or university.
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An agency or instrumentality of a state or political subdivision, or
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Owned or operated by:
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A state or political subdivision, or
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An agency or instrumentality of one or more states or political subdivisions.
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Acquiring and maintaining real property comprising part of the campus area,
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Erecting (or participating in erecting) college or university buildings,
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Acquiring and maintaining equipment and furnishings used for, or in conjunction with, normal functions of colleges and universities,
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Libraries,
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Scholarships, and
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Student loans.
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Museums of history, art, or science,
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Libraries,
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Community centers to promote the arts,
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Organizations providing facilities for the support of an opera, symphony orchestra, ballet, or repertory drama, or for some other direct service to the general public, and
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Organizations such as the American Red Cross or the United Way.
An organization will qualify as publicly supported if it passes the one-third support test. If it fails that test, it may qualify under the facts and circumstances test.
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Public officials acting in their public capacities,
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Individuals selected by public officials acting in their public capacities,
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Persons having special knowledge or expertise in the particular field or discipline in which the organization is operating, and
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Community leaders, such as elected or appointed officials, members of the clergy, educators, civic leaders, or other such persons representing a broad cross-section of the views and interests of the community.
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A museum or library that is open to the public,
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A symphony orchestra that gives public performances,
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A conservation organization that provides educational services to the public through the distribution of educational materials, or
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An old-age home that provides domiciliary or nursing services for members of the general public.
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Participating in, or sponsoring, the programs of the organization by members of the public having special knowledge or expertise, public officials, or civic or community leaders.
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Maintaining a definitive program by the organization to accomplish its charitable work in the community, such as slum clearance or developing employment opportunities.
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Receiving a significant part of its funds from a public charity or governmental agency to which it is in some way held accountable as a condition of the grant, contract, or contribution.
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Whether the solicitation for dues-paying members is designed to enroll a substantial number of persons in the community or area, or in a particular profession or field of special interest (taking into account the size of the area and the nature of the organization's activities).
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Whether membership dues for individual (rather than institutional) members have been fixed at rates designed to make membership available to a broad cross section of the interested public, rather than to restrict membership to a limited number of persons.
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Whether the activities of the organization will be likely to appeal to persons having some broad common interest or purpose, such as educational activities in the case of alumni associations, musical activities in the case of symphony societies, or civic affairs in the case of parent-teacher associations.
Example.
X is recognized as an organization described in section 501(c)(3). On the basis of support received during tax years 2009, 2010, 2011, 2012, and 2013, it meets the one-third support test for tax year 2013 (the current tax year). X also meets the one-third support test for 2014, as the immediately succeeding tax year.
In tax years 2010, 2011, 2012, 2013, and 2014, in the aggregate, X does not receive at least one-third of its support from governmental units referred to in section 170(c)(1), from contributions made directly or indirectly by the general public, or from a combination of these sources. X still meets the one-third support test for tax year 2014 based on the aggregate support received for tax years 2009 through 2013.
In tax years 2011, 2012, 2013, 2014, and 2015, in the aggregate, X does not receive at least one-third of its support from governmental units referred to in section 170(c)(1), from contributions made directly or indirectly by the general public, or from a combination of these sources. X does not meet the one-third support test for tax year 2015.
Based on the aggregate support and other factors listed in Regulations section 1.170A-9(f)(3)(iii)(A) through (E) for tax years 2010, 2011, 2012, 2013, and 2014, X meets the facts and circumstances test for tax year 2014 and for tax year 2015 (as the immediately succeeding tax year). Therefore, X is still an organization described in section 170(b)(1)(A)(vi) for tax year 2015, even though X did not meet the one-third support test for that year.
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Gifts, grants, contributions, or membership fees,
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Net income from unrelated business activities, whether or not those activities are carried on regularly as a trade or business,
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Gross investment income,
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Tax revenues levied for the benefit of an organization and either paid to or spent on behalf of the organization, and
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The value of services or facilities furnished by a governmental unit to an organization without charge (except services or facilities generally furnished to the public without charge).
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Any amount received from the exercise or performance by an organization of the purpose or function constituting the basis for its exemption (in general, these amounts include amounts received from any activity the conduct of which is substantially related to the furtherance of the exempt purpose or function, other than through the production of income), or
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Contributions of services for which a deduction is not allowed.
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Almost all support from gross receipts from related activities, and
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An insignificant amount of support from governmental units (without regard to amounts referred to in (3) in the list of items included in support) and contributions made directly or indirectly by the general public.
Example.
Z, an organization described in section 501(c)(3), is controlled by Thomas Blue, its president. Z received $500,000 during the current tax year and the 4 tax years immediately before its current tax year under a contract with the Department of Transportation, under which Z engaged in research to improve a particular vehicle used primarily by the Federal Government. During the same period, the only other support received by Z was $5,000 in small contributions primarily from Z's employees and business associates. The $500,000 is support under (1) above. Under these circumstances, Z meets the conditions of (1) and (2) above and so does not meet the one-third support test or the ten-percent-of-support requirement.
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Amounts paid to maintain library facilities that are open to the public,
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Amounts paid under government programs to nursing homes or homes for the aged to provide health care or domiciliary services to residents of these facilities, and
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Amounts paid to child placement or child guidance organizations under government programs for services rendered to children in the community.
Example 1.
M, a national foundation for the encouragement of the musical arts, is a publicly supported organization. George Spruce gives M a donation of $5,000 without imposing any restrictions or conditions upon the gift. M later makes a $5,000 grant to X, an organization devoted to giving public performances of chamber music. Since the grant to X is treated as being received from M, it is fully includible in the numerator of X's support fraction for the tax year of receipt.
Example 2.
Assume M is the same organization described in Example 1. Tom Grove gives M a donation of $10,000, but requires that M spend the money to support organizations devoted to the advancement of contemporary American music. M has complete discretion as to the organizations of the type described to which it will make a grant. M decides to make grants of $5,000 each to Y and Z, both being organizations described in section 501(c)(3) and devoted to furthering contemporary American music. Since the grants to Y and Z are treated as having been received from M, Y and Z each may include one of the $5,000 grants in the numerator of its support fraction. Although the donation to M was conditioned upon the use of the funds for a particular purpose, M was free to select the ultimate recipient.
Example 3.
N is a national foundation for the encouragement of art and is a publicly supported organization. Grants to N are permitted to be earmarked for particular purposes. O, which is an art workshop devoted to training young artists and which is claiming status as a publicly supported organization, persuades C, a private foundation, to make a grant of $25,000 to N. C is a disqualified person with respect to O. C makes the grant to N with the understanding that N would be bound to make a grant to O in the sum of $25,000, in addition to a matching grant of N's funds to O in the sum of $25,000. Only the $25,000 received directly from N is considered a grant from N. The other $25,000 is an indirect contribution from C to O and is to be excluded from the numerator of O's support fraction to the extent it exceeds the 2% limit.
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Are attracted by the publicly supported nature of the organization,
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Are unusual or unexpected in amount, and
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Would adversely affect, because of the size, the status of the organization as normally being publicly supported. (The organization must otherwise meet the support test in that year without benefit of the grant or contribution.)
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The grant or contribution is not made by a person (or related person) who created the organization or was a substantial contributor to the organization before the grant or contribution.
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The grant or contribution is not made by a person (or related person) who is in a position of authority, such as a foundation manager, or who otherwise has the ability to exercise control over the organization. Similarly, the grant or contribution is not made by a person (or related person) who, because of the grant or contribution, obtains a position of authority or the ability to otherwise exercise control over the organization.
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The grant or contribution is in the form of cash, readily marketable securities, or assets that directly further the organization's exempt purposes, such as a gift of a painting to a museum.
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The donee organization has received a final ruling or determination letter classifying it as a publicly supported organization and the organization is actively engaged in a program of activities in furtherance of its exempt purpose.
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No material restrictions or conditions have been imposed by the grantor or contributor upon the organization in connection with the grant or contribution.
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If the grant or contribution is intended for operating expenses, rather than capital items, the terms and amount of the grant or contribution are expressly limited to 1 year's operating expenses.
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Whether the contribution was a bequest or a transfer while living. A bequest will be given more favorable consideration than a transfer while living.
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Whether, before the receipt of the contribution, the organization has carried on an active program of public solicitation and exempt activities and has been able to attract a significant amount of public support.
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Whether, before the year of contribution, the organization met the one-third support test without benefit of any exclusions of unusual grants.
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Whether the organization may reasonably be expected to attract a significant amount of public support after the contribution. Continued reliance on unusual grants to fund an organization's current operating expenses (as opposed to providing new endowment funds) may be evidence that the organization cannot reasonably be expected to attract future support from the general public.
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Whether the organization has a representative governing body.
Example 1.
M is recognized as an organization described in section 501(c)(3). For the years 2008 through 2012 (the applicable period for the tax year 2012 under Regulations section 1.170A-9(f)(3)), M received support (as defined in paragraphs Regulations section 1.170A-9(f)(6) through (8)) of $600,000 from the following sources:
| Investment Income | $300,000 |
| City Y (a governmental unit described in section 170(c)(1)) | 40,000 |
| United Way (an organization described in section 170(b)(1)(A)(vi)) | 40,000 |
| Contributions | 220,000 |
| Total support | $600,000 |
For tax year 2012, M's public support is computed as follows:
| One-third of total support | $200,000 |
| Support from a governmental unit described in section 170(c)(1) | $40,000 |
| Indirect contributions from the general public (United Way) | 40,000 |
| Contributions by various donors (no one having made contributions that total more than $12,000—2% of total support) | 50,000 |
| Six contributions (each in excess of $12,000—2% of total support) 6 × $12,000 | 72,000 |
| $202,000 | |
M's support from governmental units and from direct and indirect contributions from the general public for the 2012 tax year normally exceeds one-third of M's total support ($202,000/$600,000 = 33.67 percent) for the applicable period (2008 through 2012). M meets the one-third support test for 2012 and is therefore publicly supported for the tax years 2012 and 2013.
Example 2.
N is recognized as an organization described in section 501(c)(3). It was created to maintain public gardens containing botanical specimens and displaying statuary and other art objects. The facilities, works of art, and a large endowment were all contributed by a single contributor. The members of the governing body of the organization are unrelated to its creator. The gardens are open to the public without charge and attract many visitors each year. For the current tax year and the 4 tax years preceding the current tax year, 95% of the organization's total support was received from investment income from its original endowment. N also maintains a membership society that is supported by members of the general public who wish to contribute to the upkeep of the gardens by paying a small annual membership fee. Over the 5-year period in question, these fees from the general public constituted the remaining 5% of the organization's total support. Under these circumstances, N does not meet the one-third support test for its current tax year. Furthermore, since only 5% was received from the general public, N does not satisfy the 10 percent support limitation under Regulations section 1.170A-9(f)(3)(i), and therefore does not qualify as publicly supported under the facts and circumstances test. Because N has failed to satisfy the 10 percent support limitation, none of the other requirements or factors in Regulations section 1.170A-9(f)(3)(iii)(A) through (E) can be considered in determining whether N qualifies as a publicly supported organization. For its current tax year, N is not an organization described in section 170(b)(1)(A)(vi).
Example 3.
O, an art museum, is recognized as an organization described in section 501(c)(3). In 1930, O was founded in S City by members of a single family to collect, preserve, interpret, and display to the public important works of art. O is governed by a Board of Trustees that originally consisted almost entirely of members of the founding family. However, since 1945, members of the founding family or persons standing in relationship to the members of that family described in section 4946(a)(1)(C) through (G) have annually constituted less than one-fifth of the Board of Trustees. The remaining board members are citizens of S City from a variety of professions and occupations who represent the interests and views of the people of S City in the activities carried on by the organization rather than the personal or private interests of the founding family. O solicits contributions from the general public, and for the current tax year and each of the 4 tax years immediately preceding the current tax year, O has received total contributions (in small sums of less than $100, none of which exceeds 2 percent of O's total support for such period) in excess of $10,000. These contributions from the general public represent 25 percent of the organization's total support for that 5-year period. For the same period, investment income from several large endowment funds has constituted 75 percent of O's total support. O expends substantially all of its annual income for its exempt purposes and thus depends on the funds it annually solicits from the public as well as its investment income in order to carry out its activities on a normal and continuing basis and to acquire new works of art. O has, for the entire period of its existence, been open to the public and more than 300,000 people (from S City and elsewhere) have visited the museum in the current tax year and the 4 years immediately preceding the current tax year.
Under these circumstances, O does not meet the one-third support test for its current year because it has received only 25 percent of its total support for the applicable 5-year period from the general public. However, under the facts set forth, O has met the 10 percent support limitation under Regulations section 1.170A-9(f)(3)(i), as well as the requirements of Regulations section 1.170A-9(f)(3)(ii). Under all of the facts set forth, O is considered as meeting the requirements of the facts and circumstances test on the basis of satisfying Regulations section 1.170A-9(f)(3)(iii)(A) through (D). O is therefore publicly supported for its current tax year and the immediately succeeding tax year.
Example 4.
In 1960, the P Philharmonic Orchestra was organized in T City by a local music society and a local women's club to present to the public a wide variety of musical programs intended to foster music appreciation in the community. P is recognized as an organization described in section 501(c)(3). The orchestra is composed of professional musicians who are paid by the association. Twelve performances, open to the public, are scheduled each year. A small admission charge is made for each of these performances. In addition, several performances are staged annually without charge.
During the current tax year and the 4 tax years immediately preceding the current tax year, P received separate contributions of $200,000 each from A and B (not members of a single family) and support of $120,000 from the T Community Chest, a public federated fundraising organization operating in T City. P depends on these funds to carry out its activities and will continue to depend on contributions of this type to be made in the future. P has also begun a fundraising campaign in an attempt to expand its activities for the coming years.
P is governed by a Board of Directors composed of five individuals. A faculty member of a local college, the president of a local music society, the head of a local banking institution, a prominent doctor, and a member of the governing body of the local Chamber of Commerce currently serve on the Board and represent the interests and views of the community in the activities carried on by P.
For P's current tax year, its sources of support are computed on the basis of the current tax year and the 4 immediately preceding tax years, as follows.
| Contributions | $520,000 |
| Receipts from performances | 100,000 |
| $620,000 | |
| Less: | |
| Receipts from performances (excluded, see Support) | 100,000 |
| Total support | $520,000 |
| T Community Chest (indirect support from the general public) | $120,000 |
| Two contributions (each over $10,400—2% of total support) 2 × $10,400 | 20,800 |
| Total support from general public | $140,800 |
P's support from the general public, directly and indirectly, does not meet the one-third support test ($140,800/$520,000 = 27% of total support). However, because P receives 27 percent of its total support from the general public, it meets the 10 percent support limitation under Regulations section 1.170A-9(f)(3)(i). P also meets the requirements of Regulations section 1.170A-9(f)(3)(ii). As a result of satisfying these requirements and factors, P is considered to meet the facts and circumstances test and therefore qualifies as a publicly supported organization for its current tax year and the immediately succeeding tax year.
Example 5.
Q is recognized as an organization described in section 501(c)(3) and it is a philanthropic organization. Q was founded in 1965 by C for the purpose of making annual contributions to worthy charities. C created Q as a charitable trust by transferring $500,000 worth of appreciated securities to Q.
Under the trust agreement, C and two other family members are the sole trustees of Q and are vested with the right to appoint successor trustees. In each of the current tax year and the 4 tax years immediately preceding the current tax year, Q received $15,000 in investment income from its original endowment. Each year Q solicits funds by operating a charity ball at C's residence. Guests are invited and asked to make contributions of $100 per couple. During the 5-year period involved, $15,000 was received from the proceeds of these events. C and his family have also made contributions to Q of $25,000 over the 5-year period at issue. Q makes disbursements each year of substantially all of its net income to the public charities chosen by the trustees.
Q's sources of support for the current tax year and the 4 tax years immediately preceding the current tax year are as follows:
| Investment income | $60,000 |
| Contributions | $40,000 |
| Total support | $100,000 |
| Contributions from the general public | $15,000 |
| One contribution (over $2,000—2% of total support) 1 × $2,000 | 2,000 |
| Total support from general public | $17,000 |
Q's support from the general public does not meet the one-third support test ($17,000/$100,000 = 17% of total support). Even though it does meet the ten-percent-of-support requirement, its method of solicitation makes it questionable whether Q satisfies Regulations section 1.170A-9(f)(3)(ii). Because of its method of operating, Q also has a greater burden of establishing its publicly supported nature. Based on these facts and on Q's failure to receive favorable consideration under the remaining factors of Regulations section 1.170A-9(f)(3)(iii), Q does not satisfy the facts and circumstances test and therefore does not qualify as a publicly supported organization.
Community trusts are often established to attract large contributions of a capital or endowment nature for the benefit of a particular community or area. Often these contributions come initially from a small number of donors. While the community trust generally has a governing body composed of representatives of the particular community or area, its contributions are often received and maintained in the form of separate trusts or funds that are subject to varying degrees of control by the governing body.
To qualify as a publicly supported organization, a community trust must meet the one-third support test, explained earlier under Qualifying as Publicly Supported. If it cannot meet that test, it must be organized and operated so as to attract new and additional public or governmental support on a continuous basis sufficient to meet the facts and circumstances test, also explained earlier. Community trusts are generally able to satisfy the attraction of public support requirement (as contained in the facts and circumstances test) if they seek gifts and bequests from a wide range of potential donors in the community or area served, through banks or trust companies, through attorneys or other professional persons, or in other appropriate ways that call attention to the community trust as a potential recipient of gifts and bequests made for the benefit of the community or area served. A community trust, however, does not have to engage in periodic, community-wide, fundraising campaigns directed toward attracting a large number of small contributions in a manner similar to campaigns conducted by a community chest or a united fund.
-
The organization must be commonly known as a community trust, fund, foundation, or other similar name conveying the concept of a capital or endowment fund to support charitable activities in the community or area it serves.
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All funds of the organization must be subject to a common governing instrument (or a master trust or agency agreement) that may be embodied in a single (or several) document(s) containing common language.
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The organization must have a common governing body (or distribution committee) that either directs or, in the case of a fund designated for specified beneficiaries, monitors the distribution of all funds exclusively for charitable purposes. The governing body must have the power in the governing instrument, the instrument of transfer, the resolutions or bylaws of the governing body, a written agreement, or otherwise—
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To modify any restriction or condition on the distribution of funds for any specified charitable purposes or to specified organizations if in the sole judgment of the governing body (without the necessity of the approval of any participating trustee, custodian, or agent), the restriction or condition becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served,
-
To replace any participating trustee, custodian, or agent for breach of fiduciary duty under state law, and
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To replace any participating trustee, etc., for failure to produce a reasonable return of net income over a reasonable period of time. (The governing body will determine what is reasonable.)
-
-
The organization must prepare periodic financial reports treating all of the funds that are held by the community trust, either directly or in component parts, as funds of the organization.
-
Must be created by gift, bequest, legacy, devise, or other transfer to a community trust that is treated as a single entity (described above), and
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May not be directly or indirectly subjected by the transferor to any material restriction or condition with respect to the transferred assets.
Section 509(a)(2) excludes certain types of broadly based, publicly supported organizations from private foundation status. Generally, an organization described in section 509(a)(2) may also fit the description of a publicly supported organization under section 509(a)(1). There are, however, two basic differences.
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For section 509(a)(2) organizations, the term support includes items of support discussed earlier (under Support. , in the discussion of Section 509(a)(1) Organizations) and income from activities directly related to their exempt function. This income is not included in meeting the support test for a publicly supported organization under section 509(a)(1).
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Section 509(a)(2) places a limit on the total gross investment income and unrelated business taxable income (in excess of the unrelated business tax) an organization may have, while section 509(a)(1) does not.
To be excluded from private foundation treatment under section 509(a)(2), an organization must meet two support tests.
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The one-third support test.
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The not-more-than-one-third support test.
Both these tests are designed to ensure that an organization excluded from private foundation treatment is responsive to the general public, rather than to the private interests of a limited number of donors or other persons.
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Gifts, grants, contributions, or membership fees, and
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Gross receipts from admissions, sales of merchandise, performance of services, or furnishing facilities in an activity that is not an unrelated trade or business, subject to certain limits, discussed below under Limit on gross receipts, later.
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Section 509(a)(1) organizations, described earlier,
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Governmental units, described under Section 509(a)(1) Organizations , earlier, and
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Persons other than Disqualified persons (defined under Section 509(a)(3) Organizations ), later.
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Gross investment income, and
-
The excess (if any) of unrelated business taxable income from unrelated trades or businesses acquired after June 30, 1975, over the tax imposed on that income.
-
Whether the organization has or will have a governing body that is composed of persons having special knowledge in the particular field in which the organization is operating or of community leaders, such as elected officials, members of the clergy, and educators, or, in the case of a membership organization, of individuals elected under the organization’s governing instrument or bylaws by a broadly based membership,
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Whether a substantial part of the organization’s initial funding is to be provided by the general public, by public charities, or by government grants rather than by a limited number of grantors or contributors who are disqualified persons with respect to the organization,
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Whether a substantial proportion of the organization’s initial funds are placed, or will remain, in an endowment and whether the investment of those funds is unlikely to result in more than one-third of its total support being received from gross investment income and from unrelated business taxable income in excess of the tax imposed on that income,
-
Whether an organization that carries on fundraising activities has developed a concrete plan for solicitation of funds on a community or area-wide basis,
-
Whether an organization that carries on community service activities has a concrete program to carry out its work in the community,
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Whether membership dues for individual (rather than institutional) members of an organization that carries on education or other exempt activities for or on behalf of members have been fixed at rates designed to make membership available to a broad cross section of the public rather than to restrict membership to a limited number of persons, and
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Whether an organization that provides goods, services, or facilities is or will be required to make its services, facilities, performances, or products available (regardless of whether a fee is charged) to the general public, public charities, or governmental units rather than to a limited number of persons or organizations.
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Was attracted by the publicly supported nature of the organization,
-
Was unusual or unexpected in amount, and
-
Would, because of its size, adversely affect the status of the organization as normally meeting the one-third support test. (The organization must otherwise meet the test in that year without benefit of the grant or contribution.)
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The grant or contribution is not made by a person (or related person) who created the organization or was a substantial contributor to the organization before the grant or contribution.
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The grant or contribution is not made by a person (or related person) who is in a position of authority, such as a foundation manager, or who otherwise has the ability to exercise control over the organization. Similarly, the grant or contribution is not made by a person (or related person) who, because of the grant or contribution, obtains a position of authority or the ability to otherwise exercise control over the organization.
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The grant or contribution is in the form of cash, readily marketable securities, or assets that directly further the organization's exempt purposes, such as a gift of a painting to a museum.
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The donee organization has received either an advance or final ruling or determination letter classifying it as a publicly supported organization and, except for an organization operating under an advance ruling or determination letter, the organization is actively engaged in a program of activities in furtherance of its exempt purpose.
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No material restrictions or conditions have been imposed by the grantor or contributor upon the organization in connection with the grant or contribution.
-
If the grant or contribution is intended for operating expenses, rather than capital items, the terms and amount of the grant or contribution are expressly limited to one year's operating expenses.
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Whether the contribution was a bequest or a transfer while living. A bequest will ordinarily be given more favorable consideration than a transfer while living.
-
Whether, before the contribution, the organization carried on an actual program of public solicitation and exempt activities and was able to attract a significant amount of public support.
-
Whether the organization may reasonably be expected to attract a significant amount of public support after the contribution. Continued reliance on unusual grants to fund an organization's current operating expenses can be evidence that the organization cannot attract future support from the general public.
-
Whether the organization met the one-third support test in the past without the benefit of any exclusions of unusual grants.
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Whether the organization has a representative governing body.
Example 1.
Y, an organization described in section 501(c)(3), was created by Marshall Pine, the holder of all the common stock in M corporation, Lisa, Marshall's wife, and Edward Forest, Marshall's business associate. The purpose of Y was to sponsor and equip athletic teams composed of underprivileged children in the community. Each of the three creators makes small cash contributions to Y. Marshall, Lisa, and Edward have been active participants in the affairs of Y since its creation. Y regularly raises small amounts of contributions through fundraising drives and selling admission to some of the sponsored sporting events. The operations of Y are carried out on a small scale, usually being restricted to the sponsorship of two to four baseball teams of underprivileged children.
In 2010, M Corporation recapitalizes and creates a first and second class of 6 percent nonvoting preferred stock, most of which is held by Marshall and Lisa. In 2011, Marshall contributes 49 percent of his common stock in M to Y. Marshall's contribution of M's common stock was substantial and constitutes 90 percent of Y's total support for 2011. A combination of the facts and circumstances of the determining factors preclude Marshall's contribution of M's common stock in 2011 from being excluded as an unusual grant under Temp. Regulations section 1.509(a)-3T(c)(3) for purposes of determining whether Y meets the one-third support test under section 509(a)(2).
Example 2.
M was organized in 2010 to promote the appreciation of ballet in a particular region of the United States. Its principal activities consist of erecting a theater for the performance of ballet and the organization and operation of a ballet company. M receives a determination letter that it is an organization described in section 501(c)(3) and that it is a public charity described in section 509(a)(2). The governing body of M consists of nine prominent unrelated citizens residing in the region who have either an expertise in ballet or a strong interest in encouraging appreciation of the art form.
In 2011, Z, a private foundation, proposes to make a grant of $500,000 in cash to M to provide sufficient capital for M to commence its activities. Although Albert Cedar, the creator of Z, is one of the nine members of M's governing body, was one of M's original founders, and continues to lend his prestige to M's activities and fundraising efforts, Albert does not, directly or indirectly, exercise any control over M. By the close of its first tax year, M also has received a significant amount of support from a number of smaller contributions and pledges from members of the general public. M charges admission to the ballet performances to the general public.
Although the support received in 2011 will not impact M's status as a public charity for its first 5 tax years, it will be relevant to the determination of whether M meets the one-third support test under section 509(a)(2) for the 2015 tax year, using the computation period 2011 through 2015. Within the appropriate timeframe, M may submit a request for a private letter ruling that the $500,000 contribution from Z qualifies as an unusual grant.
Under the above circumstances, even though Albert was a founder and member of the governing body of M, M may exclude Z's contribution of $500,000 in 2011 as an unusual grant under Reg. section 1.509(a)-3T(c)(3) for purposes of determining whether M meets the one-third support test under section 509(a)(2) for 2015.
Example.
P is a local agricultural club and is an organization described in section 501(c)(3). It makes awards at its annual fair for outstanding specimens of produce and livestock to encourage interest and proficiency by young people in farming and raising livestock. Most of these awards are cash or other property donated by local businessmen. When the awards are made, the donors are given recognition for their donations by being identified as the donor of the award. The recognition given to donors is merely incidental to the making of the award to worthy youngsters. For these reasons, the donations are contributions. The amount includible in computing support is equal to the cash contributed or the fair market value of other property on the dates contributed.
Example 1.
The Bureau for Africa and the Bureau for Latin America are considered separate bureaus. Each is an operating unit under the Administrator of the Agency for International Development, a policy-making official. If an organization had gross receipts from both of these bureaus, the amount of gross receipts from each would be subject to the greater of $5,000 or the 1% limit.
Example 2.
A bureau is an operating unit under the administrative office of the Executive Director. The subdivisions of the bureau are Geographic Areas and Project Development Staff. If an organization had gross receipts from these subdivisions, the total gross receipts from these subdivisions would be considered gross receipts from the same bureau and would be subject to the greater of $5,000 or the 1% limit.
Example.
X, an organization described in section 501(c)(3), is organized and operated to provide living facilities for needy widows of deceased servicemen. X charges the widows a small rental fee for the use of the facilities. Since X is accomplishing its exempt purpose through the rental of the facilities, the support received from the widows is considered gross receipts from a related exempt activity. However, if X rents part of its facilities to persons having no relationship to X's exempt purpose, the support received from these rentals will be considered gross investment income or unrelated business taxable income.
Section 509(a)(3) excludes from the definition of private foundation those organizations that meet all of the three following requirements.
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The organization must be organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations as described in sections 509(a)(1) or 509(a)(2). These section 509(a)(1) and 509(a)(2) organizations are commonly called publicly supported organizations.
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The organization has one of three types of relationships with one or more organizations described in sections 509(a)(1) or 509(a)(2). It must be:
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Operated, supervised, or controlled by one or more section 509(a)(1) or 509(a)(2) organizations (Type I supporting organization),
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Supervised or controlled in connection with one or more section 509(a)(1) or 509(a)(2) organizations (Type II supporting organization), or
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Operated in connection with one or more section 509(a)(1) or 509(a)(2) organizations (Type III supporting organization).
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The organization must not be controlled directly or indirectly by disqualified persons (defined later) other than foundation managers and other than one or more organizations described in section 509(a)(1) or 509(a)(2).
Section 509(a)(3) differs from the other provisions of section 509 that describe a publicly supported organization. Instead of describing an organization that conducts a particular kind of activity or that receives financial support from the general public, section 509(a)(3) describes organizations that have established certain relationships in support of section 509(a)(1) or 509(a)(2) organizations. Thus, an organization can qualify as other than a private foundation even though it may be funded by a single donor, family, or corporation (with certain exceptions described in Organizations controlled by donors , later). This kind of funding ordinarily would indicate private foundation status, but a section 509(a)(3) organization has limited purposes and activities and gives up a significant degree of independence.
More than one type of relationship may exist between a supporting organization and a publicly supported organization. Any relationship, however, must ensure that the supporting organization will be responsive to the needs or demands of, and will be an integral part of or maintain a significant involvement in, the operations of one or more publicly supported organizations.
The first two relationships, operated, supervised, or controlled by and supervised or controlled in connection with, are based on an existence of majority control of the governing body of the supporting organization by the publicly supported organization. They have the same rules for meeting the tests under requirement (1) and are discussed in Category one , below. The operated in connection with relationship requires that the supporting organization be responsive to and have operational relationships with publicly supported organizations. This third relationship has different rules for meeting the requirement (1) tests and is discussed separately in Category two , later.
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Any person (other than an organization described in section 509(a)(1), (2), or (4)) who controls, directly or indirectly, either alone or together with persons listed in (2) or (3) below, the governing body of a supported organization;
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A family member of a person described in (1), above; or
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A 35-percent controlled entity.
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Limit the purposes of the organization to one or more of those purposes,
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Do not expressly empower the organization to engage in activities that are not in furtherance of those purposes,
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Specify (as explained later under Specified organizations ) the publicly supported organizations on whose behalf the organization is operated, and
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Do not expressly empower the organization to operate to support or benefit any organization other than the ones specified in item (3).
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The supporting organization is operated, supervised, or controlled by or supervised or controlled in connection with one or more publicly supported organizations and the articles of organization of the supporting organization require that it be operated to support or benefit one or more beneficiary organizations that are designated by class or purpose and include:
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The publicly supported organizations referred to above (without designating the organizations by name), or
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publicly supported organizations that are closely related in purpose or function to those publicly supported organizations, or
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A historic and continuing relationship exists between the supporting organization and the publicly supported organizations, and because of this relationship, a substantial identity of interests has developed between the organizations.
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Permit the substitution of one publicly supported organization within a designated class for another publicly supported organization either in the same or a different class designated in the articles,
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Permit the supporting organization to operate for the benefit of new or additional publicly supported organizations of the same or a different class designated in the articles, or
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Permit the supporting organization to vary the amount of its support among different publicly supported organizations within the class or classes of organizations designated by the articles.
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All substantial contributors to the foundation.
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All foundation managers of the foundation.
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An owner of more than 20% of:
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The total combined voting power of a corporation that is (during such ownership) a substantial contributor to the foundation,
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The profits interest of a partnership that is (during such ownership) a substantial contributor to the foundation, or
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The beneficial interest of a trust or unincorporated enterprise that is (during such ownership) a substantial contributor to the foundation.
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A member of the family of any of the individuals just listed.
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A corporation of which more than 35% of the total combined voting power is owned by persons just listed.
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A partnership of which more than 35% of the profits interest is owned by persons described in (1), (2), (3), or (4).
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A trust, or estate, of which more than 35% of the beneficial interest is owned by persons described in (1), (2), (3), or (4).
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Limit its purposes to supporting one or more publicly supported organizations,
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Designate the organizations operated, supervised, or controlled by, and
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Not have express powers inconsistent with these purposes.
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Permit a publicly supported organization that is designated by class or purpose rather than by name to be substituted for the publicly supported organization or organizations designated by name in the articles, but only if the substitution is conditioned upon the occurrence of an event that is beyond the control of the supporting organization, such as loss of exemption, substantial failure or abandonment of operations, or dissolution of the organization or organizations designated in the articles,
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Permit the supporting organization to operate for the benefit of an organization that is not a publicly supported organization, but only if the supporting organization is currently operating for the benefit of a publicly supported organization and the possibility of its operating for the benefit of other than a publicly supported organization is remote, or
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Permit the supporting organization to vary the amount of its support between different designated organizations, as long as it meets the requirements of the integral-part test (discussed later) with respect to at least one beneficiary organization.
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The activities engaged in for, or on behalf of, the publicly supported organizations are activities to perform the functions of or to carry out the purposes of the organizations, and, but for the involvement of the supporting organization, would normally be engaged in by the publicly supported organizations themselves, or
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The supporting organization makes payments of substantially all of its income to, or for the use of, publicly supported organizations, and the amount of support received by one or more of these publicly supported organizations is enough to ensure the attentiveness of these organizations to the operations of the supporting organization.
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The supporting organization must meet all the requirements previously specified (the organizational tests, the operational test, and one of the relationship tests and not be controlled by disqualified persons).
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The section 501(c)(4), 501(c)(5), or 501(c)(6) organization would be described in section 509(a)(2) if it was a charitable organization described in section 501(c)(3). This provision allows separate charitable funds of certain noncharitable organizations to be described in section 509(a)(3) if the noncharitable organizations receive their support and otherwise operate in the manner specified by section 509(a)(2).
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The supporting organization is operated to support or benefit several specified beneficiary organizations.
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The beneficiary organization has a substantial number of dues-paying members who have an effective voice in the management of both the supporting and the beneficiary organizations.
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The beneficiary organization is composed of several membership organizations, each of which has a substantial number of members, and the membership organizations have an effective voice in the management of the supporting and beneficiary organizations.
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The beneficiary organization receives a substantial amount of support from the general public, public charities, or governmental grants.
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The supporting organization uses its funds to carry on a meaningful program of activities to support or benefit the beneficiary organization and, if the supporting organization were a private foundation, this use would be sufficient to avoid the imposition of the tax on failure to distribute income.
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The operations of the beneficiary and supporting organizations are managed by different persons, and each organization performs a different function.
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The supporting organization is not able to exercise substantial control or influence over the beneficiary organization because the beneficiary organization receives support or holds assets that are disproportionately large in comparison with the support received or assets held by the supporting organization.
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A subject line or other indicator on the first page of the request in bold, underlined, or in capital letters indicating “REQUEST FOR DETERMINATION AS TO PUBLIC CHARITY STATUS”;
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A statement requesting reclassification from section 509(a)(3) to another public charity classification under sections 509(a)(1) and 170(b)(1)(A)(vi) or section 509(a)(2); and
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Either:
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A copy of the organization's signed Form 990, Parts I through XII or Form 990-EZ, Parts I through VI, with the completed Schedule A (Form 990 or 990-EZ), Public Charity Status and Public Support, as filed with the IRS for the tax year immediately before the tax year in which the request is made; or
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The organization's support information for the past 5 completed tax years, using the organization's method of accounting used to complete the Form 990 or Form 990-EZ for such years. This information can be provided to the IRS on a completed Schedule A (Form 990 or 990-EZ).
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IRS-TEGE
Attn: Correspondence Unit, Room 4024
P.O. Box 2508
Cincinnati, OH 45201
For more information about applying for section 501(c)(3) status see Life Cycle of a Private Foundation at IRS.gov.
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Had knowledge of the revocation of the ruling or determination letter classifying the organization as an organization described in section 509(a)(1), 509(a)(2), or 509(a)(3), or
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Was in part responsible for, or was aware of, the act, the failure to act, or the substantial and material change on the part of the organization that gave rise to the revocation.
Section 509(a)(4) excludes from classification as private foundations those organizations that qualify under section 501(c)(3) as organized and operated for the purpose of testing products for public safety. Generally, these organizations test consumer products to determine their acceptability for use by the general public.
If your public charity no longer qualifies as a public charity under section 501(a)(1)-(4), it becomes a private foundation. You must file Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation.
Some private foundations qualify as private operating foundations. These are types of private foundations that, although lacking general public support, make qualifying distributions directly for the active conduct of their educational, charitable, and religious purposes, as distinct from merely making grants to other organizations for these purposes.
Most of the restrictions and requirements that apply to private foundations also apply to private operating foundations. However, there are advantages to being classified as a private operating foundation. For example, a private operating foundation (as compared to a private foundation) can be the recipient of grants from a private foundation without having to distribute the funds received currently within 1 year, and the funds nevertheless may be treated as qualifying distributions by the donating private foundation; charitable contributions to a private operating foundation qualify for a higher charitable deduction limit on the donor's tax return; and the excise tax on net investment income does not apply to an exempt operating foundation.
A private operating foundation is any private foundation that meets the assets test, the support test, or the endowment test, and makes qualifying distributions directly, for the active conduct of its activities for which it was organized, of substantially all (85% or more) of the lesser of its:
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Adjusted net income, or
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Minimum investment return.
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Devoted directly to the active conduct of its exempt activity, to a functionally related business, or to a combination of the two,
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Stock of a corporation that is controlled by the foundation (by ownership of at least 80% of the total voting power of all classes of stock entitled to vote and at least 80% of the total shares of all other classes of stock) and substantially all (at least 85%) the assets of which are devoted as provided above, or
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Any combination of (1) and (2).
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Substantially all (at least 85%) of its support (other than gross investment income) is normally received from the general public and five or more unrelated exempt organizations,
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Not more than 25% of its support (other than gross investment income) is normally received from any one exempt organization, and
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Not more than 50% of its support is normally received from gross investment income.
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Is an operating foundation, as described previously,
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Has been publicly supported for at least 10 tax years or was an operating foundation on January 1, 1983, or for its last tax year ending before January 1, 1983,
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Has a governing body that, at all times during the tax year, is broadly representative of the general public and consists of individuals no more than 25% of whom are disqualified individuals, and
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Does not have any officer, at any time during the tax year, who is a disqualified individual.
In general, if a substantial part of the activities of your organization consists of carrying on propaganda or otherwise attempting to influence legislation, your organization's exemption from federal income tax will be denied. However, a public charity (other than a church, an integrated auxiliary of a church or of a convention or association of churches, or a member of an affiliated group of organizations that includes a church, etc.) may avoid this result. Such a charity can elect to replace the substantial part of activities test with a limit defined in terms of expenditures for influencing legislation. Private foundations cannot make this election.
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Any attempt to influence any legislation through an effort to affect the opinions of the general public or any segment thereof (grass roots lobbying), and
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Any attempt to influence any legislation through communication with any member or employee of a legislative body or with any government official or employee who may participate in the formulation of legislation (direct lobbying).
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Making available the results of nonpartisan analysis, study, or research.
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Examining and discussing broad social, economic, and similar problems.
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Providing technical advice or assistance (where the advice would otherwise constitute the influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by that body or subdivision.
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Appearing before, or communicating with, any legislative body about a possible decision of that body that might affect the existence of the organization, its powers and duties, its tax-exempt status, or the deduction of contributions to the organization.
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Communicating with a government official or employee, other than:
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A communication with a member or employee of a legislative body (when the communication would otherwise constitute the influencing of legislation), or
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A communication with the principal purpose of influencing legislation.
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Lobbying expenditures that are more than 150% of the lobbying nontaxable amount for the organization for each tax year, or
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Grass roots expenditures that are more than 150% of the grass roots nontaxable amount for the organization for each tax year.
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20% of the exempt purpose expenditures if the exempt purpose expenditures are not over $500,000,
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$100,000 plus 15% of the excess of the exempt purpose expenditures over $500,000 if the exempt purpose expenditures are over $500,000 but not over $1,000,000,
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$175,000 plus 10% of the excess of the exempt purpose expenditures over $1,000,000 if the exempt purpose expenditures are over $1,000,000 but not over $1,500,000, or
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$225,000 plus 5% of the excess of the exempt purpose expenditures over $1,500,000 if the exempt purpose expenditures are over $1,500,000.
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Administrative expenses paid or incurred for the organization's exempt purposes, and
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Amounts paid or incurred for the purpose of influencing legislation, whether or not the legislation promotes the organization's exempt purposes.
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A separate fundraising unit of the organization, or
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One or more other organizations, if the amounts are paid or incurred primarily for fundraising.
Note.
These elective provisions for lobbying activities by public charities do not apply to a church, an integrated auxiliary of a church or of a convention or association of churches, or a member of an affiliated group of organizations that includes a church, etc., or a private foundation. Moreover, these provisions will not apply to any organization for which an election is not in effect.
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The governing instrument of one of the organizations requires it to be bound by decisions of the other organization on legislative issues, or
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The governing board of one of the organizations includes persons who:
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Are specifically designated representatives of the other organization or are members of the governing board, officers, or paid executive staff members of the other organization, and
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Have enough voting power to cause or prevent action on legislative issues by the controlled organization by combining their votes.
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The amount by which the lobbying expenditures made by the organization during the tax year are more than the lobbying nontaxable amount for the organization for that tax year, or
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The amount by which the grass roots expenditures made by the organization during the tax year are more than the grass roots nontaxable amount for the organization for that tax year.
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