7.25.3 Religious, Charitable, Educational, Etc., Organizations

Overview

  1. This section discusses religious, charitable, educational and other organizations under IRC 501(c)(3).

Statute

  1. IRC 501(c)(3) exempts from Federal income tax: corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation (except as otherwise provided in subsection (i)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.

IRC 501(c)(3) and Private Foundation Provisions

  1. Under the Tax Reform Act of 1969, certain types of organizations described in IRC 501(c)(3) are classified as private foundations. Foundation classification is made at the time an organization is recognized exempt under IRC 501(c)(3).

  2. The Act subjects private foundations to several restrictions and requirements in addition to those imposed on IRC 501(c)(3) organizations generally.

  3. The basic private foundation provisions are IRC 507, 508, 509, and 4940 through 4948.

  4. The kinds of IRC 501(c)(3) organizations that are classified as private foundations as well as the additional restrictions and requirements they are subject to under the Tax Reform Act of 1969 are discussed in the Private Foundations Manual, IRM 7.26, or in the Exempt Organizations Tax Manual, IRM 7.27.

Collateral Benefits

  1. In addition to exemption from the payment of federal income tax, organizations recognized as exempt under IRC 501(c)(3), may enjoy collateral benefits under the Internal Revenue Code, as well as under state or local income, property, sales, use, or other tax provisions.

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

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

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

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

    1. Especially if the organization, for example, an entity organized outside the United States or its territories or possessions, is not described in IRC 170(c).

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

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

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

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

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

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

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

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

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

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

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

The Dual Test: Organized and Operated

  1. IRC 501(c)(3) requires an organization to be both "organized" and "operated" exclusively for one or more IRC 501(c)(3) purposes. If the organization fails either the organizational test or the operational test, it is not exempt. Reg. 1.501(c)(3)–1(a)(1).

  2. The organizational test concerns the organization’s articles of organization or comparable governing document. The operational test concerns the organization’s activities. A deficiency in an organization’s governing document cannot be cured by the organization’s actual operations. Likewise, an organization whose activities are not within the statute will not qualify for exemption by virtue of a well written charter. Reg. 1.501(c)(3)–1(b)(1)(iv).

Organizational Test

  1. IRC 501(c)(3) covers only corporations, community chests, funds, and foundations. This means that some kinds of groupings can qualify and some cannot. Evidently, an individual cannot be exempt. Neither can a partnership. By the same token, a formless aggregation of individuals cannot be exempt.

Corporations

  1. Corporations are the most common form of organization specified in IRC 501(c)(3). A corporation is a creature of state law whose existence is evidenced by a charter or certificate of incorporation issued by the State under whose laws it was incorporated. The Service rarely questions the validity of the corporate status of an organization that has satisfied the formal requirements of the law governing its creation.

  2. In Emerson Institute v. United States, 356 F.2d 824 (D.C. Cir. 1966), however, the Service successfully challenged a claim of de facto corporate status based on judicial decree. In Emerson, an exempt school corporation dissolved and became a partnership, with the former directors as the partners. When the Service became aware of this, it revoked exemption and assessed tax against the surviving partner. The surviving partner obtained a consent judgment under local law voiding the earlier corporate dissolution on certain technical grounds. He then sought a refund of taxes on the grounds that the corporation had never legally dissolved, that it, not he, was entitled to the school’s earnings, and that it was exempt. The court held that there was no de facto corporation during the years after the dissolution, but, even if there was one for nontax purposes, the local court decree was not binding on the Service, as it had not been a party to the proceeding.

Trusts

  1. Fifth-Third Union Trust Co. v. Commissioner, 56 F.2d 767 (6th Cir. 1932), clearly established that a trust is included in the terms "fund or foundation." Thus, a trust is an acceptable form of organization exempt status under IRC 501(c)(3).

Associations

  1. Unincorporated associations have historically presented difficulty for the Service, as determining exempt status requires finding that there is an entity separate from the individuals who created it.

  2. In Trippe v. Commissioner, 9 TCM (CCH) 622 (1950), the Tax Court clarified a formless aggregation of individuals without some organizing instrument, governing rules, and regularly chosen officers would not be a "corporation, community chest, fund, or foundation" for purposes of IRC 501(c)(3). But Cf. Morey v. Riddell, 205 F Supp. 918 (S.D. Cal. 1962), in which the court found organizing documents sufficient to support a finding that an entity was created.

  3. The typical nonprofit association formed under a constitution or bylaws, with elective officers empowered to act for it, would be treated as a corporation for purposes of IRC 501(c)(3). Of course, an association’s organizing documents must satisfy the organizational test before the association can qualify under IRC 501(c)(3).

Practical Applications

  1. Copies of the corporate charter, constitution, or other articles of organization must be submitted as part of an application for exemption. Where the purported organizing instrument is in the form of a constitution or articles of association, there must be evidence that it was signed by people who thereby associated themselves under its terms. Unlike a trust, an association cannot be formed by a single individual, thus one individual cannot promulgate articles of association. This may be significant where, as in Hewitt v. Commissioner, T.C. Memo. 1957–112, exemption is sought for the activities of an individual who has a coterie of followers who are not really "associates."

  2. Informal aggregations of individuals who state that they "just came together" or that they "never had articles of organization" are not tax entities to which a ruling may be issued. (Trippe v. Commissioner, supra.) Accordingly, if it is determined that no organization exists, the applicant should be advised that no ruling or determination letter can be issued.

  3. An association’s constitution or articles of association should be signed by at least two persons.

    1. If an unsigned copy is submitted, but there is evidence that the original was signed by two or more persons, the copy is acceptable, if, as provided by Rev. Proc. 68–14, 1968–1 C.B. 768, it is accompanied by a declaration, signed by an individual authorized to sign for the organization, that it is a complete and correct copy of the original and that the original was signed by at least two persons.

    2. If the copy indicates that the original was not signed, submission of the declaration will not cure the defect. In that case, the application should be returned to the applicant with a request for proof that the organizing document has been adopted. Such a document will be acceptable only if the association can establish that it has operated in a manner clearly showing ratification by two or more persons. For example, if the document is accompanied by an affidavit from two officers that the association did adopt the organizing document and has been operating in accordance with its terms, the instrument will be acceptable.

Organizational Test Requirements

  1. Reg. 1.501(c)(3)–1(b)(l)(i) provide that an organization is organized exclusively for one or more exempt purposes only if its articles of organization:

    • Limit the purposes of such organization to one or more exempt purposes; and

    • Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

  2. In addition, the organization’s assets must be dedicated to an exempt purpose, either by an express provision in its governing instrument or by operation of law. Reg. 1.501(c)(3)–1(b)(4).

  3. IRC 508(e) imposes additional requirements for governing instruments of private foundations. These are discussed in the Private Foundations Manual.

  4. The term "articles" includes "the trust instrument, the corporate charter, the articles of association, or any other written instrument by which an organization is created." Reg. 1.501(c)(3)–1(b)(2).

  5. The organizational test cannot be met by any document that is not the creating document.

    1. A corporation’s bylaws cannot remedy a defect in its corporate charter. A charter can be amended only in accordance with the State’s nonprofit corporation law. States generally require that any amendments be filed with and approved by the chartering authority.

    2. In the case of a trust, operating rules cannot substitute for the trust indenture.

    3. For an unincorporated association, the test must be met by the basic creating document, whatever it is called, and any amendments. Subsidiary documents that are not amendments to the creating document may not be relied on.

  6. An organization recognized as exempt under IRC 501(c)(3) before July 27, 1959, is not required to meet the organizational requirements of IRC 501(c)(3) unless it seeks a new determination of its status; nor will its exemption be revoked solely for failure to meet these requirements. Reg. 1.501(c)(3)–1(b)(6).

Specified Purposes

  1. To meet the organizational test, the organization’s purposes must be specified in its articles. They may be as broad as, or more specific than, the purposes stated in IRC 501(c)(3). Reg. 1.501(c)(3)–1(b)(1)(ii).

  2. The following examples provide illustrations of broad and narrow purposes clauses that meet the test:

    1. Charitable and educational purposes within the meaning of IRC 501(c)(3),

    2. To grant scholarships to deserving junior college students residing in Gotham City

Ambiguous Purposes

  1. The purpose stated in the articles must be a purpose that necessarily falls within the purposes stated in IRC 501(c)(3). For example, a purpose "to operate a hospital" does not meet the organizational test since it is not necessarily within the purposes stated in IRC 501(c)(3). A hospital may or may not be exempt, depending upon the manner in which it is operated.

  2. Under no circumstances may the organizational purposes be broader than the purposes of IRC 501(c)(3). They may, however, be narrower. For example, the charter may recite as purposes "charitable and educational purposes within the meaning of IRC 501(c)(3)." It may also recite a narrow specific purpose such as "to grant scholarships to deserving junior college students residing in Gotham City." Reg. 1.501(c)(3)–1(b)(1)(iv).

Nonexempt Purposes

  1. Organizations that are organized for both exempt and nonexempt purposes fail to meet the test. The following two revenue rulings provide examples:

    1. In Rev. Rul. 69–279, 1969–1 C.B. 152, an irrevocable inter vivos trust, which provides that a fixed percentage of the income must be paid annually to the settlor with the balance of the income to charity does not meet the organizational test;

    2. In Rev. Rul. 69–256, 1969–1 C.B. 151, a testamentary trust established to make annual payments to exempt charities and to use a fixed sum from annual income for the care of the testator’s burial lot is not organized for charitable purposes.

Express Powers that Cause Failure of Organizational Test

  1. An organization does not meet the organizational test if its articles expressly empower it:

    1. To devote more than an insubstantial part of its activities to influence legislation by propaganda or otherwise (Reg. 1.501(c)(3)–1(b)(3)(i));

    2. Directly or indirectly to participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office (Reg. 1.501(c)(3)–1 (b)(3)(ii));

    3. To have objectives and to engage in activities which characterize it as an "action" organization (Reg. 1.501(c)(3)–1 (b)(3)(iii));

    4. To carry on any other activities (unless they are insubstantial) which are not in furtherance of one or more exempt purposes (Reg. 1.501(c)(3)–1(b)(1)(i)(a)).

Express Powers for IRC 501(h)

  1. An organization’s articles will not violate the organizational test even though they expressly empower it:

    1. To make the IRC 501(h) election; and

    2. If it so elects, to make lobbying and grass roots expenditures within the applicable ceiling amounts (1.501(c)(3)–1(b)(3)).

Dedication of Assets

  1. An organization does not meet the organizational test unless its assets are dedicated to an exempt purpose. Reg. 1.501(c)(3)–1(b)(4). The two ways an organization’s can be dedicated for an exempt purpose are:

    1. A provision in the organization’s articles;

    2. By operation of state law.

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

    1. for one or more exempt purposes;

    2. to the federal government or a state or local government, for a public purpose; or

    3. to another organization by a court to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized.

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

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

Operation of State Law a/k/a "The Cy Pres Doctrine"
  1. If an organization’s articles do not expressly provide for proper distribution of its assets on dissolution, state law may intervene to provide for distribution. If assets are properly dedicated by operation of law, no amendments to the articles are needed.

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

    1. The cy pres doctrine as to inter vivos charitable trusts;

    2. The cy pres doctrine as to testamentary charitable trusts, which can exist in a particular state by case law or statute;

    3. State corporate law provisions that provide for the distribution of assets upon the dissolution of nonprofit corporations;

    4. State law by court decision or statute that govern unincorporated associations.

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

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

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

Dissolution Provision Required
  1. In the instances listed below, an adequate dissolution provision is required to properly dedicate assets. In other words, state law will not substitute for a missing provision.

  2. Inter vivos trusts: Aninter vivos trust created in any state other than Delaware must have an adequate dissolution provision. Delaware is the only State whose courts always apply the cy pres doctrine to keep an inter vivos charitable trust from failing.

  3. Charitable testamentary trusts: Any charitable testamentary trust in Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, New Mexico, North Dakota, South Carolina, Utah, or Wyoming, must have an adequate dissolution provision, no matter the intent of the testator. These states have either expressly rejected or have never applied the cy pres doctrine to a charitable testamentary trust.

  4. Charitable testamentary trusts with no general intent to benefit charity: Unless the testator has manifested a general intent to benefit charity, a charitable testamentary trusts in any of the following states must have an adequate dissolution provision: Arkansas, California, Colorado, Connecticut, District of Columbia, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Tennessee, Texas, Vermont, Washington, and Wisconsin.

    • The courts in these states will apply the cy pres doctrine to keep a charitable testamentary trust from failing when the language of the trust instrument demonstrates that the trust’s creator had a general intent to benefit charity, and not merely a specific intent to benefit a particular institution.

    • The courts in the following states always apply cy pres or the similar doctrine of equitable approximation to keep a charitable testamentary trust from failing. Thus, Reg. 1.501(c)(3)–1(b)(4) is satisfied by charitable testamentary trusts in Alabama, Delaware, Louisiana, Pennsylvania, South Dakota, Virginia, and West Virginia (However, a state court decision has held that cy pres does not apply to a scientific organization in West Virginia.)

  5. Charitable corporations: Any corporation incorporated under the nonprofit laws of a state other than Arkansas, California, Louisiana, Massachusetts, Minnesota, Missouri, Ohio, or Oklahoma must have a proper dissolution provision in its articles of incorporation to satisfy the organizational test. The eight states listed are the only states that have statutes applicable to nonprofit charitable corporations that satisfy the organizational test.

  6. All unincorporated nonprofit associations must have a proper dissolution provision in the governing instrument, as no state, nor the District of Columbia provides certainty by statute or case law, for the distribution of assets upon the dissolution of an unincorporated nonprofit association.

  7. Provisions in an organization’s governing instrument that satisfy the requirements of IRC 508(e), for purposes of qualification for exemption under IRC 501(a) as a private foundation, are not in themselves sufficient to meet the requirement of Reg. 1.501(c)(3)–1(b)(4) that, upon dissolution, the organization’s assets be dedicated to an exempt purpose. Requirements set out in IRC 508(e) in regard to private foundations, are additional to those found in IRC 501(c)(3). Rev. Rul. 85–160, 1985–2 C.B. 162. For a discussion of governing instrument requirements for private foundations, see Private Foundations Manual, IRM 7.26.1.

  8. The following language illustrates a dissolution provision that satisfies Reg. 1.501(c)(3)–1(b)(4): "Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose."

  9. The information contained in this section has been published as Rev. Proc. 82–2, 1982–1 C.B. 367. The application of the doctrine of cy pres is subject to change by statute or court decision. We will attempt to update this section in the future to reflect such changes as they are brought to our attention.

Charitable Class Requirement

  1. A charitable organization or trust must be set up for the benefit of an indefinite class of individuals, not for specific persons. A trust or corporation organized and operated for the benefit of specific individuals is not charitable. Thus, a trust to benefit John Jones is not a charitable trust even though the facts may show that John Jones is impoverished. However, an organization set up with the general charitable purpose of benefiting needy individuals in a particular community is a charitable organization and it may select John Jones as a beneficiary.

  2. A trust set up for the benefit of an aged clergyman and his wife was held not to be an exempt organization in Carrie A. Maxwell Trust, Pasadena Methodist Foundation v. Commissioner, 2 TCM 905 (1943). The court found the trust to be a private, rather than charitable trust, despite the fact that the elderly gentleman was in financial need.

  3. However, an organization may properly have a purpose to benefit a comparatively small class of beneficiaries, provided the class is open and the identities of the individuals to be benefited remain indefinite. It has been held that a foundation set up to award scholarships solely to undergraduate members of a designated fraternity could be exempt as a charitable foundation. Rev. Rul. 56–403, 1956–2 C.B. 307.

  4. A trust to pay a certain sum to all the individuals enrolled in a certain school on a particular date was held to be a private trust, not a charitable trust. The beneficiaries were a group of identifiable individuals. Rev. Rul. 57–449, 1957–2 C.B. 622.

Power to Engage in Nonexempt Activity

  1. If the organization is expressly empowered by its articles to carry on, other than as an insubstantial part of its activities, activities that are not in furtherance of exempt purposes, it will not meet the organizational test even though its stated purposes are within the Code. For example, if the articles expressly reserve the power "to engage in a manufacturing business," or "to engage in the operation of a social club," the organizational test is not met. Reg. 1.501(c)(3)–1(b)(1)(iii).

  2. Similarly, the regulations preclude exemption if the articles empower the organization to engage in substantial attempts to influence legislation or to intervene in political campaigns. Reg. 1.501(c)(3)–1(b)(3).

Construction of Terms

  1. In the interpretation of an organization’s articles of organization or association, State law governs the definition of the respective rights, duties, powers, and immunities of the parties. Where an organization contends that a term has an unusual meaning under State law, clear legal authority should be presented. Reg. 1.501(c)(3)–1(b)(5).

Certain Practical Applications

  1. Articles of organization that fail to meet the organizational test are ordinarily amendable. After amendment, exemption may be retroactive to the period before amendment. Therefore, in most cases, the status of an organization depends ultimately on the operational test.

  2. This has several implications. The resolution of the organizational test question is only the first step in determining whether an organization is exempt. It is not a substitute for ascertaining the specific activities of an organization and determining whether they are within the scope of IRC 501(c)(3).

Digests of Precedent Rulings

  1. Charitable Class— A foundation set up to award scholarships solely to undergraduate members of a designated fraternity may be exempt. Rev. Rul. 56–403, 1956–2 C.B. 307.

  2. Charitable Class— A trust to pay a certain sum to all the individuals enrolled in a certain school on a particular date was held to be a private trust, not a charitable trust. The beneficiaries were a group of identifiable individuals. Rev. Rul. 57–449, 1957–2 C.B. 622.

  3. Organizational Test— A testamentary trust established to make annual payments to exempt charitable organizations and to use a fixed sum from annual income for the perpetual care of the testator’s burial lot is not organized for charitable purposes. Rev. Rul. 69–256, 1969–1 C.B. 151.

  4. Organizational Test— an irrevocable inter vivos trust which provides that a fixed percentage of the income must be paid annually to the settlor with the balance to charity is not organized and operated exclusively for charitable purposes. Rev. Rul. 69–279, 1969–1 C.B. 152.

Operational Test

  1. To satisfy the operational test, an organization must be operated exclusively for one or more of the following purposes:

    • religious

    • charitable

    • scientific

    • testing for public safety

    • literary

    • educational

    • fostering national or international sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment)

    • prevention of cruelty to children or animals

  2. Reg. 1.501(c)(3)–1(c)(1) provide that an organization is operated exclusively for charitable purposes only if it engages primarily in activities that accomplish those purposes in (1) above. It is not so operated if more than an insubstantial part of its activities do not further those purposes.

Meaning of "Operated Exclusively"

  1. The regulations’ terms "exclusively," "primarily" and "insubstantial" present difficult conceptual problems. Questions involving the application of these terms can more readily be resolved on the basis of the facts of a particular case. It is therefore important that all the facts and circumstances be fully developed.

Public v. Private Purposes

  1. Reg. 1.501(c)(3)–1(d)(l)(ii) provide that to meet the operational test, an organization must be engaged in activities furthering "public" purposes rather than private interests. It must not be operated for the benefit of designated individuals or the persons who created it. The purposes specified in IRC 501(c)(3), which are all "public" purposes, are separately analyzed below.

Charitable Organizations— Definition

  1. Reg. 1.501(c)(3)–1(d)(2) provide that the term "charitable" is used in IRC 501(c)(3) in its generally accepted legal sense and includes relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of government; promotion of social welfare.

  2. The concept of charity was developed in the common law long before the term was incorporated into the Internal Revenue Code. Scott on Trusts, section 368 (3rd ed. 1967), provides a thorough analysis of the generally accepted legal interpretation of the term "charitable" . Thus, legal precedent for analyzing whether an activity is charitable is not limited to interpretations under IRC 501(c)(3) or its predecessor provisions.

  3. One example of the Service’s application of the common law definition of charitable is Rev. Rul. 67–325, 1967–2 C.B. 113. In that case the Service considered whether an organization providing recreational facilities for a community that restricted access to its facilities on the basis of race was charitable within the meaning of IRC 501(c)(3). The Service applied the general law of charity, which holds that providing a community recreational facility is a charitable activity only if all members of the community are eligible for direct benefits, by organizations designed to accomplish any of the above purposes, or lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; or combating community deterioration and juvenile delinquency.

Relief of the Poor and Distressed or Underprivileged

  1. Reg. 1.501(c)(3)–1(d)(2) expressly provides that relief of the poor, or distressed, or underprivileged is a charitable purpose. Relief can be provided in many ways.

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

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

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

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

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

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

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

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

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

    • housing,

    • health care, and

    • financial security.

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

    • The organization must be committed to an established policy of maintaining residents who become unable to pay.

    • The organization must provide its services to residents at the lowest feasible cost.

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

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

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

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

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

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

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

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

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

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

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

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

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

    1. The recreational facilities for members served exempt purposes rather than a nonexempt social purpose. Under the circumstances, the facilities helped forestall the tedium that could drive out volunteers, and fostered comraderie and a spirit of cooperation necessary for an effective fire fighting unit.

    2. The weekly dances were not unrelated trade or business because all the work in carrying them on was performed without compensation.

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

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

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

  3. However, a nonprofit lawyer referral service, which provides any member of the public with names of lawyers from a list of approved lawyers it maintains and on request can schedule an initial half hour appointment for a nominal charge, does not qualify for exemption under IRC 501(c)(3). Although it provides some public benefit, it has the substantial purpose of promoting the legal profession. Thus, a lawyer referral service may qualify for exemption under IRC 501(c)(6) but not under IRC 501(c)(3). See Rev. Rul. 80–287, 1980–2 C.B. 186.

  4. The posting of bail bond or the payment of bondsmen’s fees on behalf of indigent persons has been held to be a charitable purpose. Thus, Rev. Rul. 76–21, 1976–1 C.B. 147, holds that an organization that, as part of its integrated program of providing legal, rehabilitative, employment, and other services to persons accused of crimes, posts its own money or property with the court as total or partial bail for indigent defendants qualifies for exemption. Similarly, an organization that provides free legal services and funds necessary to pay the commercial bondsmen’s fees for indigent persons accused of crimes was held to be operated exclusively for charitable purposes in Rev. Rul. 76–22, 1976–1 C.B. 148.

Assistance to Employees
  1. Financial assistance to employees or retired employees is not, in and of itself, a charitable activity because employees or retired employees as a class are not necessarily "needy and distressed." See Rev. Rul. 56–138, 1956–1 C.B. 202; Watson Exr. v. United States, 355 F.2nd 269 (3rd Cir. 1965); and Rev. Rul. 68–422, 1968–2 C.B. 107.

  2. Particular individuals who are employees may become needy or distressed in times of natural disaster, civil disorder, or personal calamity such as a serious illness or death in the employee’s immediate family. However, employer funded or controlled programs to relieve such distress will generally confer impermissible private benefit on the employer because they enhance the employer’s ability to attract and retain employees by offering protection based on an employment eligibility requirement.

  3. When a public charity is the employer, the benefit to the employer is not an impermissible benefit to private interests. Therefore, an employee disaster relief or hardship program of a public charity for its own employees will generally not jeopardize the organization’s exempt status. Facts and circumstances supporting a favorable conclusion in such a case include the following:

    1. The employer has been recognized as exempt under IRC 501(c)(3) and has been classified as other than a private foundation under IRC 509(a)(1) or (2).

    2. The class of eligible beneficiaries is sufficiently large and open ended to constitute a charitable class. See Rev. Rul. 56–403, 1956–2 C.B. 307.

    3. Selection of recipients is made on an objective and nondiscriminatory basis.

    4. The organization obtains sufficient evidence to verify the need for the type of assistance it provides.

    5. The award of assistance is discretionary, not a matter of entitlement.

    6. Employment status is relevant only as an initial qualifier.

    7. Records are kept of all distributions in accordance with Rev. Rul. 56–304, 1956–2 C.B. 306.

    8. The organization is not a membership organization.

  4. Even though a public charity’s program to assist its employees may not jeopardize its exempt status, the assistance received by the employees may still constitute taxable income to them. See IRC 102(c).

  5. A disaster relief or hardship program funded and controlled by employees that functions independently of the employer and is neither controlled nor funded to any significant degree by the employer may be entitled to exemption if the criteria listed above, are satisfied.

  6. If a taxable entity provides assistance to its employees through a controlled, tax exempt private foundation, the private benefit to the taxable employer may cause the employer to be liable for excise taxes on acts of self-dealing under IRC 4941 and the private foundation to be liable for excise taxes on nonexempt purpose expenditures under IRC 4945. The benefit to the employer will not ordinarily be considered to be incidental or tenuous within the meaning of Reg. 53.4941(d)–2(f)(2).

Digests of Precedent Rulings

  1. Public recreation facilities— A nonprofit organization formed for the purpose of establishing, maintaining and operating a public swimming pool, playground and other recreation facilities for the children and other residents of a community is exempt from tax. Rev. Rul. 59–310, 1959–2 C.B. 146. But see Rev. Rul. 67–325, 1967–2 C.B. 113, which held that an organization providing recreational facilities to residents of a community is not organized and operated exclusively for charitable purposes because it excluded members of the community on the basis of race.

  2. Employment assistance to the elderly— A nonprofit organization that aids unemployed elderly persons of limited means to find employment by providing them free services and educating the public about the employment capabilities of elderly persons qualifies for exemption. Rev. Rul. 66–257, 1966–2 C.B. 212.

  3. Blood banks— A nonprofit blood bank that provides a community with permanent facilities for the collection, storage, and distribution of blood, and furnishes a variety of services for the community at large and for health agencies within the community, is charitable within the meaning of IRC 501(c)(3). However, the organization is subject to unrelated business income tax on sales of blood to commercial laboratories. Rev. Rul. 66–323, 1966–2 C.B. 216.

  4. Housing guidance to low income families— A nonprofit organization that provides instruction and guidance to low income families in need of adequate housing and interested in building their own homes is exempt from tax. Rev. Rul. 67–138, 1967–1 C.B. 129. See also Rev. Rul. 70–585, 1970–2 C.B. 115; and Rev. Rul. 68–17, 1968–1 C.B. 247.

  5. Prisoner rehabilitation— An organization devoted to rehabilitating convicts to help them become self-supporting and useful citizens is exempt under IRC 501(c)(3), as is an organization formed to develop, manage, and operate community correctional centers to rehabilitate prisoners selected by the courts or governmental custodial agencies. Rev. Rul. 67–150, 1967–1 C.B. 133, and Rev. Rul. 70-583, 1970–2 C.B. 114.

  6. Promoting nondiscriminatory housing— An organization formed to educate the public about the need to make housing available to members of the public on a nondiscriminatory basis and to encourage investment in such housing may be exempt from tax. Rev. Rul. 67–250, 1967–2 C.B.182.

  7. Ministering to the sick— A nonprofit organization created to minister to the nonmedical needs of patients in a proprietary hospital qualifies for exemption as an organization described in IRC 501(c)(3). Rev. Rul. 68–73, 1968–1 C.B. 251.

  8. Self-help program— A nonprofit organization formed and operated to assist needy families in "developing" countries may be exempt from tax. Rev. Rul. 68–117, 1968–1 C.B. 251.

  9. Self-help program— A nonprofit organization created to market the cooking and needlework of women who are not otherwise able to support themselves and their families may be exempt from tax, even though it receives a small commission on each sale, if the organization is not self-supporting and must depend on public contributions. Rev. Rul. 68–167, 1968–1 C.B. 255.

  10. Self-help program— A domestic nonprofit corporation (composed of educational, civic, business, and other groups) that joins with a counterpart group in a country in Latin America to promote student and cultural exchanges and to provide technical and material assistance for self-help projects designed to improve the living conditions of underprivileged people in Latin America may be exempt from tax. Rev. Rul. 68–165, 1968–1 C.B. 253.

  11. Pension to retired employees— An organization created pursuant to the will of a stockholder of a company to pay pensions to all retired employees of that company does not qualify for exemption. Rev. Rul. 68–422, 1968–2 C.B. 207. See also Rev. Rul. 56–138, 1956–1 C.B. 202.

  12. Legal aid society— A nonprofit legal aid society providing free legal services to indigent persons otherwise financially incapable of obtaining such services qualifies for exemption. Rev. Rul. 69–161, 1969–1 C.B. 149. See also Rev. Rul. 78–428, 1978–2 C.B. 177, which provides that an organization providing legal services to indigents for a fee may qualify for exemption under IRC 501(c)(3) if the fees are based on the indigent clients’ limited ability to pay rather than the type of services rendered.

  13. Rescue service— A nonprofit organization that conducts emergency rescue services for stranded, injured or lost persons is exempt as an organization described in IRC 501(c)(3). Rev. Rul. 69–174, 1969–1 C.B. 149.

  14. Credit counseling service— A nonprofit organization formed to help reduce personal bankruptcy by providing information to the public on budgeting, buying practices, and the sound use of consumer credit, and assisting low-income individuals and families who have financial problems by providing, without charge, counseling, and, if necessary, budget plans for liquidation of indebtedness, qualifies for exemption. Rev. Rul. 69–441, 1969–2 C.B. 115.

  15. Day care center— An educational day care center operated in conjunction with an industrial company that enrolls children on a basis of family financial need and the child’s need for the care and development program of the center qualifies for exemption. Rev. Rul. 70–533, 1970–2 C.B. 112.

  16. Drug rescue center— An organization that maintains a drug rescue center and a telephone drug crisis service for persons with drug problems was held exempt as an organization described in IRC 501(c)(3). Rev. Rul. 70–590, 1970–2 C.B. 116.

  17. Community welfare— A nonprofit organization formed to provide food and drink to firemen, policemen, and other emergency personnel at the scene of fires, riots and other disasters qualifies for exemption. Rev. Rul 71–99, 1971–1 C.B. 151.

  18. Housing; elderly— A nonprofit organization that provides specially designed housing to elderly persons at the lowest feasible cost and maintains in residence those tenants who subsequently become unable to pay its monthly fees is an organization operated exclusively for charitable purposes within the meaning IRC 501(c)(3). Rev. Rul. 79–18, 1979–2 C.B. 194. See also Rev. Rul. 72–124, 1972–1 C.B. 145; Rev. Rul. 61–72, 1961–1 C.B. 188; and Rev. Rul. 64–231, 1964–2 C.B. 139.

  19. Legal services corporation— An organization formed to provide substantial free legal services to low income residents of economically depressed communities through subsidization of recent law graduates who have been admitted to the bar is exempt as an organization described in IRC 501(c)(3). Rev. Rul. 72–559, 1972–2 C.B. 247.

  20. On-the-job training— An organization that is otherwise qualified for exemption will not fail to qualify because its educational and vocational training of unemployed and underemployed persons is carried out through the manufacturing and selling of toy products. Rev. Rul. 73–128, 1973–1 C.B. 222. See also Rev. Rul. 73–127, 1973–1 C.B. 221; and Rev. Rul. 77–272, 1977–2 C.B. 191.

  21. Volunteer fire company— A nonprofit organization that was organized and operated to provide fire protection and ambulance and rescue services to a community qualifies for exemption as a charitable organization under IRC 501(c)(3). Rev. Rul. 74–361, 1974–2 C.B. 159.

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

  23. Organization of public housing tenant groups— An organization of public housing tenant groups in a State that was formed to promote the rights and welfare of public housing tenants by providing them information and technical assistance about regulations and laws concerning public housing, and that acted as the recognized State agent for public housing tenant organizations, qualifies for exemption. Rev. Rul. 75–283, 1975–2 C.B. 201.

  24. Rural rest home for elderly poor— A nonprofit, publicly supported organization that operates a rural rest home to provide, at a nominal charge, two-week vacations for elderly poor people from nearby metropolitan areas qualifies for exemption. Rev. Rul. 75–385, 1975–2 C.B. 205.

  25. Halfway house operating furniture shop— A halfway house, organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers, which also operates a furniture shop to provide full-time employment for its residents, with any profits applied to operating costs of the halfway house, qualifies for exemption. Rev. Rul. 75–472, 1975–2 C.B. 208.

  26. Legal assistance; posting bail bond— An organization that, as part of its integrated program of providing legal, rehabilitative, employment, and other services to persons accused of crimes, posts its own money or property with the court as total or partial bail for indigent defendants unable to provide funds with which to post bail may qualify for exemption. Rev. Rul. 76–21, 1976–1 C.B. 147.

  27. Legal assistance; bondsmen’s fees— An organization otherwise qualifying for exemption under IRC 501(c)(3) that provides free legal services and funds necessary to pay the commercial bondsmen’s fees for indigent persons accused of crimes is operated exclusively for charitable purposes. Rev. Rul. 76–22, 1976–1 C.B. 148.

  28. Bus transportation for senior citizens— A nonprofit organization that provides, on request, low cost bus transportation to senior citizens and handicapped persons in a community where public transportation is unavailable or inadequate qualifies for exemption. Rev. Rul. 77–246, 1977–2 C.B. 190.

  29. Subsidizing law students’ work in legal aid— An organization that assisted a school’s law students, chosen on the basis of merit and interest, to obtain practical experience with exempt public interest law firms and legal aid societies by supplementing the nominal salaries paid by the participating firms and societies qualifies for exemption under IRC 501(c)(3). In addition to promoting the law students’ educations, the organization’s payments constituted indirect support of the firms and societies that employed the students. Rev. Rul. 78–310, 1978–2 C.B. 173.

  30. Hospice— A nonprofit hospice, operated on both an inpatient and outpatient basis to alleviate the physical and mental distress of the terminally ill, is operated exclusively for charitable purposes and qualifies for exemption. Rev. Rul. 79–17, 1979–1 C.B. 193.

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

  32. Private hospital rooms for the poor— An otherwise qualifying organization that makes private hospital rooms available to patients who can benefit medically from a private room but who cannot afford the expense of such a room is operated exclusively for charitable purposes and qualifies for exemption as an organization described in IRC 501(c)(3). Rev. Rul. 79–358, 1979–2 C.B. 225.

  33. Adoption agency; placement of foreign orphans— A nonprofit organization that arranges the placement of orphan children from foreign countries in the homes of adoptive parents in the United States is operated exclusively for charitable purposes. Rev. Rul. 80–200, 1980–2 C.B. 173.

  34. Litigation of environmental issues— An otherwise qualifying organization that was formed to protect and restore environmental quality and whose principal activity consists of instituting litigation as a party plaintiff to enforce environmental legislation is operated exclusively for charitable purposes and qualifies for exemption. Rev. Rul. 80–278, 1980–2 C.B. 175.

  35. Lawyer referral service— A nonprofit lawyer referral service, which arranges at the request of any member of the public an initial half-hour appointment for a nominal charge with a lawyer whose name is on an approved list maintained by the organization, does not qualify for exemption under IRC 501(c)(3). Although it provides some benefit to the public, a substantial purpose of the organization is promoting the legal profession. Thus, a lawyer referral service may qualify for exemption as an organization described in IRC 501(c)(6) but not in IRC 501(c)(3). Rev. Rul. 80–287, 1980–2 C.B. 185.

  36. Housing, transportation, and counseling for relative of hospital patients— A nonprofit organization that provides housing, transportation, and counseling to hospital patients’ relatives and friends who travel to the locality to assist and comfort the patients qualifies for exemption. Rev. Rul. 81–28, 1981–1 C.B. 328.

Religion or Advancement of Religion

  1. IRC 501(c)(3) provides for the exemption of organizations organized and operated exclusively for "religious" purposes. Because activities often serve more than one purpose, an organization that is "advancing religion" within the meaning of Reg. 1.501(c)(3)–1(d)(2) may also qualify under IRC 501(c)(3) as charitable or educational organization.

Constitutional Considerations

  1. The First Amendment to the United States Constitution provides that Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof. However, the Supreme Court has held that a legislative grant of tax exemption does not violate this prohibition. In Walz v. Tax Commission of the City of New York, 97 U.S. 664 (1970), the Court upheld the constitutionality of property tax exemptions granted by New York City to religious organizations for properties used solely for religious worship. In holding that the exemption of religious organizations, including churches, from tax, is not a law respecting an establishment of religion in violation of the First Amendment, the Court noted that the minimal involvement between church and state created by exemption is far less entanglement than taxation would entail.

Compliance with Statutory Requirements

  1. Any religious organization, including a church, must satisfy the statutory requirements to be exempt under IRC 501(c)(3). As explained by the court in Christian Echos National Ministry. Inc. v. United States, 470 F.2d 849 (10th Cir. 1972), cert. den., 414 U.S. 864 (1973), in which the court upheld denial of tax exemption to a religious organization engaged in substantial legislative activity, "[i]n light of the fact that tax exemption is a matter of grace rather than right, we hold that the limitations contained in Section 501(c)(3) withholding exemption from nonprofit corporations [that engage in substantial lobbying] do not deprive Christian Echoes of its constitutionally guaranteed right of free speech. The taxpayer may engage in all such activities without restraint, subject, however, to withholding of the exemption, or, in the alternative, the taxpayer may refrain from such activities and obtain the privilege of exemption."

  2. Exemption from state or local taxation is neither conclusive nor relevant to the determination whether an organization is operated exclusively for religious purposes under federal tax law. Universal Life Church v. U.S., 721 USTC 9467 (E.D. Cal. 1972).

Burden of Proof

  1. As noted by the court in Church of Spiritual Technology v. United States, 26 Cl. Ct. 713 (1992), which upheld denial of an organization’s application for recognition of exemption, in demonstrating their entitlement to exemption, churches and other religious organizations are subject to the same burden of proof requirements as other organizations.

  2. The court in Church of Spiritual Technology cited a long line of authority holding that the applicant bears the burden of showing it is entitled to exemption. In Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir. 1974), the court stated that "[i]ncome tax exemption must be strictly construed, with any doubts to be resolved in favor of the taxing entity. Consequently, determinations of the Commissioner are presumed correct."

  3. Similarly, the court cited Welch v. Helvering, 190 U.S. 111, 115 (1933), and modern cases following its stricture that "[P]laintiff thus bears the burden of proving its entitlement to an exemption." See also, Bubbling Well Church of Universal Love, Inc. v. Commissioner, 670 F.2d 104, 106 (9th Cir. 1981); Freedom Church of Revelation v. United States, 588 F. Supp. 693, 696 (D.D.C. 1984).

Validity of Religious Belief

  1. In making a determination whether a religious organization qualifies for exemption under IRC 501(c)(3), the Internal Revenue Service cannot pass judgment on the merits of the applicant’s asserted religious belief.

  2. Accordingly, proof of entitlement to exemption does not include proving the validity of the religious doctrines or beliefs of the applicant or its members. It is the government’s duty to "make room for as wide a variety of beliefs and creeds as the spiritual needs of man deem necessary." Zorach v. Clausen, 343 U.S. 306 (1952).

  3. This concept is also discussed in U.S. v. Ballard, 322 U.S. 78 (1943), in which the Court stated "The Fathers of the Constitution were not unaware of the varied and extreme views of religious sects, of the violence of disagreement among them, and of the lack of any one religious creed on which all men would agree. They fashioned a charter of government which envisaged the widest possible toleration of conflicting views...The religious views espoused by respondents might seem incredible, if not preposterous, to most people. But if those doctrines are subject to trial before a jury charged with finding their truth or falsity, then the same can be done with the religious beliefs of any sect. When the triers of fact undertake that task, they enter a forbidden domain."

Religious Belief Defined

  1. The term "religious" as used in IRC 501(c)(3) is not subject to precise definition. The leading interpretation of the term was made by the Supreme Court in United States v. Seeger, 380 U.S. 163 (1965), in which the Court interpreted the phrase "religious training and belief" as used in the Universal Military Training and Service Act, 50 U.S.C. section 456 (j), in determining an individual’s eligibility for exemption from military service on religious grounds. The Court formulated the following definition: "A sincere and meaningful belief which occupies in the life of its possessor a place parallel to that filled by the God of those admittedly qualifying for the exemption comes within the statutory definition."

  2. The Court elaborated upon the Seeger definition in Welsh v. United States, 398 U.S. 33 (1970), stating that "[i]f an individual deeply and sincerely holds beliefs that are purely ethical or moral in source and content but that nevertheless impose upon him a duty of conscience to refrain from participating in any war at any time, those beliefs certainly occupy in the life of that individual a place parallel to that filled by... God in the lives of traditionally religious persons." Thus, religious beliefs include many beliefs (for example, Taoism, Buddhism, and Secular Humanism) that do not posit the existence of a Supreme Being in the conventional sense.

Actions Distinguished from Beliefs

  1. The constitutional protections afforded religious beliefs do not prevent government from regulating conduct or actions when it has a compelling interest to do so. Thus, the First Amendment does not prevent the government from requiring compliance with general laws designed to effectuate an important governmental policy or objective even though compliance may be contrary to an individual’s sincerely-held religious beliefs.

  2. In Reynolds v. United States, 98 U.S. 145 (1878), the Court upheld a law passed by Congress that made the practice of polygamy by persons residing in United States territories a crime. The Court interpreted the constitutional prohibition in this way: "Congress was deprived of all legislative power over mere opinion, but was left free to reach actions which were in violation of social duties or subversive of good order." Finding that polygamy had long been considered an offense against society in all the states of the union, the Court held that the statute under consideration was constitutional and valid as prescribing a rule of action for all those residing in the territories. In holding that religious belief did not except persons from operation of the statute, the Court said: "While they [laws] cannot interfere with mere religious belief and opinions, they may with practices."

  3. In Cantwell v. Connecticut, 310 U.S. 296 (1940), the Court endorsed Reynolds, stating that "the [First] Amendment embraces two concepts, freedom to believe and freedom to act. The first is absolute but, in the nature of things, the second cannot be." See also Davis v. Beason, 133 U.S. 33 (1890), and Mormon Church v. United States, 136 U.S. 1 (1890), where the Court grappled with the same issue. While continuing to affirm the right of freedom of religious belief, the Court nevertheless held that legislation for the punishment of actions "inimical to the peace, good order and morals of society" did not violate the First Amendment.

  4. A notable recent application of this doctrine is Bob Jones University v. United States, and Goldsboro Christian Schools v. United States, 461 U.S. 574 (1983), in which the Supreme Court upheld revocation of the exemption under IRC 501(c)(3) of religious and educational institutions on the grounds that its religiously motivated policy forbidding interracial dating violated a fundamental public policy against racial discrimination. The Court concluded that educational institutions that practice racial discrimination based on religious beliefs are not charitable in the generally accepted legal sense and thus do not qualify for federal tax exemption.

Substantial Nonexempt Purposes

  1. An organization’s activities in furtherance of a religious belief must serve exclusively exempt purposes. See Reg. 1.501(c)(3)–1(c)(1). If the organization’s activities promote a substantial nonexempt purpose, exemption under IRC 501(c)(3) is precluded.

  2. In one case, the Tax Court held that an organization dominated by one individual was not exempt as a religious organization because its purpose was to carry on the founder’s personal feud with a local newspaper. The court did not examine the validity or sincerity of the beliefs held. Rather, it found that the actual activities had little relation to the observance of those beliefs. Puritan Church of America, 10 T.C.M. 485 (1951), aff’d per curiam, 209 F.2d 306 (D.C. Cir. 1953), cert. den., 350 U.S. 810 (1955).

  3. In First Libertarian Church v. Commissioner, 74 T.C. 396 (1980), the court held that an organization that was the outgrowth of a supper club and whose primary activities were holding meetings before supper, sponsoring the supper club, and publishing a newsletter did not qualify for exemption under IRC 501(c)(3). The organization failed to show that it successfully segregated the clearly social and political aspects of its supper club meetings and its publication from its stated purpose of furthering its religious doctrine of "ethical egoism."

  4. Religious organizations that engage in substantial legislative activity are disqualified from tax exemption regardless of the motivation or purpose of that activity. Christian Echoes National Ministry, Inc. v. U.S., 470 F.2d 849 (10th Cir. 1972), cert. den., 414 U.S. 864 (1973).

  5. In The Schoger Foundation v. Commissioner, 76 T.C. 380 (1981), an organization operating a religious retreat facility did not qualify for exemption under IRC 501(c)(3) because it failed to show that the retreat facility was operated exclusively for religious purposes. Although the organization’s mountain lodge offered guests religious, recreational, and social activities; however, none were regularly scheduled or required. The court concluded that the organization had not met its burden of proof to show that the lodge was operated primarily for an exempt religious purpose and that the recreational and social activities at the lodge were only incidental to a religious purpose.

  6. The Tax Court held an organization formed to arrange for the construction of housing for sale to individuals associated with a religious denomination to be exempt under IRC 501(c)(3) in Janaluska Assembly Housing Inc. v. Commissioner, 86 T.C. 1114 (1986). The housing was to be constructed on the grounds of a retreat center owned by a conference of the United Methodist Church. The Service concluded that the housing would substantially further the nonexempt purpose of providing recreational and vacation opportunities to the purchasers. In a declaratory judgment action, the Tax Court concluded that because only active participants in the religious activities conducted at the center would be permitted to purchase the housing, the organization was organized and operated exclusively to further religious purposes.

  7. An organization will not qualify for exemption under IRC 501(c)(3) if its net earnings inure to the benefit of private shareholders or individuals.

    1. In The Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969), cert. den., 397 U.S. 1009 (1970), the court, without considering the organization’s beliefs, held that it did not qualify for exemption under IRC 501(c)(3) because its net earnings inured to the organization’s founder and members of his family. See also People of God Community v. Commissioner, 75 T.C. No. 8 (1980); Bubbling Well Church of Universal Love v. Commissioner, 74T.C. 531 (1980); Unitary Mission Church of Long Island, Inc. v. Commissioner, 74 T.C. 507 (1980); Western Catholic Church v. Commissioner, 73 T.C. 196 (1979); The Basic Unit Ministry of Schurig v. U. S., 81–1 USTC S9188 (D.D.C. 1981); Church of the Transfiguring Spirit. Inc. v. Commissioner, 76 T.C. 1 (1981); Church of Scientology of California v. Commissioner, 823 F.2d 1310 (9th Cir. 1987).

    2. In Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), the organization’s founder and his wife executed vows of poverty and transferred all their possessions and income to the organization on the condition that it qualified under IRC 501(c)(3). The founder controlled all financial decisions of the organization. The court found that a substantial purpose of the organization was to serve the private interests of the founder and his wife. Over 96 percent of the contributions the organization received (mostly from the founder and his wife) were spent on the founder’s and his wife’s subsistence, their unsubstantiated travel, and upkeep and utilities of their home, which was labeled their "parsonage." Less than one percent of contributions were spent for direct church related expenses. Accordingly, the court held that the organization did not qualify under IRC 501(c)(3). See also The Church in Boston v. Commissioner, 71 T.C. 102 (1978); and Southern Church of Universal Brotherhood Assembled v. Commissioner, 74 T.C. No. 89 (1980).

    3. In Beth-El Ministries. Inc. v. United States, 79–2 USTC § 9412, an organization whose members donated all their possessions and, if employed outside the organization, their salaries, to the organization, and which provided its members benefits in the form of food, clothing, shelter, medical care, recreational facilities, and educational services, was held not to be exempt as a religious organization. The court concluded that private benefits inured to the organization’s members because the organization paid their living expenses. See also Martinsyille Ministries, Inc. v. United States, 80–2 USTC § 9710 (D.D.C. 1979). But see Alive Fellowship of Harmonious Living v. Commissioner, T.C. Memo. 1984–87. The Tax Court held that no inurement resulted when an organization’s members received benefits on the basis of need. However, in approving this "unconventional" compensation arrangement, the court based its decision on the fact that members received less than modest assistance that did not exceed the value of the required services that they performed.

  8. For a discussion of the attributes that are necessary for a religious organization to be classified as a church or a convention or association of churches, see Private Foundations Manual, IRM 7.26.2.

Religious Publishing

  1. Publishing literature is an important method of disseminating religious views. However, publishing may also be a business operating in competition with commercial enterprises. The Service has held that publishing and distributing a monthly newspaper carrying church news of interdenominational interest accomplishes a charitable purpose by contributing to the advancement of religion. In that case subscriptions were obtained through individual churches and church associated groups and revenues did not cover the costs of operation. Rev. Rul. 68–306, 1968–1 C.B. 257.

  2. In a Tax Court case, an organization sold a large volume of literature to the general public by mail. Some of the literature had little or no connection to the beliefs held by the organization. The surrounding circumstances tended to show that the individual who dominated the organization regarded the enterprise "simply as a money making operation." The court held that this was not a religious organization, but rather a trade or business. Foundation for Divine Meditation, Inc., 24 T.C.M. 411 (1965), affirmed sub. nom. M.E. Parker v. Commissioner, 365 F.2d 792 (8th Cir. 1966), cert. denied, 385 U.S. 1026 (1967).

  3. In cases where religious literature is published by an organization to promote its beliefs, the activity may further exclusively religious purposes even though it produces an operating profit. Saint Germain Foundation, 26 T.C. 648 (1956); Unity School of Christianity, 4 B.T.A. 61 (1926). See also Pulpit Resource v. Commissioner, 70 T.C. 594 (1978), in which the court reversed the Service’s denial of exemption to an organization that sold a publication containing prepared sermons for use by ministers.

  4. However, in Scripture Press Foundation v. United States, 285 F.2d 800 (1961), cert. den., 363 U.S. 985 (1962), a separately organized publishing corporation sold a large volume of religious literature, periodicals, and Sunday school supplies at a substantial profit was held not exempt. The court found that operating profits and accumulated earnings were disproportionately large and there was no clear purpose to further any particular religious beliefs. The general character of the operation was that of a commercial publishing house catering to religious customers. Thus, the court concluded it was a trade or business and not exempt. The existence of a modest program of expenditures for religious and educational purposes unconnected with the publishing did not have a decisive effect. See also Christian Manner International v. Commissioner, 71 T.C. 661 (1979).

  5. One case places a great weight on the existence of an operating profit and a commercial pricing pattern. In Fides Publishers Association v. United States, 263 F. Supp. 924 (1967), a corporate publisher of religious books priced at commercial levels that showed moderate but consistent operating profits was held not to be exempt. The court said that although the "publishing activities further the exempt purpose of educating the lay apostolate," nevertheless, there was a substantial nonexempt purpose— "the publication and sale of religious literature at a profit."

  6. In another case, an organization that published religious literature was held to no longer qualify as tax exempt in view of an abrupt increase in salaries of top personnel of the organization’s press, a large amount of accumulated profits, and the fact that the press was in direct competition with a number of commercial publishers. The facts showed that the organization’s primary purpose was to operate as a commercial business producing net profits. Incorporated Trustees of the Gospel Workers Society v. U.S., 520 F. Supp. 374 (D.D.C. 1981).

  7. On the other hand, the Third Circuit Court of Appeals upheld the exempt status of another religious publishing organization, concluding that its accumulation of capital for physical expansion and its increased profit due to unexpected increases in popularity of one of the publisher’s authors did not show a substantial non-exempt purpose. Presbyterian and Reformed Publishing Co. v. Commissioner, 743 F.2d 148 (3rd Cir. 1984).

Religious Broadcasting

  1. Broadcasting is an activity analogous to publishing. In Rev. Rul. 68–513, 1968–2 C.B. 212, a religious broadcasting station was held exempt under IRC 501(c)(3), where broadcast time was devoted to worship services and other programs having religious content. Although the station was operated on a commercial license, it did not sell commercial or advertising time.

  2. Rev. Rul. 68–563 was amplified in Rev. Rul. 78–385, 1978–2 C.B. 174, which held a religious and educational television station exempt under IRC 501(c)(3) even though it devoted an insubstantial amount of broadcast time to commercially sponsored programs. However, the commercially sponsored programs are unrelated trade or business under IRC 513.

Commercial vs. Religious Activities

  1. A nonprofit organization that supervises the preparation and inspection of food products prepared commercially to insure the compliance of individual members with the tenets and dictates of a particular religion was held to be accomplishing a charitable purpose by engaging in an activity that advances religion and thus the organization is exempt under IRC 501(c)(3) in Rev. Rul. 74–575, 1974–2 C.B. 161.

  2. Similarly, a nonprofit organization formed to compile genealogical research data on its family members in order to perform religious ordinances in accordance with the precepts of the religious denomination was held to be advancing religion. Rev. Rul. 71–580, 1971–2 C.B. 235.

  3. Rev. Rul. 75–282, 1975–2 C.B. 201 held that an organization, formed and controlled by an exempt conference of churches, that borrows funds from individuals and makes mortgage loans at less than the commercial rate of interest to affiliated churches to finance the construction of church buildings qualifies for exemption. By operating under the close supervision and control of the parent church conference, the organization was considered to be advancing religion by carrying out an integral part of the activities of the parent, i.e., aiding member churches in obtaining facilities for their religious purposes.

  4. Rev. Rul. 77–377, 1977–2 C.B. 192, reached a contrary result concerning a nonprofit organization that arranges and conducts winter-time ocean cruises during which activities to further religious and educational purposes are provided in additional to extensive social and recreational activities. This organization is not operated exclusively for exempt purposes under IRC 501(c)(3).

  5. Rev. Rul. 77–430, 1977–2 C.B. 194, held that an otherwise qualifying organization that conducts weekend religious retreats, open to individuals of diverse Christian denominations, at a rural lakeshore site at which the participants may enjoy the recreational facilities in their limited amount of free time and that charges no fees qualifies for exemption under IRC 501(c)(3) as an organization operated exclusively for religious purposes. This organization is clearly distinguishable from the one in Rev. Rul. 77–366 because the facts show the primary emphasis was on religious, not recreational, activities.

  6. Rev. Rul. 79–359, 1979–2 C.B. 226, held that an organization whose purpose is to provide traditional burial services that directly support and maintain basic tenets and beliefs of a religion regarding burial of its members is operated exclusively for charitable purposes and is exempt under IRC 501(c)(3).

  7. An organization that operated a medical aid plan for its church members was held to be furthering the church’s religious tenet that members should bear one another’s burdens and thus was entitled to exemption under IRC 501(c)(3). Bethel Conservative Mennonite Church v. Commissioner, 84–2 USTC 9195 (CA 7), rev’g 80 T.C. 352 (1983).

  8. Compare Living Faith v. Commissioner, 950 F.2d 365 (7th Cir. 1991), aff’g T.C.M. 1990–484, in which an organization that operated vegetarian restaurants and health food stores in a manner consistent with the religious beliefs of the Seventh-Day Adventist religion did not qualify for recognition of exemption under IRC 501(c)(3). The court concluded its operations evidenced a substantial nonexempt commercial purpose.

Mail Order Churches

  1. The term "mail order church" refers to organizations set up pursuant to "church charters" purchased through the mail from organizations that claim that the charters and other "ministerial credentials" can be used to reduce or eliminate an individual’s federal income tax liability. Although a "mail order church" is not precluded from exemption, because it is possible for one to be organized operated exclusively for religious purposes, Service experience, as reflected in numerous court decisions, has shown that many are operated for the private benefit of those who control the organization. See IRM 4.70, for procedures regarding coordination with Examination function of IRC 170(c) deduction cases and assignment of income cases; and also for a general discussion of examination procedures for mail order churches; churches or conventions or associations of churches; and a discussion of IRC 7611, which sets forth certain restrictions on the examination of churches.

  2. Service position regarding a common form of operation for many mail order churches is set forth in Rev. Rul. 81–94, 1981–1 C.B. 330. In Rev. Rul. 81–94 a professional nurse founded an organization under the name of ABC Church after purchasing a "certificate of ordination" from an organization selling such certificates and church charters. The nurse was the organization’s minister, director, and principal officer. The nurse executed a vow of poverty and transferred all of her assets, including a home and an automobile, and income to the organization. The organization also assumed all of her liabilities, including a home mortgage and credit card balances. The organization paid all her living expenses, and she continued to use the house and automobile for personal purposes. Rev. Rul. 81–94 concludes that, based on these facts, the organization does not qualify for exemption under IRC 501(c)(3) because it operates to serve the private interests of a designated individual rather than a public interest.

  3. Numerous court cases have held that, in situations similar to that described in Rev. Rul. 81–94, an organization that serves the private interests of a designated individual rather than a public interest does not qualify for exemption under IRC 501(c)(3). See, for example, Basic Bible Church v. Commissioner, 74 T.C. 846 (1980); Church of the Transfiguring Spirit, Inc. v. Commissioner, 76 T.C. 1 (1981); People of God Community v. Commissioner, 75 T.C. 127 (1980); The Southern Church of Universal Brotherhood Assembled, Inc. v. Commissioner, 74 T.C. 1223 (1980); Bubbling Well Church of Universal Love v. Commissioner, 74 T.C. 531 (1980); and Unitary Mission Church of Long Island v. Commissioner, 74 T.C. 507 (1980); aff’d, 647 F. 2d 163 (2d Cir. 1981).

  4. On a related issue, the Service has denied a charitable contribution deduction under IRC 170 for amounts contributed by an individual to an organization formed under the name of the ABC Church but operated for the individual’s private benefit. See Rev. Rul. 78–232, 1978–1 C.B. 69. Numerous court cases have also held that, in situations similar to the one described in Rev. Rul. 78–232, a charitable contribution deduction under section 170 was properly denied by the Service. See, for example, McGahen v. Commissioner, 76 T.C. No. 41 (March 26, 1981); Hall v. Commissioner, T.C.M. 1981–143; Baker v. Commissioner, T.C.M. 1980–367; Manson v. Commissioner, T.C.M. 1980–315, aff’d, 628 F. 2d. 1353 (5th Cir. 1980); Abney v. Commissioner, T.C.M. 1980–27; Push v. Commissioner, T.C.M. 1980–4; Heller v. Commissioner, T.C.M. 1978–149; and Clippinger v. Commissioner, T.C.M. 1978–107.

  5. In many situations where the organization selling the church charters and ministerial credentials has been recognized as exempt under IRC 501(c)(3) (but has not received a group exemption), the organization purchasing the charter claims that it is covered by the selling organization’s exempt status. This argument was made in Basic Bible Church, discussed above, where the petitioner contended that as an auxiliary of the Basic Bible Church, it shared that organization’s tax exempt status (The organization had not received a group ruling). The court concluded, however, that the petitioner was legally separate and distinct from the parent church and, therefore, had to qualify for exemption under IRC 501(c)(3) on its own merits. See also United States v. Toy National Bank, 79–1 USTC ¶ 9344 (N.D.lowa 1979), and Brown v. Commissioner, T.C.M. 1980–553, which held that organizations that had obtained a charter from the Universal Life Church, Inc. (ULC) were not covered by that organization’s individual exemption. The courts in these cases concluded that because ULC had an individual rather than a group exemption, the chartered organizations had to qualify for exemption on their own merits.

Digests of Precedent Rulings

  1. Coffee house— A nonprofit organization formed by local churches to operate a supervised facility known as a "coffee house," in which persons of college age are brought together with church leaders, educators and leading businessmen of the community for discussions and counseling on religion, current events, social, and vocational problems was held to be advancing religion and thus exempt as a charitable organization. Rev. Rul. 68–72, 1968–1 C.B. 250.

  2. Religious publishing— A nonprofit organization that publishes a newspaper primarily devoted to news, articles, and editorials relating to church and religious matters is exempt. Rev. Rul. 68–306, 1968–1 C.B. 257.

  3. Religious broadcasting— A nonprofit religious broadcasting station that does not sell commercial or advertising time is exempt under IRC 501(c)(3) even though it operates on a commercial license. Rev. Rul. 68–563, 1968–2 C.B. 212.

  4. Genealogical research— A nonprofit organization formed to compile genealogical research data on its family members in order to perform religious ordinances in accordance with the precepts of the religious denomination to which family members belong is advancing religion and thus exempt. Rev. Rul. 71–580, 1971–2 C.B. 235.

  5. Supervision and inspection of commercially prepared food products— A nonprofit organization that supervises the preparation and inspection of food products prepared commercially in a particular locality to insure that they satisfy the dietary rules of a particular religion, thereby assisting the individual members of the religion to comply with its tenets and dictates, qualifies for exemption. Rev. Rul. 74–575, 1974–2 C.B. 161.

  6. Mortgage loans to conference churches--An organization formed and controlled by an exempt conference of churches that borrows funds from individuals and makes mortgage loans at less than the commercial rate of interest to affiliated churches to finance the construction of church buildings qualifies for exemption. Rev. Rul. 75–282, 1975–2 C.B. 201.

  7. Missionary housing— An organization established to provide temporary low-cost housing and related services for missionary families on furlough for recuperation or training in the U.S. from their assignments abroad is operated exclusively for charitable purposes. Rev. Rul. 75–434, 1975–2 C.B. 205.

  8. Religious tours— A nonprofit organization that arranges and conducts winter cruises during which activities to further religious and educational purposes are provided in addition to extensive social and recreational activities is not operated exclusively for exempt purposes and does not qualify for exemption. Rev. Rul. 77–366, 1977–2 C.B. 192.

  9. Religious retreats— An otherwise qualifying organization that conducts weekend religious retreats, open to individuals of diverse Christian denominations, at a rural lakeshore site at which the participants may enjoy the recreational facilities in their limited amount of free time and that charges no fees is operated exclusively for religious purposes and qualifies for exemption. Rev. Rul. 77–430, 1977–2 C.B. 194.

  10. Charitable contribution; benefit to contributors— An individual who claims to be a minister, forms an organization under the name ABC Church, deposits salary checks for salary earned from outside employment in the organization’s bank account, and uses the funds of the account for personal living expenses is not entitled to a charitable deduction under IRC 170 for the amount of the salary checks. Rev. Rul. 78–232, 1978–1 C.B. 69.

  11. Religious broadcasting— A nonprofit organization formed to advance education and religion that broadcasts religious and educational programs for all but an insubstantial amount of its broadcast time from a television station it owns and operates under a commercial license qualifies for exemption under IRC 501(c)(3), even though its remaining broadcast time is devoted to commercially sponsored programs. The commercially sponsored programs, however, are unrelated trade or business under IRC 513. Rev. Rul. 78–385, 1978–2 C.B.

  12. Religious burial services— A nonprofit organization whose purpose is to provide traditional burial services that directly support and maintain basic tenets and beliefs of a religion regarding burial of its members is operated exclusively for charitable purposes and qualifies for exemption. Rev. Rul. 79–359, 1979–2 C.B. 226.

  13. Church operated for benefit of founder— A nonprofit organization formed under the name ABC Church by a professional nurse (who is also the organization’s minister, director, and principal officer) that is used as a vehicle for handling the nurse’s personal financial transactions is not exempt under IRC 501(c)(3) because it serves the private interests of a designated individual rather than a public interest. Rev. Rul. 81–94, 1981–1 C.B. 330.

Educational Purposes

  1. An organization that is organized and operated exclusively for educational purposes qualifies for exemption under IRC 501(c)(3).

  2. The regulations under Reg. 1.501(c)(3)–1(d)(3)(i) define education as:

    1. "the instruction or training of the individual for the purpose of improving or developing his capabilities"

    2. "the instruction of the public on subjects useful to the individual and beneficial to the community."

Schools

  1. Schools provide the classic form of individual instruction. For IRC 501(c)(3) purposes, a school includes:

    • primary or secondary school,

    • college, or

    • professional or trade school.

  2. A school is defined in IRC 170(b)(1)(A)(ii). To qualify, a "school" must:

    1. primarily present formal instruction,

    2. maintain a regular faculty and curriculum,

    3. have a regularly enrolled body of students, and

    4. have a facility.

Racially Nondiscriminatory Requirement for Schools

  1. A private school that does not have a racially nondiscriminatory policy as to students does not qualify for exemption. This position was announced in Rev. Rul. 71–447, 1971–2 C.B. 230.

    1. A "racially nondiscriminatory policy as to students" means that the school admits 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 administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.

    2. Rev. Proc. 75–50, 1975–2 C.B. 587, clarified that discrimination on the basis of race includes discrimination on the basis of color and national or ethnic origin.

    3. The requirement is based on the clear federal public policy against racial discrimination in education. Under the common law definition of charitable, purposes that are contrary to public policy are not charitable.

  2. Rev. Proc. 75–50, 1975–2 C.B. 587, provides procedures that a school must follow to establish that it has a racially nondiscriminatory policy as to students. Under Rev. Proc. 75–50, a school must show affirmatively that it—

    1. has adopted a racially nondiscriminatory policy as to students;

    2. is operating under a racially nondiscriminatory policy as to students; and

    3. has made this policy known to all segments of the general community served by the school.

  3. The requirement of racial and ethnic nondiscrimination extends to organizations, including churches or a convention or association of churches, that have secular school operations, whether separately incorporated or operated as part of the organization’s overall operations.

    If a church THEN
    operates a separately incorporated school with a policy of refusing to accept any children from certain racial or ethnic groups the school is not operated exclusively for charitable purposes and does not qualify under IRC 501(c)(3). (Rev. Rul. 75–231, 1975–1 C.B. 158.)
    operates a racially discriminatory school as part of its operations the school will jeopardize the exemption of the organization. (Rev. Rul. 75–231, 1975–1 C.B. 158.)
    is a parochial school that selects students on the basis of membership in a religious denomination as long as the denomination does not restrict its membership to a particular racial or ethnic group, the school is not discriminatory.
    is a seminary or other "purely" religious school, primarily teaching religious subjects, usually with the purpose of training students for the ministry the organization is not subject to the racially and ethnically nondiscriminatory requirements inasmuch as it is considered to be a religious rather than an educational organization.

  4. Rev. Rul. 77–272, 1977–2 C.B. 191, holds that an organization formed to conduct an apprentice training program for Native Americans, in conjunction with the Bureau of Indian Affairs, was charitable and not racially discriminatory.

Significant Cases
  1. In Green v. Connally, 330 F. Supp. 1150 (D.D.C., 1970) aff’d sub nom. Coit v. Green, 404 U.S. 997 (1971), as supplemented and modified by Green v. Miller, 45 AFTR 2d 80–1566, 80–1 USTC 9401 (D.D.C. 1980), the court held that racially discriminatory private schools are not entitled to exemption, and that donations to such schools are non-deductible.

  2. In Prince Edward School Foundation v. Commissioner, 478 F. Supp. 107 (D.D.C. 1979), the court held that a private school did not qualify for exemption because it failed to meet its burden to establish that its policy is to admit black students on the same basis as those of other races. Pertinent facts included:

    1. the school was established because the public school system had been desegregated;

    2. the organization had previously conceded that it practiced a racially discriminatory policy of exclusiveness; and,

    3. although it was subsequently enjoined from such practices by court order, it failed to present any evidence that it had modified the above policy.

  3. In Bob Jones University v. U.S. and Goldsboro Christian Schools, Inc. v. U.S., 461 U.S. 574 (1983), the Supreme Court upheld the revocation of exemption under IRC 501(c)(3) of an educational and religious organization that operated a university whose policies forbade interracial dating by its students. The Court concluded that educational institutions practicing racial discrimination based on religious beliefs are not charitable in the common law sense and thus are not entitled to federal income tax exemption.

    1. However, in a recent case, Bob Jones University Museum and Gallery v. Commissioner, T.C. Memo 1996–247 (1996), the Tax Court ruled against the Service’s denial of the Museum’s charitable status. The Museum absorbed the museum functions of Bob Jones University. The court, limiting its analysis to the case’s specific facts, ruled that the Museum is described in IRC 501(c)(3), as its activities promote education, it is independent of the University, and it pays fair market rates for services provided by the University.

  4. In Calhoun Academy v. Commissioner of Internal Revenue, 94 T.C. 284 (1990), a court applied the racially nondiscriminatory policy in holding that a school was unable to overcome an inference of discrimination resulting from its creation at the time of desegregation of public schools, its failure to adequately publicize a policy of racial nondiscrimination, and its long history of operation without a single black student being enrolled.

Day Care Centers

  1. A nonprofit day care center may be exempt under IRC 501(c)(3) as an educational organization.

    IF an IRC 501(c)(3) day care center THEN
    meets the requirements for a school it will be classified as an educational organization under IRC 509(a)(1) and 170(b)(1)(A)(ii).
    does not meet the requirements for a school it will most likely be classified as a IRC 509(a)(2) organization.

Organizations that are Intregal Part of a School

  1. Organizations that are operated for the convenience of students and faculty can qualify for exemption under IRC 501(c)(3) because they promote educational purposes. This category includes:

    • University bookstores. Rev. Rul. 58–194, 1958–1 C.B. 240, and Squire v. Student Book Corp., 191 F.2d 1018 (9th Cir. 1951).

    • Cafeterias. Rev. Rul. 58–194, 1958–1 C.B. 240.

    • Cooperative college book and supply stores. Rev. Rul. 69–538, 1969–2 C.B. 116.

  2. Other school-affiliated organizations and activities that may qualify as educational include:

    1. A law review journal. Rev. Rul. 63–235, 1963–2 C.B. 210.

    2. A high school interscholastic athletic program. Rev. Rul. 55–587, 1955–2 C.B. 261.

    3. Providing meals for coaches and members of a university’s athletic teams. Rev. Rul. 67–291, 1967–2 C.B. 184. However, compare Rev. Rul. 56–13, 1956–1 C.B. 198, which holds that recruiting athletes is not an exclusively educational activity. Thus, an organization formed to assist a school recruit talented athletes to the school does not qualify for exemption under IRC 501(c)(3).

    4. A faculty-run organization that gives business students experience in managing a securities portfolio. Rev. Rul. 68–16, 1968–1 C.B. 246.

    5. An alumni association. Rev. Rul. 60–143, 1960–1 C.B. 192; Estate of Phillip R. Thayer, et al. v. Commissioner, 24 T.C. 384 (1955), acquiescence, 1956–2 C.B. 8; Rev. Rul. 56–486, 1956–2 C.B. 309.

    6. Housing for college students. Rev. Rul. 76–336, 1976–2 C.B. 143.

    7. An organization that promotes alternative education. National Association for the Legal Support of Alternative Schools v. Commissioner, 71 T.C. 118 (1978), acq. 1981–36 I.R.B. 5.

Fraternities and Student Clubs

  1. College fraternities do not qualify for exemption under IRC 501(c)(3) because they are not operated for exclusively educational purposes. Although many have certain educational aspects, their activities serve substantial social purposes. Rev. Rul. 69–573, 1969–2 C.B. 125; J. Chrys Dougherty v. Phinney, 307 F.2d 357 (5th Cir. 1962); Alfred T. Davison v. Commissioner, 60 F.2d 50 (2nd Cir. 1932).

  2. Similarly, Rev. Rul. 64–118, 1964–1 (Part 1) C.B. 182, holds that fraternity housing corporations are not exempt as educational organizations.

  3. Student clubs and societies may qualify for exemption under IRC 501(c)(3) if they serve exclusively educational purposes, even if they offer incidental social or recreational activities.

    1. The educational purposes of a student club or society that qualifies under IRC 501(c)(3) is reflected by the nature of its programs, the incidental character of its recreational and social activities, and the criteria by which it selects it membership.

    2. The mere limiting of availability of a program to a relatively small membership of a restricted class in the manner described in Rev. Rul. 56–403, 1956–2 C.B. 307, will not preclude exemption for an otherwise qualified student organization.

  4. In contrast, as set out in Rev. Rul. 73–439, 1973–2 C.B. 176, a student club or society is not educational if its activities, membership criteria, or other operational aspects reflect purposes that are not exclusively educational.

Services for Educational Institutions

  1. Organizations that provide services for educational organizations may be exempt in that they advance education. The following are exempt service organizations consisting of computer networks and organizations:

    1. A regional network of member owned or leased computers, created and controlled by exempt colleges and universities to collect and disseminate only scientific and educational information to exempt members, faculties, and students. Rev. Rul. 74–614, 1974–2 C.B. 164.

    2. A library computer network that provides bibliographic information to member libraries, some of which are not exempt. Rev. Rul. 81–29, 1981–4 I.R.B. 13, amplifying Rev. Rul. 74–614.

  2. Compare:

    • An organization whose membership is limited to organizations that use a specific type of computer and whose activities are designed to keep members informed of current data relating to that computer, is not exempt as an educational organization; it serves the members’ private interests. Rev. Rul. 74–116, 1974–1 C.B. 127.

  3. Other exempt service organizations:

    • Accrediting institutions. Rev. Rul. 74–146, 1974–1 C.B. 129.

    • An organization that brings together instructors and interested students for purposes of instruction. Rev. Rul. 71–413, 1971–2 C.B. 228.

  4. Cooperative service organization of operating educational organizations, which are exempt under IRC 501(f), are discussed in section IRM 7.25.3.7.6.1.

  5. IRM 7.25.25 discusses IRC 502, ( "feeder organizations" ), which provides that an organization, operated for the primary purpose of carrying on a trade or business for profit, is not exempt under IRC 501 on the ground that all of its profits are payable to one or more organizations exempt under IRC 501.

Cooperative Service Organizations of Operating Educational Organizations
  1. IRC 501(f) provides for the exemption of cooperative service organizations, organized and controlled by schools and organizations operated for the benefit of certain state and municipal colleges and universities, for the collective investment of their funds in stocks and securities.

  2. Under IRC 501(f), an organization shall be treated as an organization organized and operated exclusively for charitable purposes, if:

    1. organized and operated solely to hold, commingle, and collectively invest and reinvest (including arranging for and supervising the performance by independent contractors of investment service related thereto) in stocks and securities, the moneys contributed thereto by each of the members of such organization, and to collect income therefrom and turn over the entire amount thereof, less expenses, to such members,

    2. organized and controlled by one or more such members, and

    3. comprised solely of members that are organizations described in clause (ii) or (iv) of IRC 170(b)(1)(A)— which are exempt from taxation under subsection (a), or the income of which is excluded from taxation under IRC 115(a), then such organization shall be treated as an organization organized and operated exclusively for charitable purposes.

  3. IRC 501(f) does not apply to any organization formed to promote the furnishing of investment services by private interests even though those services might be made available only to educational organizations. For example, if a private brokerage company or investment advisory company were to initiate the formation of a cooperative investment organization, in order to obtain customers for its business, such an organization would not be exempt under the provisions of IRC 501(f) even though it were limited to schools. (S. Rept. No. 93-888, 2d Session, 1974–2 C.B. 415.)

Scholarships

  1. Assistance that allows students to complete their educational programs may serve exclusively educational and charitable purposes, depending on the manner of selection and the class of eligible recipients. The following forms of student aid illustrate the standards of IRC 501(c)(3) that apply to educational assistance programs.

  2. Scholarships and student loans (whether secured as in Rev. Rul. 63–220, 1963–2 C.B. 208 or unsecured as in Rev. Rul. 61–87, 1961–1 C.B. 191) that are granted on the basis of:

    • need, as in Rev. Rul. 66–103, 1966–1 C.B. 134; or

    • merit, as in Rev. Rul. 69–257, 1969–1 C.B. 151.

  3. Free housing, books, or supplies, as in Rev. Rul. 64–274, 1964–2 C.B. 141, and Rev. Rul. 76–336, 1972–2 C.B. 143.

  4. Various forms of student aid and recognition have been determined to further educational purposes, including—

    1. A national honor society that recognizes scholastic achievements at universities and colleges where chapters are established. Rev. Rul. 71–97, 1971–1 C.B. 150.

    2. An organization formed to provide housing and food services exclusively for students and faculty of a university. Rev. Rul. 67–217, 1967–2 C.B. 181.

    3. A nonprofit organization which subsidizes meals for coaches and members of a university’s athletic teams. Rev. Rul. 67–291, 1967–2 C.B. 184.

  5. Student aid does not further exclusively educational purposes if it is provided as compensation. An example of a "scholarship" program that served a substantial non exempt purpose is Miss Georgia Scholarship Fund, Inc. v. Commissioner, 72 T.C. 267 (1979), in which the court held that an organization whose activity was awarding scholarships to contestants in a beauty pageant did not qualify under IRC 501(c)(3) because the scholarships were awarded in consideration of contractual obligations.

  6. An organization that provides educational assistance to pre-selected, specifically-named individuals, it does not qualify for exemption. Rev. Rul. 67–367, 1967–2 C.B. 188.

  7. Scholarships may serve exclusively educational purposes even though eligibility is limited to members of a single fraternity, as in Rev. Rul. 56–403, 1956–2 C.B. 307.

Vocational Training

  1. Organizations that provide vocational training may be exempt as educational organizations, provided that any commercial operations are not larger than needed for the training program. In other words, commercial activity must be incidental to the educational activity. Cases that illustrate this principle include:

    1. Rev. Rul. 73–128, 1973–1 C.B. 222, in which an organization that provides vocational training to unemployed individuals by manufacturing and selling toys was held exempt under IRC 501(c)(3). The organization’s purpose was educational, and its commercial operations were limited to sales of toys produced in the training program.

    2. In contrast, Rev. Rul. 73–127, 1973–1 C.B. 221, held that an organization operating a grocery store that conducted a training program for hard-core unemployed individuals as a part of its operations does not qualify for exemption. The commercial grocery store operations exceeded the needs of the training program.

    3. Rev. Rul. 76–37, 1976–1 C.B. 148, held that an organization that assists a public vocational training center in its home construction training program, and uses the income from home sales to finance new projects and equipment for the public school system qualifies for exemption under IRC 501(c)(3). The completed houses the organization sells are products of its training program, and are sold in substantially the same state they are in upon completion of the training program. Further, the organization built only as many houses as needed for its on-the-job training program.

    4. Rev. Rul. 75–284, 1975–2 C.B. 202, held an organization that provides high school graduates and college students with work experience in selected trades or professions, for which they receive no compensation, qualifies for exemption under IRC 501(c)(3). The organization, which is supported by tuition and contributions, contracts with skilled craft workers and professionals to provide one-on-one training to students. Accordingly, the organization furthered educational purposes by familiarizing students with various career fields, and by training individuals for the purpose of developing their capabilities.

    5. Rev. Rul. 72–101, 1972–1 C.B. 144, held that an organization created through collective bargaining agreements to train individuals desiring to acquire skills in a particular industry qualifies for exemption under IRC 501(c)(3). The organization, which is run by trustees selected by both labor and management, and is funded by participating employers based on the hours worked by their respective employees, conducts full-time, six week course that covered the various crafts and skills needed to work in the industry.

    6. Rev. Rul. 77–272, 1977–2 C.B. 191, recognized exemption under IRC 501(c)(3) of an organization formed and operated by a labor union in conjunction with a Bureau of Indian Affairs program to provide apprentice training in a skilled trade to Native Americans. The organization conducts an intensive course in the skilled trade for adults selected by the Bureau of Indian Affairs. The course was conducted in accordance with the Adult Vocational Training Act to provide members of a disadvantage group with skills needed to be gainfully employed.

    7. An organization that assists law students, chosen by merit and interests, to obtain practical experience with exempt public interest law firms and legal aid societies. Rev. Rul. 78–310, 1978–2 C.B. 173.

    8. An organization that marketed products made by the blind and distributed the net profits to the blind workers. Industrial Aid for the Blind v. Commissioner, 73 T.C. 96 (1979), acq. 1980-2 C.B. 1.

Organizations Affiliated with Businesses or Professions

  1. Organizations may be educational even if their educational activities are geared toward a certain business or profession. Exempt business-affiliated organizations include:

    1. An organization that conducted study courses for employees of banking institutions. Rev. Rul. 68–504, 1968–2 C.B. 211.

    2. An organization that conducted post-graduate education medical seminars for practicing physicians. Rev. Rul. 65–298, 1965–2 C.B. 163.

    3. Compare: An organization formed to provide continuing education seminars for physicians was not exempt because of: 1) private benefit to the for-profit travel agency that arranged tours for the organization’s seminars; and 2) the provision of extensive sightseeing and recreational activities that were not incidental to educational purposes. International Postgraduate Medical Foundation v. Commissioner, T.C.M. 1989–36.

    4. An organization created by representatives of both labor and management to select individuals for apprentice training, arrange their classroom and on-the-job training and provide books and supplies used for the training. Rev. Rul. 67–72, 1967–1 C.B. 125.

  2. An educational program must be conducted for exclusively educational purposes, with only incidental nonexempt purposes. In Rev. Rul. 59–6, 1959–1 C.B. 121, an professional association was held not exempt under IRC 501(c)(3) where its educational program is only an incidental part of activities that had as a principal purpose the professional advancement of the members as a group.

  3. An organization that operates a school to train individuals to fill responsible positions in political campaigns does not qualify for exemption under IRC 501(c)(3) where it fails to establish that it operates on a nonpartisan basis. In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the court concluded that the organization, an outgrowth of similar training programs sponsored by the National Republican Congressional Committee, operated for the private benefit of Republican entities and candidates, who were not members of a charitable class. Although the organization had no formal requirement that candidates for admission be affiliated with any particular political party, the evidence suggested that most of its graduates went on to work in Republican campaigns, and the organization offered no evidence of an graduate who was affiliated with a domestic political party other than the Republican party.

Promotion of the Arts

  1. The promotion of the arts and of culture is generally recognized as an educational activity. See Reg. 1.501(c)(3)–1(d)(3)(ii). The following are exempt educational activities dedicated to such pursuits:

    1. Promoting the dramatic arts. Rev. Rul. 64–175, 1964–1 (Part 1) C.B. 185.

    2. Operating a nonprofit school of contemporary dance. Rev. Rul. 65–270, 1965–2 C.B. 160.

    3. Promoting jazz festivals and jazz concerts. Rev. Rul. 65–271, 1965–2 C.B. 161.

    4. Group harmony singing. Rev. Rul. 66–46, 1966–1 C.B. 133.

    5. Fellowship grants to students or to qualified writers and artists. Rev. Rul. 66–103, 1966–1 C.B. 134.

    6. Aiding young musicians and singers interested in acquiring concert experience. Rev. Rul. 67–392, 1967–2 C.B. 191.

    7. Conducting annual festivals to provide unknown film makers with opportunities to display their films. Rev. Rul. 75–471, 1975–2 C.B. 207.

    8. Recording and selling, primarily to educational institutions, new works of unrecognized composers of contemporary symphonic and chamber music as well as neglected works of more established composers. Rev. Rul. 79–369, 1979–2 C.B. 226.

    9. Historic preservation of buildings for viewing by the general public. Rev. Rul. 75–470, 1975–2 C.B. 207.

  2. Organizations that sponsor art exhibits may or may not be exempt, depending on the particular facts and circumstances:

    1. For a description of an exempt art exhibit, see Rev. Rul. 66–178, 1966–1 C.B. 138.

    2. A cooperative art gallery formed by artists to exhibit and sell their works does not qualify for exemption. Rev. Rul. 71–395, 1971–2 C.B. 228.

    3. An organization that sold works of art and turned most of the proceeds over to the individual artists was not exempt. Rev. Rul. 76–152, 1976–1 C.B. 151.

    4. An organization that sold works of art and turned most of the proceeds over to the individual artists was exempt. It operated in a part of the country where there were no nearby art museums. Goldsboro Art League v. Commissioner, 75 T.C. 337 (1980).

  3. The promotion of theatrical productions can be an educational activity. See, for example:

    • Community repertory theaters. Rev. Rul. 64–175, 1964–1 (Part 1) C.B. 185; and Rev. Rul. 64–174, 1964–1 (Part 1) C.B. 183.

    • Sponsoring plays, musicals, and concerts. Rev. Rul. 73–45, 1973–1 C.B. 220.

  4. Plumstead Theatre Society, Inc. v. Commissioner , 74 T.C. 1324 (1980), aff’d 675 F.2d 244 (9th Cir. 1982), involved an organization formed to promote theatre. The issue was whether an IRC 501(c)(3) organization can serve as a general partner to non-exempt limited partners in a limited partnership. The court, in holding that the organization was exempt, found that the organization’s assets were shielded from the limited partners, the limited partners had no control over the organization, and the organization operated for charitable purposes.

  5. Organizations that sponsor the performing arts must be nonprofit organizations in the sense that the earnings may not be distributed to individuals. For example:

    1. An organization that generated community interest in classical music by a for-profit radio station did not qualify for exemption; the organization’s activities benefited the radio station in more than an incidental way. Rev. Rul. 76–206, 1976–1 C.B. 154.

    2. However, admission fees are not a bar to exemption. Reg. 1.501(c)(3)–1(d)(3)(ii) provide specifically for the exemption of symphony orchestras, which have traditionally charged substantial admission fees.

  6. The Tax Court determined that an organization that purchased, imported and sold handicrafts of disadvantaged artisans was exempt, in that it alleviated economic deficiencies in objectively determined communities of disadvantaged artisans in the United States and abroad. Aid to Artisans, Inc. v. Commissioner, 71 T.C. 202 (1978), acq. in result only 1981-2 C.B. 1.

Education of the Public

  1. Reg. 1.501(c)(3)–1(d)(3)(i) provide that the term educational includes the instruction of the public on subjects useful to the individual and beneficial to the community.

Publishing
  1. Publishing printed material may be educational if:

    1. the content of the publication is educational;

    2. the preparation of material follows methods generally accepted as "educational" in character;

    3. the distribution of materials is necessary or valuable in achieving the organization’s educational and scientific purposes; and

    4. the manner in which the distribution is accomplished is distinguishable from ordinary commercial publishing practices. Rev. Rul. 67–4, 1967–1 C.B. 121 (involving a journal of scientific and medical data).

  2. Examples of exempt publishing activities:

    1. Preparing, publishing and distributing abstracts of scientific and medical literature without charge. Rev. Rul. 66–147, 1966–1 C.B. 137.

    2. Preparing, publishing, and distributing literature concerning a specific park in conjunction with the National Park Service. Rev. Rul. 68–307, 1968–1 C.B. 258.

    3. Publishing an authoritative manual on the standard library cataloguing system. Forest Press, Inc. 22 T.C. 265 (1954), acq., 1954–2 C.B. 4.

    4. Publishing and selling below cost a bulletin of translations from foreign news media. People Translation Service/Newsfront International v. Commissioner, 72 T.C. 42 (1979), acq. 1981–36 I.R.B. 5.

  3. Where the dissemination of published material has the characteristics of a trade or business, it is not in furtherance of an exempt purpose. Non-exempt publishing rulings include:

    1. Magazine operated in a manner indistinguishable from ordinary commercial publishing practices. Rev. Rul. 60–351, 1960–2 C.B. 169.

    2. Publishing ethnic newspaper similar to that of forprofit publishers. Rev. Rul. 77–4, 1977–1 C.B. 141. IRM 7.25.3.6.8 for a discussion of religious publishing.

Other
  1. Education of the public may be carried on outside the classroom. The regulations provide examples including: public discussions, forums, panels, lectures, museums, zoos, and planetariums. Reg. 1.501(c)(3)–1(d)(3)(ii). Other examples include:

    1. An organization that disseminated information on painless childbirth. Rev. Rul. 66–255, 1966–2 C.B. 210. See also Rev. Rul. 73–543, 1973–2 C.B. 343 (education on natural childbirth).

    2. An organization that disseminated newsletters and study kits on the quality of radio and television broadcasts. Rev. Rul. 64–192, 1964–2 C.B. 136.

    3. Collecting documentation on a candidate for higher elective office for donation to a university or library. Rev. Rul. 70–321, 1970–1 C.B. 129.

    4. Counseling activities: Marriage counseling, Rev. Rul. 70–640, 1970–2 C.B. 117; counseling women with unwanted pregnancies, Rev. Rul. 73–569, 1973–2 C.B. 178; counseling on voluntary sterilization methods, Rev. Rul. 74–595, 1974–2 C.B. 164; and counseling widows, Rev. Rul. 78–99, 1978–1 C.B. 152.

    5. Conducting a fair with exhibitions of livestock, poultry, and farm products. Rev. Rul. 67–216, 1967–2 C.B. 180.

    6. Exhibiting historical events, cultural achievements, and products of various nations. Rev. Rul. 71–545, 1971–2 C.B. 235.

    7. Producing films on the need for international cooperation. Rev. Rul. 67–342, 1967–2 C.B. 187.

    8. A nonprofit radio station that broadcasts educational material with no commercial sponsorship. Rev. Rul. 66–220, 1966–2 C.B. 209.

    9. Providing senior citizens an opportunity to listen, through closed-circuit radio, to free noncommercial and educational broadcasts concerning their special needs. Rev. Rul. 77–42, 1977–1 C.B. 141.

    10. An organization that conducts studies into the quality, utilization, and effectiveness of health care and educates persons who furnish and administer health care. Rev. Rul. 76–455, 1976–2 C.B. 150. Rev. Rul. 74–553 distinguished (IRC 501(c)(6) peer review organization).

    11. An organization that encourages understanding and tolerance of homosexuals. Rev. Rul. 78–305, 1978–2 C.B. 172.

    12. Certain genealogical societies. Rev. Rul. 80–301, 1980–2 C.B. 180; Rev. Rul. 71–580, 1971–2 C.B. 235 (genealogical research for religious purposes). Compare Rev. Rul. 80–302, 1980–2 C.B. 182, a nonexempt genealogical society that benefitted only a particular family. See also, The Callaway Family Association, Inc. v. Commissioner, 71 T.C. 340 (1978) and Benjamin Price Genealogical Association v. Commissioner, 44 AFTR 2d 79–5024 (D.D.C. 1979).

    13. Instructing individuals in a particular sport in municipal parks and recreational areas. Rev. Rul. 77–365, 1977–2 C.B. 192.

    14. Arranging the temporary exchange of children between families of a foreign country and the United States to foster the cultural and educational development of children. Rev. Rul. 80–286, 1980–2 C.B. 1979. Rev. Rul. 67–327 (arranging group tours abroad) distinguished.

  2. Organizations that devote most of their effort to research and the development of a new body of knowledge may be educational. The results of the study and research must be available to the public even though it may not be extensively disseminated.

    1. A social science research organization was exempt that disseminated the results of its research through seminars and lectures, and by placing material in libraries. Rev. Rul. 65–60, 1965–1 C.B. 231.

  3. An organization engaged in activities relating to "est" programs involving training, seminars, lectures, etc., in areas of intrapersonal awareness and communication which were conducted under licensing arrangements with a for-profit corporation, was held not to be exempt under IRC 501(c)(3). The court held that although the organization was educational in nature, it served the commercial purposes of the for-profit corporation and, therefore, was not operated exclusively for exempt purposes. est of Hawaii, A Hawaiian Corporation v. Commissioner, 71 T.C. 1067 (1979).

  4. An organization, the primary purpose of which was to train dogs, did not qualify for exemption. Although the dog owners received some instruction as to the training of the dogs, the dogs were the primary objects of the organization’s training classes and evaluation. Since training dogs is not an educational purpose described in IRC 501(c)(3), the organization did not qualify for exemption. Ann Arbor Dog Training Club, Inc. v. Commissioner, 74 T.C. 207 (1980).

  5. An organization composed of consumer counseling agencies qualified for exemption under IRC 501(c)(3). Its principal activities were free information to the general public on budgeting, buying practices, and the sound use of credit; and counseling on budgeting and the use of credit to debt-distressed individuals and families. The agencies were free to charge a nominal fee for the credit counseling. Consumer Credit Counseling Service of Ala., Inc., et al. v. U.S., 44 AFTR 2d 79–5122 (D.D.C. 1978). See also, Credit Counseling Center of Oklahoma, Inc. v. U.S. 45 AFTR 2d 80–1401 (D.D.C. 1979).

  6. An organization which primarily conducted an adoption service was held not to qualify for exemption. The organization’s adoption service was operated in a commercial manner and was more than insubstantial in relation to its charitable and educational activities of providing counseling services to unwed mothers. Indicia of commercial operations included the existence of substantial profits, funds raised exclusively from fixed adoption fees, fixed fees which were prohibitive to a large segment of the community, and medical expenses charged to mothers who decided not to put their babies up for adoption. A further ground for denial was the existence of private benefit to the organization’s sole life member. Easter House v. U.S., 60 AFTR 2d 87–5119 (Ct. Cl. 1987).

Education of Youth
  1. Programs for young people may be either educational, as forming the character of youth, or charitable in the broader sense, in that they prevent juvenile delinquency. See Reg. 1.501(c)(3)–1(d)(2). Examples of education of youth are:

    1. Teaching a particular sport to children. Rev. Rul. 65–2, 1965–1 C.B. 227.

    2. Maintaining a supervised drag strip for youth. Lions Associated Drag Strip v. United States, 13 A.F.T.R. 2d 973 (1963), 64–1 U.S.T.C. 9283.

  2. An organization, the principal activity of which is the owning and operation of an amateur baseball team that competes in a semi-professional league is exempt. The organization furnishes instructors and coaches for a baseball camp, provides coaches for little league teams, and seeks employment for the members of the baseball team that it owns. The organization’s purpose of promoting, advancing and sponsoring baseball as an amateur sport was not defeated since the team members were amateurs who received no pay and did not share in gate receipts. Hutchinson Baseball Enterprises, Inc. v. Commissioner, 73 T.C. 144 (1980), nonacq. 1980–2 C.B.

Child Care Organizations
  1. Before enactment of IRC 501(k), the Service position was that a nonprofit day care center qualified for exemption under IRC 501(c)(3) only if it was operated in a charitable or educational manner.

    1. To be considered charitable, enrollment in a day care center would generally have to be limited to children from low-income families. See Rev. Rul. 68–166, 1968–1 C.B. 255, and Rev. Rul. 70–533, 1970–2 C.B. 112.

    2. To be considered educational, a day care center would have to provide a comprehensive educational program through a professional staff of qualified teachers. See Rev. Rul. 73–430, 1973–2 C.B. 362, and San Francisco Infant School, Inc. v. Commissioner, 69 T.C. 957 (1978), acq. 1978–2 C.B. 2.

  2. IRC 501(k), added to the Code by the Deficit Reduction Act of 1984, provides that organizations providing for the care of children away from their homes are deemed to have "educational purposes" under IRC 501(c)(3), 170(c)(2), 2055(a)(2), and 2522(a)(2) if:

    1. substantially all of the care provided by the organization is for the purpose of enabling individuals to be gainfully employed, and

    2. the services provided by the organization are available to the general public.

  3. The enactment of IRC 501(k) has no effect on the existing precedents mentioned in paragraph (1) above, and child care organizations covered by those precedents will qualify for exemption under IRC 501(c)(3) without consideration of IRC 501(k).

  4. IRC 501(k) requires that child care be provided for the purpose of "enabling individuals to be gainfully employed." The classes of individuals contemplated by the statute would include any employee or self-employed individual, any enrolled student or vocational trainee, and any individual who is actively seeking employment.

  5. IRC 501(k) requires that "substantially all" of the services of the organization be provided to the children of individuals described in paragraph (4) above. This requirement should be deemed to be satisfied if the parents or guardians of at least 85 percent of the children served fall within the designated classes of individuals. Where the 85 percent test is not met, the case should be referred to the National Office.

  6. IRC 501(k) requires that services be "available to the general public." This statutory requirement would normally be satisfied even though the organization has an enrollment restriction based on political boundaries (e.g., enrollment limited to person residing in a particular county, city, or school district). On the other hand, a restriction that limits enrollment to children of a particular employer would normally violate the requirement that services be "available to the general public." However, in such cases an alternative basis for exemption may be available. For example, if enrollment was limited to children of employees of a governmental agency, it might be shown that the organization is "lessening the burdens of government" within the meaning of Reg. 1.501(c)(3)–1(d)(2); or, if enrollment was limited to children of employees of a private employer, the organization might qualify as a voluntary employees’ beneficiary association under IRC 501(c)(9).

  7. A child care organization that has educational purposes solely by virtue of IRC 501(k) is not a private school subject to the requirements of Rev. Proc. 75–50, 1975–2 C.B. 587. Nevertheless, although a child care organization need not meet the specific requirements of Rev. Proc. 75–50, supra, pursuant to the requirements of the law of charity, as applied to educational organizations (and to child care organizations through IRC 501(k)), such an organization cannot be racially discriminatory. See Bob Jones University v. United States, 461 U.S. 574 (1983). All the facts and circumstances must be evaluated to determine if an IRC 501(k) organization is racially discriminatory. An application for exemption containing indicia of racial discrimination or questionable selective admissions criteria should be referred to the Washington POD. A child care organization seeking and meeting the requirements of IRC 170(b)(1)(A)(ii) is subject to the requirements of Rev. Proc. 75–50, supra.

  8. Determinations under IRC 501(c)(3) for IRC 501(k) child care organizations are subject to the same requirements for exemption and foundation status classification as other IRC 501(c)(3) organizations. In most cases, an IRC 501(k) organization which receives the majority of its funding from fees for child care services, will satisfy the requirements for either an advance or definitive non-private foundation ruling under IRC 509(a)(2).

Political/Controversial Issues or Advocating a Position
  1. Public education through the mass media frequently gets into areas that are controversial. While the term educational includes the instruction of the public on subjects useful to the individual and beneficial to the community, what an organization claims to be educational may in fact be political or legislative activities. Generally, exemption under IRC 501(c)(3) is precluded for those organizations which are substantially engaged in attempting to influence legislation or those which participate in or intervene in any political campaign on behalf of any candidate for public office.

  2. Certain activities that touch on the political and/or legislative scenes have been held to be outside the scope of the statutory prohibitions. In one instance, for example, a nonprofit educational organization exempt under IRC 501(c)(3) became interested in the question of court reform at the same time the State legislature was considering amending the State constitution. In that case, however, the organization’s activity was limited to the study, research and assembly of materials and the presentation of an objective analysis to those interested in court reform including those who oppose it as well as those who favor it, and to the general public. Accordingly, it was held that such activity was not an attempt to influence legislation and thus did not affect the organization’s exempt status. (Rev. Rul. 64–195, 1964–2 C.B. 138.) In another instance a nonprofit organization formed to elevate the standards of ethics and morality in the conduct of political campaigns by disseminating information concerning general campaign practices, furnishing teaching aids to political science and civics teachers, and publicizing its proposed code of fair campaign practices without soliciting the signing or endorsement of the code by candidates was held to qualify for exemption as an educational organization. Rev. Rul. 76–456, 1976–2 C.B. 151.

  3. The extent to which partisan political topics may be considered educational has long been a problem. The problem first arose in the context of attempts to influence legislation. Organizations using the mass media to persuade voters to a certain political view and to bring about particular legislation were sometimes held to be noneducational. (See Noah Slee v. Commissioner, 42 F.2d 184 (2nd Cir. 1930).) However in Bertha Poole Weyl v. Commissioner, 48 F.2d 811(2nd Cir. 1931), a distinction was made for the discussion of controversial topics with legislative implications, if the discussion was not primarily directed toward the enactment of particular legislation. Also, in Rev. Rul. 74–574, 1974–2 C.B. 160, a distinction is made where an organization exempt under IRC 501(c)(3) operates a broadcasting station presenting religious, educational, and public interest programs, and provides reasonable air time equally available to all legally qualified candidates for election to public office in compliance with section 312(a)(7) of the Federal Communications Act of 1934, as amended. The organization endorsed no candidate or viewpoint and was held not to be participating in political campaigns on behalf of public candidates in violation of IRC 501(c)(3).

  4. Attempts to influence legislation are now specifically covered by statute. The problem relating to the definition of "educational" is now a comparatively narrow one— how to classify public discussion of controversial topics. Rev. Rul. 68–263, 1968–1 C.B. 256, holds that the publication of material which discredits particular institutions and individuals on the basis of unsupported opinions and incomplete information about their affiliations is not educational. In Rev. Rul. 66–256, 1966–2 C.B. 210, however, an organization that conducted public forums, lectures, and debates on controversial social, political, and international questions was held to be educational. Although the speakers were frequently controversial, the organization adopted an unbiased position. Organizations doing research or educating the public on controversial public issues must stick to the reasoned approach and avoid unsupported opinion. They must also avoid the advocacy of specific legislation as a substantial part of their activity.

  5. A nonprofit organization whose purpose is to educate the public concerning the accuracy and fairness of news coverage by local newspapers was held to be exempt. (See Rev. Rul. 74–615, 1974–2 C.B. 165.) By educational methods, the organization encouraged the newspapers to meet high standards of journalism.

  6. An organization that provides information to the public about the public’s right of access to the broadcast media and objectively evaluates the performance of local broadcasters in fulfilling their public service obligations is operated exclusively for charitable and educational purposes as an organization described in IRC 501(c)(3). Rev. Rul. 79–26, 1979–1 C.B. 196.

  7. Certain publications of congressional incumbents’ voting records on selected issues in a nonpartisan newsletter do not constitute participation or intervention in any political campaign within the meaning of IRC 501(c)(3). Rev. Rul. 78–248 amplified by Rev. Rul. 80–282, 1980–2 C.B. 178.

  8. The Service has published the criteria used to determine the circumstances under which advocacy of a particular viewpoint or position by an organization is considered educational within the meaning of Reg. 1.501(c)(3)–1(d)(3). This criteria is set forth in Rev. Proc. 86–43, 1986–2 C.B. 729, sec. 3. Two court decisions have considered challenges to the constitutionality of Reg. 1.501(c)(3)–1(d)(3). One decision held that the regulation was unconstitutionally vague. Big Mama Rag v. U.S., 631 F.2d 1030 (D.C. Cir. 1980). However, in National Alliance v. U.S., 710 F.2d 868 (D.C. Cir. 1983), the court upheld the Service’s position that the organization in question was not educational. Although the latter decision did not reach the question of the constitutionality of Reg. 1.501(c)(3)–1(d)(3), it did note that the methodology test used by the Service when applying the regulation "tends toward ensuring that the educational exemption be restricted to material which substantially helps a reader or listener in a learning process." The court also noted that the application of this test reduced the vagueness found in the earlier Big Mama Rag decision. The methodology test cited by the court in National Alliance reflects the longstanding Service position that the method used by an organization in communicating its position, rather than the viewpoint or position itself, is the standard for determining whether an organization has educational purposes. This methodology test is used in all situations where the educational purposes of an organization that advocates a particular viewpoint or position are in question.

Hobby Clubs
  1. Hobby clubs may be exempt if their principal purpose is educational, and the Service has recognized certain garden clubs and mineralogical societies as educational. (See Rev. Rul. 66–179, 1966–1 C.B. 139, and Rev. Rul. 67–139, 1967–1 C.B. 129.)

  2. Generally, hobby clubs exempt under 501(c)(3) are ones that conduct structured educational programs for members and the public, issue newsletters or bulletins containing educational material, maintain reference libraries and prepare displays and exhibits for the public. Recreational and social activities must be insubstantial. The way in which the clubs select their members must be consistent with an educational (as opposed to social or recreational) purpose.

Digests of Precedent Rulings
  1. Repertory theater— A nonprofit corporation which is organized exclusively for charitable, scientific, literary, or educational purposes and more specifically to stimulate, promote, and develop the interest of the American public in the dramatic arts, and which operates a permanent repertory theater, is exempt under IRC 501(c)(3). Rev. Rul. 61–175, 1964–1 (Part 1) C.B., 185.

  2. Fraternity chapter house— An organization does not qualify for exemption under IRC 501(c)(3) as an educational organization where its primary activity is to furnish, on a rental basis, a chapter house to a fraternity. However, a corporation, fund, or foundation so organized may, under proper circumstances, be classified as a club organized and operated exclusively for pleasure, recreation and other nonprofitable purposes and exempt under IRC 501(c)(7). Rev. Rul. 64–118, 1964–1 (Part 1) C.B. 182.

  3. Repertory theater— A foundation was formed for charitable, educational, and literary purposes. In furtherance of its purposes, it creates interest in the development of the American theater by aiding local communities to establish their own charitable and educational repertory theaters. It also contributes part of its funds to exempt charitable organizations. No part of its net income inures to the benefit of any private individual. Such a foundation is held to be an exempt organization described in IRC 501(c)(3). Rev. Rul. 64–174, 1964–1 (Part 1) C.B., 183.

  4. Educational; evaluating radio and television programs— A nonprofit organization formed for the purpose of educating the public as to the quality of radio and television programs by means of opinion polls, teaching evaluation guides, newsletters, and study kits to better their understanding and judgment of radio and television programs and thereby encourage broadcasters to fulfill their obligations to better serve the public interest may qualify for exemption under IRC 501(c)(3). Rev. Rul. 64–192, 1964–2 C.B. 136.

  5. Educational; evaluating prospective legislation— The IRC 501(c)(3) status of a nonprofit educational organization is not affected by its nonpartisan study, research, and assembly of materials in connection with prospective legislation relating to court reform and the dissemination of such materials to the public. Rev. Rul. 64–195, 1964–2 C.B. 138.

  6. Student aid corporations— An organization which provides housing, books and educational supplies, as a gift or on an interest-free loan basis, to qualified students who would otherwise have to discontinue their education for lack of funds, is exempt as a charitable organization. Rev. Rul. 64–274, 1964–2 C.B. 141.

  7. Sailboat racing training— An organization formed for the purpose of training suitable candidates in the techniques of racing sailboats in national and international competition, and thereby improving the caliber of candidates representing the United States in Olympic and Pan-American games, qualifies for exemption from Federal income tax as an educational organization described in IRC 501(c)(3). Rev. Rul. 64–275, 1964–2 C.B. 142.

  8. Educational; community sports foundation— A foundation operated exclusively to teach children a sport by holding clinics conducted by qualified instructors in schools, playgrounds, and parks and by providing free instruction, equipment, and facilities qualifies for exemption under IRC 501(c)(3). Rev. Rul. 65–2, 1965–1 C.B. 227.

  9. Educational research in social sciences— An organization formed for the primary purpose of developing and disseminating a body of new knowledge relating to the social sciences, whose activities consist of the performance of scientific research under contracts with governmental agencies, the results being communicated to the public through seminar courses, lectures, and public discussions, and through publications distributed free to depositary libraries qualifies for exemption under IRC 501(c)(3). Rev. Rul. 65–60, 1965–1 C.B. 231.

  10. Foreign students and visitors hospitality center— A nonprofit corporation organized to extend hospitality to foreign visitors and students, promote cultural and educational programs, and provide an environment for social contact between American citizens and foreign visitors and students that accomplishes these purposes by maintaining and operating a community or hospitality center is, under the circumstances, exempt from tax under IRC 501(c)(3). Rev. Rul. 65–191, 1965–2 C.B. 157.

  11. Dancing school— A nonprofit organization formed to operate a school to teach the art of dancing, particularly contemporary dancing, that maintains a regular faculty and curriculum with a regularly enrolled body of students, is exempt from tax under IRC 501(c)(3). Rev. Rul. 65–270, 1965–2 C.B. 160.

  12. Jazz music appreciation— A nonprofit organization created to develop and promote an appreciation of jazz music as an American art form through the presentation of public jazz festivals or concerts is exempt from tax under IRC 501(c)(3). Rev. Rul. 65–271, 1965–2 C.B. 161.

  13. Medical research and education— A nonprofit organization, organized and operated on a non-membership basis exclusively for the purpose of carrying on research as to diseases and other disorders of the human body and to develop scientific methods for diagnosis, prevention, and treatment thereof, and then to demonstrate the results of such research to other physicians and the public through means of seminars, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 65–298, 1965–2 C.B. 163.

  14. Group harmony singing— A nonprofit organization formed to promote public appreciation of group harmony singing and to educate its members and the general public in this type of music may qualify for exemption from Federal income tax under IRC 501(c)(3) as an educational organization. Rev. Rul. 66–46, 1966–1 C.B. 133.

  15. Creative arts awards— A nonprofit organization providing awards and grants, including scholarships and fellowships, to needy individuals to continue their education or their work in the creative arts with no monetary benefit to the donor is exempt from tax. Rev. Rul. 66–103, 1966–1 C.B. 134.

  16. Publishing teaching materials and textbooks— A nonprofit organization which makes funds available to authors and editors for preparing teaching materials and writing textbooks, and, under the terms of the contract with the publisher, receives royalties from sales of the published materials and then shares them with the editors and authors, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–104, 1966–1 C.B. 135.

  17. Evaluating scientific and medical literature— An organization formed to survey medical and scientific articles published throughout the world and to abstract selected articles of note in a monthly publication that is distributed free to interested parties requesting to be put on the mailing list is exempt from tax under IRC 501(c)(3). Rev. Rul. 66–147, 1966–1 C.B. 137.

  18. Art exhibit sponsorship— A nonprofit organization created to foster and develop the arts by sponsoring a public art exhibit at which the works of unknown but promising artists are selected by a panel of qualified judges for viewing and are gratuitously displayed is exempt from tax under IRC 501(c)(3). Rev. Rul 66–178, 1966–1 C.B. 138.

  19. Garden clubs— Illustrations under which garden clubs may establish exemption as charitable or educational organizations, civic organizations, horticultural organizations, or as social clubs. Rev. Rul. 66–179, 1966–1 C.B. 139.

  20. Broadcasting station; noncommercial— A nonprofit corporation organized exclusively for educational purposes to operate a noncommercial educational broadcasting station presenting educational, cultural, and public interest programs is exempt from Federal income tax under IRC 501(c)(3). Rev. Rul. 66–220, 1966–2 C.B. 209.

  21. Painless childbirth— A nonprofit organization which through meetings, films, forums, and publications educates the public in a particular method of painless childbirth, is entitled to exemption from Federal income tax under IRC 501(c)(3). Rev. Rul. 66–255, 1966–2 C.B. 210.

  22. Political education— A nonprofit organization created to elevate the standards of ethics and morality in the conduct of campaigns for election to political office by publishing its code of fair campaign practices through newspapers, radio and television and by furnishing aids to political science and civics teachers for use in school classes may qualify for exemption as an educational organization. Rev. Rul. 60–193 modified. Rev. Rul. 76–456, 1976–2 C.B. 151.

  23. Accreditation of animal care facilities— A nonprofit organization which promotes humane treatment of laboratory animals by carrying on a program for the accreditation of animal care facilities that supply, keep, and care for animals used by medical and scientific researchers is advancing education and science and thus exempt as a charitable organization. Rev. Rul. 66–359, 1966–2 C.B. 219.

  24. Apprentice training program— An organization created by representatives of both labor and management to select individuals for apprentice training, arrange their classroom and on-the-job training, and provide books and supplies used in the training is exempt from tax under IRC 501(c)(3). Rev. Rul. 67–72, 1967–1 C.B. 125.

  25. Housing guidance to low-income families— A nonprofit organization created to provide instruction and guidance to low-income families in need of adequate housing and interested in building their own homes is exempt from tax under IRC 501(c)(3). Rev. Rul. 67–138, 1967–1 C.B. 129.

  26. Civil War research— A nonprofit organization formed to increase the knowledge of its members and the public about historic events of the Civil War by researching, studying, and involving its members in historically accurate reenactments of Civil War battles to which the public is invited may be exempt under IRC 501(c)(3). Rev. Rul. 67–148, 1967–1 C.B. 132.

  27. Rehabilitating ex-convicts and parolees— A nonprofit organization which furthers the rehabilitation of ex-convicts and parolees in order to make them self-supporting and useful citizens may be exempt from tax under IRC 501(c)(3). Rev. Rul. 67–150, 1967–1 C.B. 133.

  28. Agricultural; fairs— A nonprofit organization formed and operated exclusively to instruct the public on agricultural matters by conducting annual public fairs and exhibitions of livestock, poultry, and farm products may be exempt from tax under IRC 501(c)(3). Rev. Rul. 67–216, 1967–2 C.B. 180.

  29. University housing and food service— A nonprofit organization may qualify for exemption under IRC 501(c)(3) where it is formed to provide housing and food service exclusively for students and faculty of a university in accordance with the rules and regulations of the university and offers the university an option to acquire the property at any time upon payment of an amount equal to the outstanding indebtedness. Rev. Rul. 67–217, 1967–2 C.B. 181.

  30. Promoting nondiscriminatory housing— An organization formed to educate the public about the need for making housing available to members of the public on a nondiscriminatory basis and to encourage investment in such housing may be exempt from tax under IRC 501(c)(3). Rev. Rul. 67–250, 1967–2 C.B. 182.

  31. Training table for university’s athletic teams— A nonprofit organization which subsidizes a training table for coaches and members of a university’s athletic teams furthers the educational program of the university and may be exempt under IRC 501(c)(3). Rev. Rul. 67–291, 1967–2 C.B. 184.

  32. Educational; wild bird and animal sanctuary— An organization formed for the purpose of developing a sanctuary for wild birds and animals for the education of the public may be exempt as an educational organization under IRC 501(c)(3). Rev. Rul. 67–292. 1967–2 C.B. 184.

  33. International cooperation for peace; commercial television— A nonprofit organization which is formed and operated to educate the public on the need for international cooperation in order to create and maintain a peaceful world and which disseminates its educational material by means of commercial television may qualify for exemption under IRC 501(c)(3). Rev. Rul. 67–342, 1967–2 C.B. 187.

  34. Community land-use plan— A nonprofit organization formed to develop and distribute a community land-use plan may be exempt from tax under IRC 501(c)(3). Rev. Rul. 67–391, 1967–2 C.B. 190.

  35. Sponsoring young musical artists— A nonprofit organization which encourages and promotes the advancement of young musical artists by conducting weekly workshops, sponsoring public concerts by the artists, and securing paid engagements for the artists to improve their professional standing may be exempt from tax under IRC 501(c)(3). Rev. Rul. 67–392, 1967–2 C.B. 191.

  36. Career planning and occupational adjustment— A nonprofit organization that helps people in planning their careers and in achieving occupational adjustment by distributing educational publications at a nominal charge and providing free vocational counseling qualifies for exemption under IRC 501(c)(3). Rev. Rul. 68–71, 1968–1 C.B. 249.

  37. Coffee house— A nonprofit organization formed by local churches to operate a supervised facility, known as a "coffee house," in which persons of college age are brought together with church leaders, educators, and leading businessmen of the community for discussions and counseling on religion, current events, social and vocational problems, may be exempt as a charitable organization under IRC 501(c)(3) since it is advancing both education and religion. Rev. Rul. 68–72, 1968–1 C.B. 250.

  38. Aiding needy in developing countries— A nonprofit organization formed and operated to assist needy families in "developing" countries by teaching modern farming methods and furnishing other technical assistance is advancing education and thus exempt under IRC 501(c)(3) as a charitable organization. Rev. Rul. 68–117, 1968–1 C.B. 251.

  39. Small boat safety— An organization formed to develop and disseminate standards of safety in small boat design, construction, and operation is instructing the public on subjects useful to the individual and beneficial to the community and may be exempt under IRC 501(c)(3). Rev. Rul. 68–164 1968–1 C.B. 252.

  40. Publication; discrediting institutions and individuals— An organization formed to promote the education of the public on patriotic, political and civic matters, and to inform and alert the public on the dangers of an extreme political doctrine is not exempt under IRC 501(c)(3) because, as a substantial part of its activities, it distributes publications that seek to discredit particular institutions and individuals on the basis of unsupported opinions and incomplete information about their affiliations and activities. Rev. Rul. 68–263, 1968–1 C.B. 256.

  41. National Park Service programs— A nonprofit organization formed to assist the National Park Service, Department of the Interior, in furthering its educational and scientific programs may be exempt from tax under IRC 501(c)(3). Rev. Rul. 68–307, 1968–1 C.B. 258.

  42. Sports museum— A nonprofit organization that procures, cares for, and displays objects of lasting interest or value relating to a particular sport may be exempt under IRC 501(c)(3). Rev. Rul. 68–372, 1968–2 C.B. 205.

  43. Study courses provided— An organization formed to conduct an educational program for bank employees, whose courses are limited to its members and whose membership is open to area bank employees, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 68–504, 1968–2 C.B. 211.

  44. Bus transportation for private school children— A nonprofit organization, formed by parents of pupils attending a private school, that provides school bus transportation for its members’ children serves a private rather than a public interest and does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 69–175, 1969–1 C.B. 149.

  45. College; employment furnished students— An organization wholly owned by a tax-exempt college is not eligible for exemption under IRC 501(c)(3) if it manufactures and sells wood products primarily to employ students of the college to enable them to continue their education. Rev. Rul. 69–177, 1969–1 C.B. 150.

  46. Scholarships— A nonprofit organization awarding scholarships based on scholastic ability, without regard to financial need, may qualify for exemption under IRC 501(c)(3). Rev. Rul. 69–257, 1969–1 C.B. 151; Rev. Rul. 66–103, 1966–1 C.B. 134; Rev. Rul. 56–403, 1956–2 C.B. 307; Rev. Rul. 67–367, 1967–2 C.B. 188; Rev. Rul. 63–220, 1963–2 C.B. 208; and Rev. Rul. 61–87, 1961–1 C.B. 191.

  47. Foreign educational program— A nonprofit organization that selects students and faculty members who are interested in a particular foreign history and culture and enrolls them in foreign universities, transports them to and from that country, and conducts on-site tours qualifies for exemption under IRC 501(c)(3). Rev. Rul. 69–400, 1969–2 C.B. 114. See also, however, Rev. Rul. 67–327, 1967–2 C.B. 187.

  48. College; book and supply store— An organization that operates a college book and supply store serving exclusively members of the faculty and student body of the college and refunds its excess earnings to members in proportion to their purchases qualifies for exemption under IRC 501(c)(3). Rev. Rul. 69–538, 1969–2 C.B. 116.

  49. Fraternity— An organization built a chapter house with proceeds from contributions from students and alumni. The house serves as a social center for members and has living quarters, study rooms and a library. The organization is not exempt under IRC 501(c)(3) but is exempt under IRC 501(c)(7). Since the fraternity is not organized and operated exclusively for IRC 170(c) purposes contributions to it are not deductible. Rev. Rul. 69–573. 1969–2 C.B. 125.

  50. Research in anthropology— An organization formed to support research in anthropology by manufacturing quality cast reproductions of anthropological specimens which are sold to scholars and educational institutions in a noncommercial manner was held to be advancing education and science. Rev. Rul. 70–129, 1970–1 C.B. 128.

  51. Campaign materials— An organization formed to collect and collate campaign materials of a candidate for an historically important elective office for donation to a university or public library was held to qualify under IRC 501(c)(3) as an educational and charitable organization. Rev. Rul. 70–321, 1970–1 C.B. 129.

  52. Children’s day care center— An educational day care center operated in conjunction with an industrial company that enrolls children on the basis of family financial need and the child’s need for the care and development program of the center qualifies for exemption. Rev. Rul. 70–533, 1970–2 C.B. 112.

  53. Travel study tours— A nonprofit organization whose primary activity is conducting travel study tours that include courses on the culture of the U.S., foreign countries, and nature studies taught by certified personnel qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–534, 1970–2 C.B. 113.

  54. College students; internship programs— A nonprofit organization that recruits college students for internship programs providing work experience in various phases of government related to their studies while enabling them to contribute to the community furthers a charitable purpose by advancing education and relieving the burdens of government. Rev. Rul. 70–584, 1970–2 C.B. 114.

  55. Marriage counseling service— A nonprofit organization that provides personal marriage counseling services and conducts workshops and seminars on the subject of marital adjustment qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–640, 1970–2 C.B. 117.

  56. Honor Society for women— A national honor society for women organized to recognize scholastic achievements and to serve various universities and colleges where chapters are established in furthering education qualifies for exemption. Rev. Rul. 71–97, 1971–1 C.B. 150.

  57. Art gallery— A cooperative art gallery formed and operated by a group of artists for the purpose of exhibiting and selling their works does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 71–395, 1971–2 C.B. 228.

  58. Clearinghouse and course coordinator; classes in community— A nonprofit organization acting as a clearinghouse and course coordinator by bringing together instructors and interested students in a community for purposes of instruction on subjects useful to individuals and beneficial to the community is exempt from tax under IRC 501(c)(3). Rev. Rul. 71–413, 1971–2 C.B. 228.

  59. Private school; racially nondiscriminatory policy— A private school that does not have a racially nondiscriminatory policy as to students does not qualify for exemption. Rev. Rul. 71–447, 1971–2 C.B. 230.

  60. International exposition— An organization that conducts an international exposition commemorating certain historical events and cultural achievements and exhibiting products of various nations, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 71–545, 1971–2 C.B. 235.

  61. Community welfare; solid waste pollution— An organization formed to educate the public regarding environmental deterioration due to solid waste pollution and operated with contributions and proceeds from sale of collected solid waste such as old newspapers, glass containers, and metal cans for recycling qualifies for exemption under IRC 501(c)(3). Rev. Rul. 72–560, 1972–2 C.B. 248.

  62. Drama and musical arts appreciation— A nonprofit organization created to develop a community appreciation for drama and musical arts by sponsoring professional presentations such as plays, musicals, and concerts, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 73–45, 1973–1 C.B. 220.

  63. On-the-job training— An organization that is otherwise qualified for exemption under IRC 501(c)(3) will not fail to qualify because its educational and vocational training of unemployed and underemployed persons is carried out through the manufacturing and selling of toy products. Rev. Rul. 73–128, 1973–1 C.B. 222; see also, however, Rev. Rul. 73–127, 1973–1 C.B. 221.

  64. Educational organization; membership based on compatibility— An organization that selects its membership from the junior class of a college primarily on the basis of compatibility without regard to scholarship, and that holds closed meetings at which personally oriented speeches and discussions are carried on by the speaker-members, is not operated for exclusively educational purposes and does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 64–117 superseded. Rev. Rul. 73–439, 1973–2 C.B. 176.

  65. Counseling women on unwanted pregnancies— An organization that provides free counseling to women on methods of resolving unwanted pregnancies, including lawful abortion, delivering and placing the child for adoption, and delivering and keeping the child, qualifies for exemption as an educational organization. Rev. Rul. 73–569, 1973–2 C.B. 178.

  66. Credit unions in developing nations— An organization formed to assist individuals in developing nations to improve their living conditions through educational programs on credit problems and to instruct and train individuals from those nations in the techniques of organizing and managing credit unions qualifies for exemption as an educational organization. Rev. Rul. 74–16, 1974–1 C.B. 126.

  67. Computer users— An organization whose membership is limited to organizations that own, rent, or use a specific type of computer and whose activities are designed to keep members informed of current scientific and technical data of special interest to them as users of the computer is not exempt under IRC 501(c)(3). Rev. Rul. 74–116, 1974–1 C.B. 127.

  68. Accreditation of educational institutions— A nonprofit organization of accredited educational institutions, whose membership includes a small number of proprietary schools, and whose activities include the preparation of accreditation standards, identification of schools and colleges meeting these standards, and the dissemination of accredited institution lists is exempt as an educational organization. Rev. Rul. 74–146, 1974–1 C.B. 129.

  69. Broadcasting station; free air time to political candidates— An organization exempt under IRC 501(c)(3), operating a broadcasting station presenting religious, educational, and public interest programs, is not participating in political campaigns on behalf of public candidates in violation of the provisions of that section by providing reasonable air time equally available to all legally qualified candidates for election to public office in compliance with section 312(a)(7) of the Federal Communications Act of 1934, as amended, and endorsing no candidate or viewpoint. Rev. Rul. 74–574, 1974–2 C.B. 160.

  70. Counseling men on voluntary sterilization methods— An organization that provides free counseling to men concerning methods of voluntary sterilization, assists them in obtaining sterilization operations, and distributes pamphlets and brochures explaining the effectiveness of sterilization in family planning is exempt under IRC 501(c)(3). Rev. Rul. 74–595, 1974–2 C.B. 164.

  71. Regional computer network— An otherwise exempt organization of exempt colleges and universities that devises, operates, and provides the organizational structure for a regional network of member owned or leased computers to collect and disseminate scientific and educational information to exempt members’ faculties and students is operated exclusively for charitable purposes and exempt under IRC 501(c)(3). Rev. Rul. 74–614, 1974–2 C.B. 164. See also, however, Rev. Rul. 74–116, 1974–1 C.B. 127.

  72. Church operated schools with discriminatory policies.— Organizations, including churches, that conduct schools with a policy of refusing to accept children from certain racial and ethnic groups will not be recognized as tax-exempt charities under IRC 170 and 501(c)(3). Rev. Rul. 75–231, 1975–1 C.B. 158.

  73. Training program for high school graduates and college students— A nonprofit organization that was formed to provide high school graduates and college students with work experience, for which they receive no compensation, in selected trades or professions, and that is financed by tuition and contributions from the general public, is an organization operated exclusively for charitable and educational purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 75–284, 1975–2 C.B. 202.

  74. Preservation of buildings having historical or architectural significance— A nonprofit organization formed to promote an appreciation of history through the acquisition, restoration, and preservation of homes, churches, and public buildings having special historical or architectural significance and to open the structures for viewing by the general public qualifies for exemption under IRC 501(c)(3). Rev. Rul. 75–470, 1975–2 C.B. 207.

  75. Film festival sponsorship— A nonprofit organization formed to promote the art of film making by conducting annual festivals to provide unknown independent film makers with opportunities to display their films and by sponsoring symposiums on film making qualifies for exemption under IRC 501(c)(3). Rev. Rul. 75–471, 1975–2 C.B. 207.

  76. Educational television; program producer— An otherwise qualifying organization that produces and distributes free (or at small cost-defraying fees) educational, cultural, and public interest programs for public viewing via public-educational channels of commercial cable television companies is operated exclusively for educational purposes and is exempt from Federal income taxes under IRC 501(c)(3). Rev. Rul. 76–4, 1976–1 C.B. 145.

  77. Construction trades training center; sale of homes— A nonprofit organization that purchases building lots, furnishes funds to a public vocational training center for use in its on-the-job home construction training program, sells the completed homes to the general public at fair market value, and uses the income from home sales to finance new projects and obtain vocational training equipment for the public school system, qualifies for exemption under IRC 501(c)(3). The income from the sale of the homes is not unrelated business income. Rev. Rul. 76–37, 1976–1 C.B. 148.

  78. Art gallery— A nonprofit organization formed by art patrons to promote community understanding of modern art trends by selecting for exhibit, exhibiting, and selling art works of local artists, retaining a commission on sales less than customary commercial charges and not sufficient to cover the cost of operating the gallery, does not qualify for exemption under IRC 501(c)(3); Rev. Rul. 71–395 clarified. Rev. Rul. 76–152, 1976–1 C.B. 151.

  79. Aid to immigrants— A nonprofit organization formed to aid immigrants in overcoming social, cultural, and economic problems by providing personal counseling, referrals to helpful agencies, social and recreational activities, instruction in English, and distributing a newsletter containing information on attaining citizenship, securing housing, and obtaining medical care is operated exclusively for charitable and educational purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76–205, 1976–1 C.B. 154.

  80. Promotion of classical music radio programs— A nonprofit organization formed to generate community interest in the retention of classical music programs by a local for-profit radio station by seeking program sponsors, encouraging continuation of contracts by existing sponsors, urging the public to patronize the sponsors, soliciting subscriptions to the station’s program guide, and distributing materials promoting the classical music programs, all of which activities tend to increase the station’s revenues, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 76–206, 1976–1 C.B. 154.

  81. Noncommercial television programs— A nonprofit organization that makes facilities and equipment available to the general public for the production of noncommercial educational or cultural television programs for communication to the public via public and educational channels of a commercial cable television company qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76–443, 1976–2 C.B. 149.

  82. Health care improvements— A nonprofit organization formed to encourage and assist in establishment of nonprofit regional health data systems, to conduct studies and propose improvements with regard to quality, utilization, and effectiveness of health care and health care agencies, and to educate those involved in furnishing, administering, and financing health care is operated exclusively for scientific and educational purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76–455, 1976–2 C.B. 150. Rev. Rul. 74–553 distinguished.

  83. Closed-circuit radio broadcasting system— A non-profit organization that sets up closed-circuit radio transmitting equipment in multiple residence structures such as nursing homes, rest homes, and convalescent homes, providing senior citizens within the building an opportunity to listen to free, noncommercial and educational broadcasts concerning their special needs, is operated exclusively for charitable and educational purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 77–42, 1977–1 C.B. 142.

  84. Children and adolescents with learning disabilities— A nonprofit organization formed to provide individual psychological and educational evaluations, as well as tutoring and therapy, for children and adolescents with learning disabilities is operated exclusively for charitable purposes under IRC 501(c)(3). Rev. Rul. 77–68, 1977–1 C.B. 142.

  85. Community sport activity— A nonprofit organization that conducts clinics, workshops, lessons, and seminars at municipal parks and recreational areas to instruct and educate individuals in a particular sport is operated exclusively for educational purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 77–365, 1977–2 C.B. 192.

  86. Counseling widows— A nonprofit organization formed to provide individual and group counseling to widows to assist them in legal, financial, and emotional problems caused by the death of their husbands and that provides the widows with information on available benefits and services is considered to be operated exclusively for educational purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 78–99, 1978–1 C.B. 152.

  87. Homosexuality— A nonprofit organization formed to educate the public about homosexuality in order to foster an understanding and tolerance of homosexuals and their problems qualifies for exemption under IRC 501(c)(3). Rev. Rul. 78–305, 1978–2 C.B. 172.

  88. Law student’s work in legal aid— A nonprofit organization formed for the purpose of assisting a school’s law students, chosen on the basis of merit and interest, to obtain practical experience with exempt public interest law firms and legal aid societies and that supplements the nominal salaries paid to the students by the participating firms and societies and obtains its funds from contributions of students and alumni is operated exclusively for charitable and educational purposes as described in IRC 501(c)(3). Rev. Rul. 78–310, 1978–2 C.B. 173.

  89. Promoting sports for children— An organization formed to develop, promote, and regulate a sport for individuals under 18 years of age by organizing local and statewide competitions, promulgating rules, organizing officials, presenting seminars, distributing a newsletter, and otherwise encouraging growth of the sport qualified for exemption under IRC 501(c)(3). Rev. Rul. 70–4 distinguished by Rev. Rul. 80–215, 1980–2 C.B. 174.

  90. Publication of voting records— Certain publications of congressional incumbents’ records on selected issues in a nonpartisan newsletter do not constitute participation or intervention in any political campaign within the meaning of IRC 501(c)(3). Rev. Rul. 80–282, 1980–2 C.B. 178. Rev. Rul. 78–248 amplified.

  91. Genealogical research (public interest)— A genealogical society that (1) opens its membership to all persons in a particular area, (2) provides instruction in genealogical research techniques to its members and to the general public, but does not research genealogies for its members, (3) conducts research projects and makes the results available to the state historical society, (4) provides materials for libraries and community displays, and (5) promotes various other related activities for the public qualifies for exemption under IRC 501(c)(3). Rev. Rul. 80–301, 1980–2 C.B. 180. Rev. Rul. 80–302 distinguished.

  92. Genealogical research (private interest)— An organization that (1) limits its membership to descendants of a particular family (2) compiles family genealogical research data for use by its members for reasons other than to conform to the religious precepts of the family’s denomination, (3) presents the data to designated libraries, (4) publishes volumes of family history, and (5) promotes social activities among family members does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 80–302, 1980–2 C.B. 182. Rev. Ruls. 71–580 and 80–301 distinguished.

  93. Training for political campaign workers; limited to one political party— An organization that operates a school to train individuals to fill responsible positions in political campaigns does not qualify for exemption under IRC 501(c)(3) where it fails to establish that it operates on a nonpartisan basis. In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the court concluded that the organization, an outgrowth of similar training programs sponsored by the National Republican Congressional Committee, operated for the private benefit of Republican entities and candidates, who were not members of a charitable class. Although the organization had no formal requirement that candidates for admission be affiliated with any particular political party, the evidence suggested that most of its graduates went on to work in Republican campaigns, and the organization offered no evidence of an graduate who was affiliated with a domestic political party other than the Republican party.

Public Works and Recreation as a Charitable Purpose

  1. In the general law of charity, the promotion of the happiness and enjoyment of the members of the community is a charitable purpose. Restatement (Second) of Trusts §374 (1959); IV A. Scott, The Law of Trusts § 374.10 (3d ed. 1967).

  2. Maintaining public parks, public monuments, and other kinds of public works, and the providing community recreational facilities for the entire community furthers charitable purposes. See, Isabel Peters, 21 T.C. 55 (1953), acq. 1950–2 C.B. 6.

  3. However, providing public parks and recreational facilities is not a per se charitable activity. They are charitable only if they provide a community-wide benefit.

Community Benefit Requirement Precludes Irrelevant Restrictions

  1. Providing or maintaining recreation facilities for an entire community is a charitable activity.

    1. A nonprofit corporation operating a swimming pool and playground for all residents of a community was held exempt under IRC 501(c)(3) in Rev. Rul. 59–310, 1959–2 C.B. 146.

    2. Similarly, an organization formed by residents of a city to preserve, beautify, and maintain a public park located in the center of the city was held exempt under IRC 501(c)(3). The park was open to the general public and commonly used by all residents. Rev. Rul. 78–85, 1978–1 C.B. 150.

  2. The applicable community must be defined in a manner that does not confer excessive private benefit that outweighs a community benefit.

    1. In Rev. Rul. 75–286, 1975–2 C.B. 210, an organization with membership limited to residents and businesses on a city block formed to preserve and beautify public areas in the block was held not exempt under IRC 501(c)(3) because the benefits to private individuals whose property abutted the public property outweighed benefits to the general public. Rev. Rul. 75–286 also held, however, that the organization may qualify for exemption under IRC 501(c)(4) as an organization formed to promote social welfare.

    2. Size alone does not define a community. In Columbia Park and Recreation Association, Inc. v. Commissioner, 88 T.C. 1 (1987), aff’d in unpublished opinion 838 F. 2d 465 (4 th Cir. 1988), the court upheld denial of exemption under IRC 501(c)(3) to an organization formed to develop and operate utilities, systems, services, and facilities "for the common good and social welfare" for a private real estate development with a population of over 100,000 residents. The development was neither an incorporated city nor other form of political subdivision. The court considered this fact significant in concluding that the organization was "...merely an aggregation of homeowners and tenants bound together in a structural unit formed as an integral part of a plan for the development of real estate." As such, it lacked a "sufficient public element" to be a "community at large" in the charitable context.

  3. Restrictions that deny use of facilities to a significant segment of the community will based on race, religion, nationality, belief, occupation, or other classification having no relationship to the nature or size of the facility will always preclude exemption under IRC 501(c)(3). This longstanding position is illustrated by Rev. Rul. 67–325, 1967–2 C.B. 113, which holds that nonprofit organization that ran a community recreational facility restricted on the basis of race is not exempt under IRC 501(c)(3). Exclusion of part of the community on the basis of race removes the community benefit that would justify exemption.

Lessening the Burdens of Government

  1. Reg. 1.501(c)(3)–1(d)(2) includes "lessening of the burdens of government" in the definition of the term "charitable." As stated in Rev. Rul. 85–2, 1985–2 C.B. 178, an organization is lessening the burdens of government if

    1. its activities are activities that a governmental unit considers to be its burdens; and

    2. the activities actually lessen such governmental burden.

  2. The organization must demonstrate that a governmental unit considers the organization to be acting on the government’s behalf, thereby actually freeing up government assets — human, material, and fiscal — that would otherwise have to be devoted to the particular activity. This determination is based on facts and circumstances.

Requirements

  1. An activity is a burden of government only if there is an objective manifestation by a governmental unit that it considers the activities of the organization to be its burden. Rev. Rul. 85–1, 1985–1 C.B. 177.

  2. Little weight should be given to statements of government officials that merely praise or express approval of an organization and its activities. Rather, the government must formally recognize the organization and its functions to be considered a governmental burden. Relevant factors to determine if the government unit has made the necessary objective manifestation include:

    1. A statute specifically creates the organization and clearly defines the organization’s structure and purposes.

    2. The activity is an integral part of a larger governmental program, or is acted jointly with a governmental unit.

    3. The governmental unit controls the activities of the organization, such as appointing all the board members.

    4. The organization pays governmental expenses.

    5. Regular government funding of the organization’s activities through grants or general obligation bonds backed with the full faith and credit of the governmental unit (as opposed to general revenue bond financing).

    6. The governmental unit is not prohibited from performing the particular activity.

Examples

  1. A nonprofit organization assisted local governments of a metropolitan area by researching solutions for common regional problems, such as water and air pollution, waste disposal, water supply, and transportation. The chief elected officers of the local jurisdictions constituted the membership of the organization. Receipts included assessments on the local jurisdictions. The interrelationship between the local governments and the organization indicates the existence of a burden of government in that the organization’s membership was composed totally of government officials; persons appointed by the local governments involved. The funding of the organization from the government assessments indicates a burden of government. Developing regional plans and policies for regional problems is an activity normally conducted by governmental units, and indicates a burden of the government. Rev. Rul. 70–79, 1970–1 C.B. 127.

  2. A nonprofit organization was formed as a Model Cities demonstration project under the Demonstration Cities and Metropolitan Act of 1966 to provide bus transportation to isolated areas of a community not served by the existing city bus system. As a Model Cities project, the organization has been approved by the local government and works in coordination with local governmental agencies. Its income is from fares, contributions, and governmental grants. The organization provides bus service under the authority of the Federal and local governments. The organization was formed in conformity with the statute which defined the organization’s structure and purpose. It works in conjunction with governmental agencies, and is funded by governmental grants. These factors demonstrate a governmental burden. Rev. Rul. 78–68, 1978–1 C.B. 149.

  3. A nonprofit organization funds a county’s law enforcement agencies to police illegal narcotic traffic. Its funds allow undercover narcotics agents to buy drugs in the course of their efforts to apprehend persons engaged in illegal drug traffic. No government funds are otherwise available for these purposes. The organization is actually lessening the burdens of government because without its funds, the undercover investigations could not be conducted since no other funds are available, and the law enforcement agencies can engage in the undercover work without the appropriation of additional government funds. Rev. Rul. 85–1, 1985–1 C.B. 177. Also see, Rev. Rul. 74–246, 1974–2 C.B. 130 (an organization which made funds available to the police department for use in offering awards is assisting the government is carrying out its function.)

Requirement to Serve Public Purpose Rather than Private Benefit

  1. Even if an organization’s activities lessen the burdens of government, it must otherwise satisfy the requirements under IRC 501(c)(3). Thus, the organization must demonstrate that its activities serve a public rather than a private interest within the meaning of Reg. 1.501(c)(3)–1(d)(1).

  2. In Indiana Crop Improvement Association, Inc. v. Commissioner, 76 T.C. 394 (1981), acq. 1981–2 C.B. 1, the Tax Court considered private benefit in the context of lessening the burdens of government. The court held that an agricultural association, delegated the responsibility of seed certification by state and federal laws, qualified for exemption under IRC 501(c)(3). Seed certification was available to any seed producer or farmer that was a member of the Association. The court found that the seed certification activity was a recognized governmental function, and the organization furthered the charitable purpose of lessening the burdens of government by performing it. The court further found that the Association’s activities did not primarily benefit the private business interests of the member seed producers and farmers.

Urban Problems and Programs

  1. Reg. 1.501(c)(3)–1(d)(2) defines "charitable" to include the promotion of social welfare by organizations designed to lessen neighborhood tensions; eliminate prejudice and discrimination; defend human and civil rights secured by law; and combat community deterioration and juvenile delinquency.

  2. These purposes are particularly relevant to modern urban problems such as poverty, racial discrimination, and urban decay.

Eliminating Prejudice and Discrimination

  1. Many organizations attempting to eliminate prejudice and discrimination are necessarily engaged in educating the public. Issues mainly involve housing and employment.

  2. Educating the public about the need for making housing available to everyone on a non-discriminatory basis and encouraging investment in such housing helps to eliminate prejudice and discrimination on a charitable basis. Rev. Rul. 67–250, 1967–2 C.B. 182. Also, educational programs to prevent panic selling resulting from the introduction of non-white residents into a formerly all-white neighborhood also furthers charitable purposes. In one case, the organization also encouraged and assisted white families to purchase homes in integrated neighborhoods where it was determined that such families helped to stabilize the neighborhood. The organization purchased homes to lease or resell at no profit on an open occupancy basis. Rev. Rul. 68–655, 1968–2 C.B. 213.

  3. Organizations that foster prejudice or discrimination will be disqualified from recognition of exemption under IRC 501(c)(3). See IRM 7.25.3.7.2 for a discussion of the Service position with respect to schools that do not have a racially nondiscriminatory policy.

Examples of Organizations Combating Prejudice and Discrimination

  1. An organization that studied employment conditions and informed the public of the advantages of non-discriminatory hiring. Rev. Rul. 68–70, 1968–1 C.B. 248.

  2. An organization that conducted investigations regarding discrimination and met with trade associations and with proprietors of establishments where discrimination had been observed to encourage better compliance with civil rights law. Rev. Rul. 68–438, 1968–2 C.B. 209.

  3. An organization that investigated instances of discrimination in employment with regard to women, and educated women to recognize and deal with discrimination in the workplace. Rev. Rul. 72–228, 1972–1 C.B. 148.

Combating Deterioration and Urban Decay

  1. Reg. 1.501(c)(3)–1(d)(2) (iv) includes combating community deterioration in the definition of charitable purposes. Combating community deterioration involves remedial action to eliminate the physical, economic and social causes of such deterioration, including providing

    • housing assistance

    • Economic development

    • prevention of deterioration

    • planning and enforcement

    • historic preservation

  2. Organizations engaged in combating community deterioration generally achieve their purposes through assistance to others or through other activities that are not inherently "charitable" . Thus, determining whether an activity is charitable requires a multi-step analysis:

    1. identify the conditions the organization seeks to improve and determine if they are "community deterioration" in the charitable sense;

    2. identify the persons who will benefit from the organization’s activities, and determine if they are members of a charitable class;

    3. identify the organization’s activities and determine if some or all are inherently charitable activities, for example, education of the public;

    4. if the activities are not inherently charitable, determine how they achieve the organization’s stated charitable purposes; and

    5. identify who benefits form the organization’s activities, and determine if private benefits are consistent with exemption under IRC 501(c)(3), either because the recipients are members of a charitable class, or if not, because private benefits are incidental to achieving the charitable purpose.

Housing Assistance
  1. Rev. Rul. 70–585, 1970–2 C.B. 115, describes four different nonprofit housing organizations created to lessen neighborhood tensions, eliminate prejudice and discrimination, and combat community deterioration by providing housing for low or moderate income families. Three of the organizations qualify for exemption under IRC 501(c)(3), one does not. The four situations are:

    1. An organization constructed new housing and renovated existing homes for sale to low income families on long-term, low payment plans. It conducted these activities throughout the city, but limited sales to families who qualify for loans under a federal housing program and cannot obtain conventional financing. It also assisted eligible families who could not afford the down payment. The organization qualifies under IRC 501(c)(3) because it relieves the poor and distressed.

    2. An organization constructed housing units for sale to low and moderate-income members of minority groups who are unable to obtain adequate housing because of local discrimination. The housing units were located as to help reduce racial and ethnic imbalances in the community. The organization, which also conducted education on integrated housing as a means to minimize misunderstanding and stabilize integrated neighborhoods, qualifies for exemption under IRC 501(c)(3) because it helps eliminate prejudice and discrimination and lessen neighborhood tensions.

    3. An organization formed to plan for renewal and rehabilitation of an area of a city with a low median income level and generally old and deteriorated housing helps provide area residents with decent, safe, and sanitary housing without relocating them outside the area. The organization developed an overall rehabilitation plan for the area; sponsored a renewal project in which area residents took the initiative; arranged monthly meetings to involve area residents in the renewal planning; and plans to purchase an apartment house to rehabilitate and rent at cost to low and moderate residents of the area. The organization qualifies for exemption under IRC 501(c)(3) because it combats community deterioration by helping to rehabilitate an old and run-down residential area.

    4. An organization formed to build new housing to help moderate-income families secure decent, safe, and sanitary at affordable prices in an area facing a shortage of moderate-income housing does not qualify for exemption under IRC 501(c)(3). The organization’s program did not combat community deterioration, nor did it provide relief to the poor.

  2. An organization operated a self-help home building program for low-income families in need of adequate housing was recognized exempt under IRC 501(c)(3) in Rev. Rul. 67–138, 1967–1 C.B. 129. In addition to combating community deterioration, the organization’s activities provided relief to the underprivileged, lessened the burdens of government, and were educational.

  3. An organization provided small, short-term, interest-free loans to low-income homeowners unable to obtain a loan elsewhere to promote the rehabilitation of a badly deteriorated residential area of a city was recognized exempt under IRC 501(c)(3) in Rev. Rul. 76–408, 1976–2 C.B. 145. Although the organization’s activities were conducted in a badly deteriorated residential area of a large city, Rev. Rul. 76–408 emphasized the charitable class aided in finding the organization charitable because it relieves the poor and distressed.

Economic Development
  1. Economic development is a desirable goal sought by virtually every community on some way. However, not all desirable goals are "charitable" within the meaning of IRC 501(c)(3). Determining whether particular economic development activities are charitable requires analyzing the conditions the organization seeks to improve, what the organization seeks to achieve and how it plans to achieve them, who will benefit, and whether benefits to noncharitable interests will be incidental to achieving charitable purposes.

  2. An organization that purchased blighted land in a depressed area, converted it into an industrial park, and leased the land to business tenants who were required to hire and train a significant number of unemployed persons living in the area, was held exempt under IRC 501(c)(3) in Rev. Rul. 76–419, 1976–2 C.B. 146. The organization was funded pursuant to a public law providing for the such programs in areas with urban blight, little industry, and high unemployment and underemployment of low-income persons.

  3. Rev. Rul. 74–587, 1974–2 C.B. 162, describes a nonprofit organization that qualified for exemption under IRC 501(c)(3) by providing low-cost loans to businesses in economically depressed areas. Because of lack of development capital, limited entrepreneurial skills of business owners, social unrest and instability in the area, and depressed economic conditions in the larger region, many businesses in the target areas had declined, fallen into disrepair, or failed. The organization combats these conditions by providing working capital, either through low-interest loans or purchases of equity interests, to businesses that cannot obtain commercial financing. The terms of financing were reasonably related to the needs of the particular businesses, and the organization disposed of any equity interest as soon as the particular business’ success was reasonably assured.

  4. Rev. Rul. 81–284, 1981–2 C.B. 130, amplifies Rev. Rul. 74–587, supra, by describing how the standards for exemption apply to a nonprofit small business investment company licensed under §301 (d) of the Small Business Investment Act to provide low-cost or long-term loans to businesses in economically depressed areas. An organization licensed under §301 (d) cannot aid disadvantaged businesses to the extent described in Rev. Rul. 74–587 because SBA regulations impose lending standards that limit the businesses eligible for loans, and also require a organization to charge an interest rate sufficient to recover the cost of its loan funds. Rev. Rul. 81–284 holds that the SBA requirements do not preclude a §301 (d) licensee from being organized and operated exclusively for charitable purposes, but the mere fact that an organization is licensed under §301 (d) does qualify it for exemption under IRC 501(c)(3).

  5. Exemption was denied to an organization that increased business patronage in an economically deteriorated area as well as to an organization that revived lagging sales in a particular area in Rev. Rul. 77–111, 1977–1 C.B. 144. One organization sought to increase business in a deteriorated area by promoting the area through media advertising and other means. The other organization sought to combat economic decline of an urban area by constructing a shopping mall to make the area more competitive with outlying shopping areas. Although the first organization’s activities may further charitable purposes, they were not limited to members of a charitable class. They overall thrust was to promote business generally. The second organization failed to further primarily charitable purposes because it primarily benefited businesses that located in the shopping center.

Prevention of Deterioration
  1. Activities to prevent deterioration may benefit a community in a charitable manner regardless whether the community is now or presently in a state of decline, provided the interests served are public in scope and not merely the private interests of a class of persons that do not constitute a charitable class.

  2. An organization that preserved and developed the beauty of a city by planting trees in public areas, assisting municipal authorities in keeping the city clean, and informing the public of the advantages of these programs was held to be organized and operated exclusively for charitable purposes in Rev. Rul. 68–14, 1968–1 C.B. 243.

  3. An organization that worked to improve conditions in an area of a city where the income level was higher and housing better than in other areas of the city by providing information on methods of counteracting housing deterioration and ways of improving homes was held exempt in Rev. Rul. 76–147, 1976–1 C.B. 151. The organization identifies community problems and encourages their resolution through pamphlets and brochures, open meetings, and letter-writing campaigns.

    1. Rev. Rul. 76–147 modified Rev. Rul. 67–6, 1967–1 C.B. 135, to remove any implication that preserving or improving a community does not benefit a sufficiently broad segment of the public to be charitable. Rev. Rul. 67–6 concerns and organization formed to preserve the traditions, architecture, and appearance of a community solely for the benefit of the community’s residents. Rev. Rul. 76–147 recognizes that as long as the community interests an organization serves are truly public in scope and not merely the private interests of persons who do not comprise a charitable class, the organization may be considered to confer a public community benefit that is charitable within the meaning of IRC 501(c)(3).

Planning and Enforcement
  1. Rev. Rul. 68–15, 1968–1 C.B. 244, held and organization engaged in a variety of activities directed to combating community deterioration and juvenile delinquency, lessening neighborhood tensions, and eliminating prejudice and discrimination. Among its activities that furthered charitable purposes, the organization investigated complaints of possible building code and zoning violations that could result in community deterioration, identified uses for vacant lots to keep them from becoming hangouts, and sponsored meetings and other activities to relieve racial tensions both within the schools and within the larger community.

Historic Preservation
  1. Rev. Rul. 86–49, 1986–1 C.B. 243, recognizes that preserving he historic or architectural character of a community through acquiring and occasionally restoring historically or architecturally significant properties can serve to prevent community deterioration within the meaning of Reg. 1.501(c)(3)–1(d)(2). The organization set up a revolving fund to acquire and resell these properties subject to restrictive covenants, to preserve the historic or architectural character of the community. The organization’s manner of operations achieved its charitable purposes without serving private interests because:

    1. it confined acquisitions to significant properties that met strict criteria, including listing in the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior as significant to such district;

    2. purchases were made at arm’s length for fair market value;

    3. all resales were subject to restrictive covenants that insure perpetual preservation and reasonable visual access for the public;

    4. resales were made at fair market value;

    5. the organization would not resell a property to the person or a relative of the person who sold or contributed the property to the organization.

    Example:

    An organization, formed for the purpose of preserving the natural environment, acquired, by gift or purchase, ecologically significant undeveloped land and either maintained the land itself with limited public access or transferred the land to a government conservation agency by outright gift or reimbursement by the agency for its cost was held to qualify under IRC 501(c)(3) in Rev. Rul. 76–204, 1976–1 C.B. 152.

    Example:

    Compare with an organization that restricted its farm land to uses that do not change the environment but did not preserve land that is ecologically significant was denied exemption under IRC 501(c)(3) in Rev. Rul. 78–384, 1978–2 C.B. 174.

  2. An organization that developed and distributed a community land use plan was held exempt under IRC 501(c)(3) in Rev. Rul. 67–391, 1967–2 C.B. 190.

  3. An organization that educated the public regarding environmental deterioration due to solid waste pollution and operated recycling centers staffed by volunteers was held exempt under in Rev. Rul. 72–560, 1972–2 C.B. 248. The organization, which was supported by contributions and proceeds from sale of collected solid waste for recycling, engaged in exclusively charitable activities. In addition to educating the public on subjects useful to the community, the organization combated environmental deterioration through the operation of its recycling centers.

  4. Litigation and mediation are permissible means to achieve charitable environmental purposes.

    1. An organization that instituted litigation as a party plaintiff to enforce environmental legislation to protect and restore environmental quality was held exempt in Rev. Rul. 80–278, 1980–2 C.B. 175.

    2. An organization that conducted legal research to help resolve international environmental disputes and participated in the resolution of such disputes through mediation was held exempt in Rev. Rul. 80–279, 1980–2 C.B. 1976.

Environment and Conservation

  1. Organizations engaged in the development and conservation of natural resources, such as forests, lands, or wildlife, for the benefit of the entire community may be exempt as charitable organizations. Rev. Rul. 67–292, 1967–2 C.B. 184.

Defense of Human and Civil Rights

  1. Reg. 1.501(c)(3)–1(d)(2)(iii) provides that charitable purposes include "to defend human and civil rights secured by law."

  2. An organization that provides funds to defend members of a religious sect in legal actions involving substantial constitutional issues was held to be defending human and civil rights secured by law and thus exempt as a charitable organization in Rev. Rul. 73–285, 1973–2 C.B. 174.

  3. An antiwar protest organization formed to promote world peace and disarmament by nonviolent direct action and whose primary activity is the sponsoring of antiwar protest demonstrations in which demonstrators are urged to commit violations of local ordinances and breaches of public order was held not to qualify for exemption under IRC 501(c)(3) in Rev. Rul. 75–384, 1975–2 C.B. 204. Although the organization’s ultimate purposes are charitable, its activities violated the common law requirement that all charitable trusts (and by implication all charitable organizations) are subject to the requirement that their purposes may not be illegal or contrary to public policy.

  4. An organization formed to assist workers in litigating their rights to work against compulsory unionism was held to be exempt under IRC 501(c)(3) in National Right to Work Legal Defense and Education Foundation v. U.S., 487 F. Supp. 801, 45 AFTR 2d 80–764 (DC NC 1979). The court stated that the organization’s activities were charitable and that the Constitution recognizes the right to work as a human and civil right secured by law; therefore, defense of this right was beneficial to the community and was charitable in nature. This case is significant because the "right to work" , as used in the sense of state laws that prevent mandatory union membership as a condition of employment, is not a right guaranteed by the United States Constitution or the United Nations Universal Declaration of Human Rights.

Prevention of Cruelty

  1. Organizations that are organized and operated exclusively for the "prevention of cruelty to children or animals" are exempt under IRC 501(c)(3).

Cruelty to Children
  1. Rev. Rul. 67–151, 1967–1 C.B. 134, held an organization formed to protect children from working at hazardous occupations in violation of state laws and in unfavorable work conditions is an organization for the prevention of cruelty to children.

Cruelty to Animals
  1. An organization promoting high standards of care for laboratory animals was held exempt in Rev. Rul. 66–359, 1966–2 C.B. 219. The organization accredited laboratories that gave satisfactory care to experimental animals. This was an exempt purpose, described as charitable, supporting education and science, and preventing cruelty to animals.

  2. Rev. Rul. 74–194, 1974–1 C.B. 129, holds a nonprofit organization formed to prevents the birth and eventual suffering of unwanted animals, by subsidizing spaying or neutering for pet owners who otherwise cannot afford the services, exempt under IRC 501(c)(3).

  3. Organizations formed to prevent cruelty to animals often engage in attempts to influence legislation. This activity is appropriate, unless it is more than an insubstantial part of the organization’s activities, or, if the organization elects under IRC 501(h), it engages in excess lobbying. See, Rev. Rul. 67–293, 1967–2 C.B. 185.

Unrelated Business Income
  1. Income derived by an exempt organization from boarding and grooming services is income from an unrelated trade or business under IRC 513. See Rev. Rul. 73–587, 1973–2 C.B. 192.

Digests of Precedent Rulings

  1. Public recreation facilities—A nonprofit organization formed for the purpose of establishing, maintaining and operating a public swimming pool, playground and other recreation facilities, for the children and other residents of the community, is exempt from tax. Rev. Rul. 59–310, 1959–2 C.B. 146.

  2. Garden club—A garden organization exclusively engaged in the development of plantings on public lands, making awards for civic achievements, and conducting similar activities for the community benefit was held to be promoting social welfare by combating community deterioration and thus exempt under IRC 501(c)(3). Rev. Rul. 66–179, 1966–1 C.B. 139.

  3. Housing guidance to low-income families—A nonprofit organization created to provide instruction and guidance to low-income families in need of adequate housing and interested in building their own homes is exempt from tax under IRC 501(c)(3). Rev. Rul. 67–138, 1967–1 C.B. 129.

  4. Promoting non-discriminatory housing—An organization formed to educate the public about the need for making housing available to members of the public on a nondiscriminatory basis and to encourage investment in such housing may be exempt from tax under IRC 501(c)(3). Rev. Rul. 67–291, 1967–2 C.B. 184.

  5. Resource planning—Organizations engaged in the development and conservation of natural resources, such as forests, lands, or wildlife, for the benefit of the entire community are exempt as charitable organizations. Rev. Rul. 67–292, 1967–2 C.B. 184.

  6. Public works and recreation; facilities restricted—Where an organization provides community facilities without charge to residents of a township but restricts the use of facilities on the basis of race, it is not organized and operated exclusively for charitable purposes and does not qualify for exemption. Rev. Rul. 67–325, 1967–2 C.B. 113.

  7. Resource planning—An organization that developed and distributed a community land use plan may be exempt under IRC 501(c)(3). Rev. Rul. 67–391, 1967–2 C.B. 190.

  8. City beautification program—An organization that preserved and developed the beauty of a city by planting trees in public areas, assisting municipal authorities in keeping the city clean, and informing the public of the advantages of these programs was combating community deterioration and thus operated for charitable purposes. Rev. Rul. 68–14, 1968–1 C.B. 243.

  9. Community development—An organization that investigated complaints in cases in which possible violations of building codes and zoning ordinances might result in community deterioration, planned the use of vacant lots, and worked to relieve racial tensions both within the schools and within the larger community was held exempt under IRC 501(c)(3) as a charitable organization. Rev. Rul. 68–15, 1968–1 C.B. 244.

  10. Housing—A nonprofit organization that conducts a model demonstration housing program for low-income families and disseminates information about the results of the program may qualify for exemption under IRC 501(c)(3). Rev. Rul. 68–17, 1968–1 C.B. 247.

  11. Discrimination; eliminating unemployment—An organization formed to end discrimination in employment, study employment conditions, and inform the public of the advantages of non-discriminatory hiring through lectures and discussions was held exempt under IRC 501(c)(3). Rev. Rul. 68–70, 1968–1 C.B. 248.

  12. Discrimination; eliminating prejudice—An organization conducted investigations to obtain information regarding discrimination and met with proprietors of establishments where discrimination had been observed and with trade associations for the purpose of encouraging better compliance with civil rights law was eliminating prejudice and discrimination and thus exempt under IRC 501(c)(3). Rev. Rul. 68–438, 1968–2 C.B. 209.

  13. Discrimination; eliminating prejudice—A nonprofit organization formed to promote racial integration in housing, to lessen neighborhood tensions, and to prevent deterioration of neighborhoods may be exempt under IRC 501(c)(3). Rev. Rul. 68–655, 1968–2 C.B. 213.

  14. Resource planning—A nonprofit organization which holds meetings to discuss, identify, and cooperate in developing regional plans and policies for such problems as water and air pollution, waste disposal, water supply, and transportation, but does not advocate any legislative action to implement its findings, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–79, 1970–1 C.B. 127.

  15. Public works and recreation—An organization formed to preserve a lake used as a public recreation facility by treating the water in the lake and otherwise improving its condition for recreational purposes is a charitable organization exempt under IRC 501(c)(3). Rev. Rul. 70–186, 1970–1 C.B. 128.

  16. Lessening burdens of government; rehabilitation of prisoners—An organization formed to develop and manage community correctional centers for the rehabilitation of prisoners in cooperation with the courts and government custodial agencies qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–583, 1970–2 C.B. 114.

  17. Lessening burdens of government; internship program in government for college students—An organization formed to recruit college students for internship programs providing work experience in various phases of government related to their studies while enabling them to contribute to the community qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–584, 1970–2 C.B. 114.

  18. Housing—Nonprofit organizations created to provide housing for low and moderate income families, thereby lessening neighborhood tensions, eliminating prejudice and discrimination, and combating deterioration qualify for exemption. Rev. Rul. 70–585, 1970–2 C.B. 115.

  19. Lessening burdens of government; grant to transit authority—A grant to a city transit authority for the purpose of maintaining a mass transportation system qualifies as a charitable disbursement in furtherance of an organization’s exempt purposes. The grant lessens the burdens of government and is therefore charitable within the meaning of IRC 501(c)(3). Rev. Rul. 71–29, 1971–1 C.B. 150. See also Rev. Rul. 62–78, 1962–1 C.B. 86.

  20. Lessening burdens of government; on-site canteen for emergency personnel—An organization was formed to provide food and drink to firemen, police and other emergency personnel at the scene of fires, riots and other disasters. The organization, supported by contributions from the general public, is authorized by the local government to perform these activities. By assisting firemen, police and other personnel to perform their duties more efficiently during emergency conditions, the organization is helping lessen the burdens of government and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 71–99, 1971–1 C.B. 151.

  21. Discrimination; schools—A private school that does not have a racially nondiscriminatory policy as to students does not qualify for exemption. Rev. Rul. 71–447, 1971–2 C.B. 230.

  22. Discrimination; eliminating prejudice—An organization formed to promote equal rights for women by investigating instances of discrimination in employment and to aid women in recognizing and dealing with discrimination is promoting a charitable purpose since it is trying to eliminate prejudice and discrimination. Rev. Rul. 72–228, 1972–1 C.B. 148. See also Rev. Rul. 67–250, 1967–2 C.B. 182.

  23. Legal services corporation—An organization formed to provide substantial free legal services to low income residents of economically depressed communities through the subsidization of recent law graduates who have been admitted to the bar is promoting social welfare by relieving the poor and distressed or underprivileged. Rev. Rul. 72–559, 1972–2 C.B. 247.

  24. Resource conservation—An organization formed to educate the public regarding environmental deterioration due to solid waste pollution and which operated with contributions and proceeds from the sale of collected solid waste for recycling was held to be combating environmental deterioration. Rev. Rul. 72–560, 1972–2 C.B. 248.

  25. Defense of religious sect members—An organization that provides funds to defend members of a religious sect in legal actions involving substantial constitutional issues of state abridgement of religious freedom is defending human and civil rights secured by law and is thus exempt under IRC 501(c)(3). Rev. Rul. 73–285, 1973–2 C.B. 174.

  26. Lessening burdens of government; apprehension of criminals—An organization assisting the police department in the apprehension and conviction of criminals by making funds available for use in offering rewards qualifies for exemption under IRC 501(c)(3). The gratuitous performance of services to Federal, state or local governments is charitable in the generally accepted legal sense. Rev. Rul. 74–246, 1974–1 C.B. 130.

  27. Lessening burdens of government; volunteer fire company—A volunteer fire company which provides fire protection and ambulance services for a community qualifies for exemption as a charitable organization under IRC 501(c)(3). Rev. Rul 74–361, 1974–2 C.B. 159.

  28. Housing—A nonprofit organization formed to relieve poverty, eliminate prejudice, reduce neighborhood tensions, and combat community deterioration through a program of financial assistance in the form of low-cost or long-term loans to, or the purchase of equity interests in, various business enterprises in economically depressed areas is exempt under IRC 501(c)(3). Rev. Rul. 74–587, 1974–2 C.B. 162.

  29. Community improvement organization; block association—An organization which limits its preservation, beautification or improvement of public property to a specific geographic area, a city block, where the public property adjoins the private property of the organization’s members, does not qualify for exemption under IRC 501(c)(3). However, the organization does qualify for exemption under IRC 501(c)(4). Rev. Rul. 75–286, 1975–2 C.B. 210.

  30. Antiwar protest organization—A nonprofit organization formed to promote world peace and disarmament by nonviolent direct action and whose primary activity is the sponsoring of antiwar protest demonstrations in which demonstrators are urged to commit violations of local ordinances and breaches of public order does not qualify for exemption under IRC 501(c)(3) or (4). Rev. Rul. 75–384, 1975–2 C.B. 204.

  31. Community improvement organizations—An organization formed to improve conditions in an area of a city where the income level is higher and housing better than in other areas of the city and whose activities include providing general information on methods of counteracting housing deterioration and ways of improving homes may qualify for exemption under IRC 501(c)(3). Rev. Rul. 67–6 modified. Rev. Rul. 76–147, 1976–1 C.B. 151.

  32. Environmental conservancy—A nonprofit organization formed for the purpose of preserving the natural environment by acquiring, by gift or purchase, ecologically significant undeveloped land, and either maintaining the land itself with limited public access or transferring the land to a government conservation agency by outright gift or being reimbursed by the agency for its cost, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76–204, 1976–1 C.B. 152.

  33. Community improvement organization; home repairs to low-income homeowners—An organization formed to promote rehabilitation of a badly deteriorated residential area within a large city, by encouraging homeowners to make use of small, short-term, interest-free loans to make repairs necessary to meet local housing regulations, where the homeowners are otherwise unable to obtain loans for repairs, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76–408, 1976–2 C.B. 145.

  34. Resource planning; reduction of vehicle deaths and injuries—An organization formed to initiate and develop plans and programs to reduce vehicle deaths and injuries by providing local government officials upon request with free expert opinions on the existence of hazardous traffic conditions and the alleviation of these conditions, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76–418, 1976–2 C.B. 145.

  35. Community improvement organization; industrial parks in depressed areas—An organization receiving funding pursuant to a government program for the establishment of programs to reduce chronic unemployment by making purchases of blighted land in an economically depressed community to convert such land into an industrial park for lease to tenants, who are required to hire unemployed persons residing in that area and train the unemployed in needed skills, qualifies for exemption under IRC 501(c)(3). Rev. Rul. 76–419, 1976–2 C.B. 146.

  36. Community improvement; promoting business activity in an economically deteriorated area—An organization was formed to increase business patronage in a deteriorated area by providing information on shopping in the area and providing a telephone information service on transportation and accommodations. Another organization was formed to revive declining sales in a particular area and purchased land for the construction of a retail center. Neither organization qualified for exemption under IRC 501(c)(3). Rev. Rul. 77–111, 1977–1 C.B. 144.

  37. Lessening burdens of government; transportation system—An organization formed as a Model Cities Demonstration project to provide bus transportation to isolated areas of a community unserved by the existing bus system qualifies for exemption under IRC 501(c)(3). Rev. Rul. 78–68, 1978–1 C.B. 149.

  38. Public works and recreation; public park maintenance—An organization formed by residents of a city cooperated with municipal authorities in preserving, beautifying and maintaining a public park located in the center of the city. The park was commonly used by citizens of the entire city. Activities included the planning of the design of the park, horticultural plantings, design of trash containers, mowing of grass and removal of litter. The organization qualified for exemption under IRC 501(c)(3). Rev. Rul. 78–85, 1978–1 C.B. 150.

  39. Environmental conservancy—An organization restricted the use of its farm to farming and other ecologically suitable purposes that did not change the environment. The organization was not preserving land that had any distinctive ecological significance within the meaning of Rev. Rul. 76–204. Any benefit to the public from these restrictions is too indirect and insignificant to establish that the organization serves a charitable purpose. Thus the organization does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 78–384, 1978–2 C.B. 174.

  40. Litigation of environmental issues—An otherwise qualifying organization that was formed to protect and restore environmental quality and whose principal activity consists of instituting litigation as a party plaintiff to enforce environmental legislation is operated exclusively for charitable purposes and qualifies for exemption under IRC 501(c)(3). Rev. Rul. 80–278, 1980–2 C.B. 175.

  41. Mediation of international environmental disputes—An otherwise qualifying organization that engages in legal research concerning various means of adjusting and resolving international environmental disputes and arranges for, and participates in, the resolution of such disputes through mediation is exempt under IRC 501(c)(3). Rev. Rul. 80–279, 1980–2 C.B. 176.

  42. Lessening the burdens of government; funding for law enforcement—An organization that provides funds to a county’s law enforcement agencies to police illegal narcotic traffic lessens the burdens of government and, therefore, is described in IRC 501(c)(3). Rev. Rul. 85–1, 1985–1 C.B. 177.

  43. Lessening the burdens of government; legal assistance—An organization that provides legal assistance to guardians ad litem who represent abused and neglected children before a juvenile court that requires their appointment lessens the burdens of government and, therefore, is described in IRC 501(c)(3). Rev. Rul. 85–2, 1985–2 C.B. 178.

  44. Community improvement organization; preserving historical character—An organization formed for the purpose of preserving the historic or architectural character of a community through the acquisition and occasional restoration of historically or architecturally significant properties; and subsequent disposition of these properties subject to restrictive covenants is described in IRC 501(c)(3). Rev. Rul. 86–49, 1986–1 C.B. 243.

  45. Public works and recreation; community association in a private development—An organization formed to develop and operate various parks and recreation facilities, including pathways, swimming pools, golf courses, and community centers, for a private real estate development, does not qualify for exemption under IRC 501(c)(3). The development was a planned community with a population of more than 100,000, but was neither an incorporated city nor other form of political subdivision. As such, the Tax Court concluded that it was merely an aggregation of homeowners and tenants bound together for their private interests rather than a community at large. Columbia Park and Recreation Association v. Commissioner, 88 T.C. 1 (1987), aff’d in unpublished opinion 838 F. 2d 465 (4th Cir. 1988).

Health

  1. Promotion of health has long been recognized as charitable, provided that it is not carried on in a proprietary manner and the class of beneficiaries is sufficiently large and indeterminate to benefit the community as a whole. Restatement (Second) of Trusts, §§ 368, 372 (1959); 4A Austin W. Scott and William F. Fratcher, The Law of Trusts §§ 368, 372 (4th ed. 1989).

Hospitals

  1. Rev. Rul. 69–545, supra, holds that a hospital otherwise meeting the requirements of IRC 501(c)(3) with the following characteristics qualifies as an organization described in IRC 501(c)(3):

    1. The hospital is governed by a board of trustees consisting of prominent citizens in the community.

    2. Medical staff privileges are available to all qualified physicians in the community.

    3. The hospital operates a full time emergency room and no one requiring emergency care is denied treatment.

    4. The hospital otherwise limits treatment to those able to pay, either themselves or through third-party payors, such as insurance or public programs like Medicare.

    5. All surplus funds are used to improve the quality of patient care, expand its facilities, and advance its medical training, education, and research programs.

  2. Provision of free or below-cost non-emergency hospital care is not a requirement for exemption as an organization described in IRC 501(c)(3). See Rev. Rul. 69–545, supra. However, it is a factor that may be considered in determining whether a hospital is promoting health in a charitable manner. See Rev. Rul. 56–185, supra; Sonora Community Hospital v. Commissioner, 46 T.C. 519, (1966), aff’d 397 F.2d 814 (9th Cir. 1968); and Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974).

  3. The operation of a full-time emergency room, open to all regardless of ability to pay, is one factor in determining whether a hospital is promoting health in a charitable manner. However, a hospital may qualify as an organization described in IRC 501(c)(3) where it does not operate an emergency room if (a) either a governmental health planning agency has made a determination that an emergency room is not required or the hospital is a specialty hospital that typically does not require emergency care (such as an eye hospital or cancer institute) and (b) it otherwise engages in activities that promote the health of the community in a charitable manner, such as research and education. Rev. Rul. 83–157, 1983–2 C.B. 94.

Other Healthcare Organizations—Traditional

  1. In determining whether nonhospital healthcare organizations qualify as organizations described in IRC 501(c)(3), a "flexible community benefit standard" derived from Rev. Rul. 69–545, supra, is applied. See Sound Health Association v. Commissioner, 71 T.C. 158 (1978), acq. 1981–2 C.B. 2 and Geisinger Health Plan v. Commissioner, 985 F.2d 1210 (3rd Cir., 1993), rev’g 62 T.C.M. 1656 (1991).

  2. Not all activities that promote health support exemption under IRC 501(c)(3). See Federation Pharmacy Services, Inc. v. Commissioner, 625 F.2d 804, 807 (8th Cir. 1980), aff’g 72 T.C. 687 (1979), where the court noted that "the selling of prescription drugs by Federation may serve to promote health, but it does not, without more, further a charitable purpose." An activity must promote health for the benefit of the community to be considered charitable.

  3. In University Medical Resident Services, P. C. and University Dental Resident Services, P. C. v. Commissioner, T.C. Memo 1996–251 (1996), the Tax Court upheld the Service’s denial of charitable status for the petitioners, UMRS and UDRS, which were nonprofit professional corporations established to aid certain medical and dental residency programs in upstate New York. A charitable organization administered the residency programs, the teaching hospitals handled the training, and medical schools supervised the quality of the teaching program. The petitioners, which had no administrative staff, paid the residents’ compensation and had nominal power to hire and fire the residents.

    1. The petitioners argued they were charitable because they (1) advanced education; (2) lessened the burdens of the local government; and (3) were educational under the integral part theory. The court ruled that the petitioners’ advancement of education was minimal; that the petitioners had failed to establish that either the medical schools or the teaching hospitals were governmental entities or that the petitioners reduced the cost of the training in any event; and that petitioners were merely shell corporations providing the conduit through which compensation might be made to the medical and dental residents. Thus, the petitioners could not be conducting the integral functions of any charitable organizations.

SSA Representative Payee Organizations
  1. The Representative Payee Organization Program (RPOP) of the Social Security Administration (SSA) permits qualified organizations to collect disability insurance and supplemental security insurance payments for individuals who are mentally or physically debilitated due to:

    • drug or alcohol abuse,

    • mental or physical impairments, or

    • old age.

  2. The funds are used to ensure the personal care and well-being of SSA beneficiaries.

Activities Pursuant to Applicable Statute
  1. Public Law 104–121, section 105, enacted on March 29, 1996, terminates payments as well as Medicare/Medicaid coverage, effective Jan. 2, 1997, for SSA beneficiaries whose disabilities are based on drug addiction or alcoholism. Termination of their payments and insurance benefits will not result if drug addiction or alcoholism is not material to the beneficiaries’ disabilities.

  2. Section 205(j)(4)(B) of the of the Social Security Independence and Program Improvements Act of 1994 (P.L. 103–296) defines the term qualified organization to include any community based non-profit agency. In 20 CFR 404.2040a of the Code of Federal Regulations, SSA defines community based non-profit agency as:

    1. a non-profit social service agency;

    2. that is "community-based," i.e., it is located within its service area, comprised of one or more neighborhoods, city or county locales;

    3. that is bonded or licensed in the state in which it serves as representative payee, regularly provides representative services concurrently to at least five beneficiaries, and is not a creditor of the beneficiary; and

    4. a nonprofit social service organization founded for religious, charitable or social welfare purposes that is tax-exempt under IRC 501(c).

  3. Representative payee organizations (RPOs) first must use the payments from SSA to pay for the basic needs (such as food and shelter) of the beneficiaries. Then, they may use the excess to pay for other needs such as

    • clothing,

    • medical expenses not covered by Medicare or Medicaid, or

    • recreation.

  4. RPOs are compensated for providing such services to SSA RPOP beneficiaries, by deducting a fee set by statute and SSA regulations from each beneficiary’s SSA funds.

Rationales for Exemption
  1. RPOs may qualify for exemption under IRC 501(c)(3) on two rationales:

    • providing relief to the poor and distressed;

    • lessening the burdens of government.

  2. Relief of the Poor and Distressed — RPOs assist a class of individuals who are mentally or physically debilitated. By managing, monitoring, and providing funds that pay for their basic necessities of living, a RPO relieves the poor and distressed and, therefore, are furthering IRC 501(c)(3) or IRC 501(c)(4) purposes.

  3. Lessening the Burdens of Government — Rev. Rul. 81–276, 1981–C.B. 128 holds that a professional standards review organization qualifies for exemption under IRC 501(c)(3) because it is lessening the burdens of government. The ruling reasons that the organization assumes the government’s burden of reviewing the professional activities of health care practitioners and institutions to ensure they are appropriate recipients of Medicare and Medicaid reimbursement. Similarly, a PRO, by assisting the SSA ensure that public funds are used to provide necessities of life to SSA beneficiaries, may lessen the burdens of government.

  4. A RPO’s operations may be distinguished from the organization held to be engaged in a trade or business ordinarily carried on for profit in Rev. Rul. 72–369, 1972 C.B. 245. Rev. Rul. 72–369 describes an organization regularly providing managerial and consulting services to unrelated charities for a fee no more than its cost. It concludes that the organization does not qualify for exemption because it is only providing services of a ordinary commercial nature. A PRO is distinguishable from a commercial trade or business organizations because it provides services that may not be available through commercial channels to all eligible beneficiaries of the SSA RPOP, regardless of the potential fees.

Requirement to Serve Public Rather Than Private Interests
  1. A RPO must otherwise satisfy the requirements for exemption under IRC 501(c)(3), including the requirement in Reg. 1.501(c)(3)–1(d)(1)(ii) to be operated for the benefit of public rather than private interests.

  2. Many RPO’s are organized in a manner that raise the issue whether the organization primarily serves the private interests of those who control it rather the public interests of the SSA. Facts that suggest private interests may be served include:

    1. The RPO was created and is controlled by one or two people, who are also the sole or controlling employees.

    2. If there are other employees, they are related to the controlling individual(s).

    3. The board of directors is comprised of controlling individual(s) and related persons.

    4. Expenses consist primarily of compensation or rent to those individuals who control the organization.

  3. The presence of the following factors suggest that a RPO is organized and operates for public rather than private purposes:

    1. Services are provided to all eligible SSA RPOP beneficiaries without regard to the amount (and corresponding RPO service fee) of the benefit that an eligible beneficiary may receive;

    2. The governing body is comprised primarily of community members who do not have a financial interest in the RPO’s activities;

    3. The governing body has exclusive authority to determine compensation of employees and other parties that perform major services for the RPO;

    4. Any members of the governing body who are also compensated for services provided to the RPO are not eligible to vote on board decisions involving their compensation;

    5. The governing body and key employees have experience or background in social services;

    6. Officials of the RPO represent that the organization will follow the operational requirements of the SSA, including fulfilling the duties described in SSA publications and regulations.

  4. The criteria are not unique to RPO’s, and have long been applied to a variety of organizations seeking recognition of exemption. For example, the requirement that such an organization be governed by a board of directors representative of the community served, rather than by "insiders" with a financial interest in the organization’s activities, is consistent with published precedents. In the health care area, health care providers and similar organizations are required to have a "community board" rather than a governing body dominated by financially interested individuals. See, e.g., Rev. Rul. 69–545, 1969–2 C.B. 117; compare Rev. Rul. 55–656, 1955–2 C.B. 262 (community nursing bureau qualified for exemption under IRC 501(c)(3)), with Rev. Rul. 61–170, 1961–2 C.B. 112 (private duty nurses’ registry did not qualified for exemption under IRC 501(c)(3) and distinguished from community nursing bureau on basis that public control and support of latter demonstrated operation for public benefit).

Digests of Precedent Rulings

  1. Hospitals—A non-profit organization whose purpose and activity are providing hospital care is promoting health and may, therefore, qualify as organized and operated in furtherance of a charitable purpose if it meets the other requirements of IRC 501(c)(3) Rev. Rul. 69–545, 1969–2 C.B. 117.

  2. Medical staff of hospital—A nonprofit organization formed by a medical staff of an exempt hospital to carry on a charitable program of benefit to the hospital is described in IRC 501(c)(3). Rev. Rul. 69–631, 1969–2 C.B. 119.

  3. Clinic to aid drug victims—A nonprofit organization operating a clinic to aid victims of hallucinatory drugs and providing information concerning such drugs is described in IRC 501(c)(3). Rev. Rul. 70–590, 1970–2 C.B. 116.

  4. Medical society; local—A city medical society exempt under IRC 501(c)(6), that primarily directs its activities to the promotion of the common business purposes of its members may not be reclassified as an educational or charitable organization under IRC 501(c)(3). Rev. Rul. 71–504, 1971–2 C.B. 231.

  5. Rehabilitation program, former medical patients—An organization providing a residence facility and therapeutic "group living program" for individuals recently released from a medical institution is described in IRC 501(c)(3). Rev. Rul. 72–16, 1972–1 C.B. 143.

  6. Home health care—A nonprofit organization, a qualified "home health agency" as defined in 1861(c) of the Social Security Act, formed to provide low cost home health care for people of a community may qualify for exemption as an organization described in IRC 501(c)(3). Rev. Rul. 72–209, 1972–1 C.B. 148.

  7. Rural health center—An organization formed and supported by residents of an isolated rural community to provide a medical building and facilities at a reasonable rent to attract a doctor who would provide medical services to the entire community is promoting the health of the community and thus exempt as a charitable organization under IRC 501(c)(3). Rev. Rul. 73–313, 1973–2 C.B. 174.

  8. Medical specialty board—A medical specialty board that devises and administers written examinations to physicians in a particular medical specialty and issues certificates to successful candidates is exempt from tax as a business league under IRC 501(c)(6), but is not exempt as an organization described in IRC 501(c)(3). Rev. Rul. 73–567, 1973–2 C.B. 178.

  9. Medical information retrieval system; donated body organs—A nonprofit organization that operates a free computerized donor authorized retrieval system to facilitate transplantation of body organs upon a donor’s death qualifies for IRC 501(c)(3) exemption. Rev. Rul. 75–197, 1975–1 C.B. 156.

  10. Trust used to satisfy hospital’s malpractice claims—A trust created by an exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital, and from which the hospital directs the bank-trustee to make payments to claimants qualifies for exemption under IRC 501(c)(3). Rev. Rul. 78–41, 1978–1 C.B. 148.

  11. Health care facility; Christian Science—An otherwise qualifying nonprofit organization that operates a health care facility for patients under the care of Christian Science practitioners, receives its income principally from contributions, patients, fees, medicare, medicaid, and health insurance qualifies for exemption as an organization described in IRC 501(c)(3). As funds permit, the organization accepts patients who are unable to pay. Rev. Rul. 80–114, 1980–1 C.B. 115.

  12. Hospital—Organization formed to construct, maintain, and operate or lease—An otherwise qualifying nonprofit organization that was created to construct, maintain and operate or lease a public hospital and related facilities for the benefit of a city and the surrounding communities is operated exclusively for charitable purposes and qualifies for exemption. Rev. Rul. 80–309, 1980–1 C.B. 183.

  13. Hospitals—A nonprofit hospital that is not required to operate an emergency room where a state or local health planning agency has found that this would unnecessarily duplicate emergency services and facilities that are adequately provided by another medical institution in the community is described in IRC 501(c)(3). Amplifies Rev. Rul. 69–545, supra. Rev. Rul. 83–157, 1983–2 C.B. 94.

  14. Recruitment incentives—A nonprofit hospital may pay recruitment incentives to a physician without jeopardizing its exempt status provided the transactions further charitable purposes, do not result in inurement, do not result in the hospitals serving a private rather than a public purpose, and do not constitute an illegal activity. Rev. Rul. 97–21, 1997–18 I.R.B. 8.

  15. Joint ventures—A nonprofit hospital that transfers substantially all of its assets to a joint venture with a for-profit entity may continue to qualify as an IRC 501(c)(3) organization if the facts and circumstances indicate that the organization’s participation in the joint venture furthers a charitable purpose and the transaction is structured so that the organization is not operating for the private benefit of its for-profit partners. Rev. Rul. 98–15, 1998–12 I.R.B. 6.

Instrumentalities

  1. There is no provision in the Internal Revenue Code that imposes a tax on the income of governmental units. The term "governmental units" refers to the states and their political subdivisions. The income of governmental units is not generally subject to federal income taxation. However, the income of a separately organized entity, that is, an organization that is not an integral part of a state government or a political subdivision, is subject to tax unless a Code exemption or an exclusion applies.

  2. The term "instrumentality" of a governmental unit does not appear in IRC 501. It is referenced, however, in the Code sections applying the FICA and FUTA employment taxes

IRC 501(c)(3) Exemption

  1. A wholly owned state or municipal entity which is separately organized and not an integral part of the state or local government itself, and which is organized and operated exclusively for purposes described in IRC 501(c)(3) may qualify for exemption from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3). Rev. Rul. 60–384, 1960–2 C.B. 172.

Organizational Requirements
  1. Reg. 1.501(c)(3)–1(b) requires that an organization’s enabling document set forth purposes that limit it to exclusively serving one or more exempt purposes. Nevertheless, where an organization is established pursuant to a state statute, its stated purposes satisfy the organizational test by sufficiently describing its operations.

  2. To be considered a separately organized entity, an organization must establish that it is either a corporation, a trust, or an association. A review of the organization’s creating documents will normally disclose the nature of its formal structure, that is, whether it is in form a corporation, a trust, or an association.

Corporations
  1. A corporation is a legal entity, created under the authority of the non-profit laws of a state. It is regarded as having an existence completely separate and apart from that of its creators and constituents.

  2. The separate organization requirement is generally met if the entity is incorporated under state non-profit corporation law. This is because by definition a corporation is a legal entity, created under the authority of the laws of a state, which is regarded as having an existence completely separate and apart from that of its creators and constituents. Accordingly, if the instrumentality in question is in substance and in form a corporation, it must be considered a separately organized entity.

Trusts
  1. A trust is an arrangement created either by a will or by an inter vivos declaration where trustees take title to property to protect or conserve it for the beneficiaries under the ordinary rules applied in chancery or probate courts. Reg. 301.7701–4(a). If the purpose of an arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit, then it is a trust.

    Example:

    O is a trust, created under the will of X, to provide college scholarships for graduates of public schools in County C. The trust instrument appoints the public school board in County C as trustee of the trust. Under the trust provisions, the County C school board invests trust principal and uses the income therefrom to provide scholarships. The organization is a trust as defined in Reg. 301.7701–4(a).

Associations
  1. IRC 7701(a)(3) states that the term "corporation" includes associations. Thus, any entity that is a "corporation" for federal tax law purposes will be considered separately organized, even if it is not incorporated under state law.

  2. Reg. 301.7701–2 lists six characteristics that are ordinarily found in a pure corporation, which, taken together, distinguish it from other organizations. As adapted to fit unincorporated nonprofit bodies, these corporate characteristics are: (i) associates, (ii) an objective by the associates to carry on the activity for which the organization was formed, (iii) continuity of life, (iv) centralized management, (v) limited liability, and (vi) free transferability of interests. The presence or absence of these characteristics will depend upon the facts in each individual case. Thus, an organization will be treated as an association if it more nearly resembles a corporation than a partnership or trust and, therefore, may be considered to be an organization distinct from its creator.

  3. Entities considered "separately organized" include colleges and universities; hospital, housing, or development authorities; public library boards; water or park districts; public school athletic associations; charitable trusts; and organizations created by inter-governmental agreement.

  4. Specific examples of separately organized entities, which have continuity of life and centralized management, as well as associates (their board members) who have an objective to carry on each organization’s activity separate and apart from the general activity of the government, are:

    1. Pursuant to a statute of State A, several county and municipal governments in A entered into an intergovernmental cooperation agreement providing for the creation of M. M’s purpose is to provide special education services to students in schools in counties and municipalities which are parties to the agreement. The services M provides are required by federal law. M is governed by a board of directors composed of one representative of each member government. The board annually assesses member governments, proportionately based on population of each county or municipality, an amount needed to fund M’s activities. The members may, by majority vote, provide for the dissolution of M. Upon dissolution, any funds remaining after payment of M’s liabilities will be returned to the school fund of each governmental unit which has participated in M’s activities, proportionately to assessments paid by the unit.

    2. N is a public hospital authority, created by a county in State B, pursuant to B statute. The statute provides that any county in B may create such an authority by vote of the county legislature. Under the statute, management of N’s facilities is vested in a board of governors. N’s initial governing board was named in the legislative enactment creating it; thereafter, N’s board members are appointed by the county executive with the approval of the county legislature. N receives an annual appropriation for its activities from the county legislature, as well as fees for patient services. State law authorizes N to issue bonds to construct new facilities. N may be dissolved, pursuant to statute, by vote of the county legislature. Upon dissolution, any facilities N owns become the property of County B, and any funds remaining after payment of N’s debts are transferred to a County Hospital Fund, to be used in providing health care services to residents of County B.

  5. Rev. Rul. 62–66, 1962–1 C.B. 84, describes an organization that is not separately organized. It holds that a committee created by executive order of the governor of a state as an official state agency, to educate the public about the purposes and activities of the United Nations as an instrument of world peace, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 62–66 concludes the organization is an "integral part" of the State government, and therefore, under Rev. Rul. 60–384, not described in IRC 501(c)(3).

Powers Other Than Those Described in IRC 501(c)(3)

  1. Rev. Rul. 60–384 provides that even though a wholly-owned state or municipal instrumentality may be a separately organized entity, it is not entitled to IRC 501(c)(3) exemption if it has powers other than those described in IRC 501(c)(3). Where an instrumentality exercises substantial regulatory or enforcement powers in the public interest, it will not qualify. Powers of regulation or enforcement are powers which are possessed by governmental agencies such as school boards and boards of health and welfare. These powers are referred to as sovereign powers. The three acknowledged sovereign powers are the police power, the power to tax, and the power of eminent domain. The presence of either the police power or the power to tax, if substantial, will disqualify a separately organized government entity from exemption under IRC 501(c)(3).

    1. U is a public housing authority incorporated under a statute giving it power to conduct examinations and investigations, take sworn testimony at hearings, issue subpoenas requiring attendance of witnesses or production of books and papers, and issue commissions to examine witnesses not attending hearings. Through these means, it collects information and makes it available to other agencies to use in enforcing planning, building, and zoning ordinances. U does not qualify for exemption because its investigatory powers are beyond those permitted under IRC 501(c)(3). Rev. Rul. 74–14, 1974–1 C.B. 125.

  2. Compare Rev. Rul. 74–15, 1974–1 C.B. 126, in which a public library organized as a separate entity under a State statute has the authority to certify the tax rate needed for its operation to the rate-making authority. The library was held to qualify for exemption under IRC 501(c)(3). Since the State statute conferred only a limited power upon the public library to determine the tax rate necessary to support its operations, the power regarding the tax rate was not a regulatory or enforcement power within the meaning of Rev. Rul. 60–384.

  3. There is no distinction between the power to recommend or certify a tax rate, the power to determine a tax rate, and the power to "levy," "assess," or "impose" a tax. The regulatory or enforcement power lies with the power to collect, not the power to certify or levy a tax rate. Thus, if an organization has the power to collect the tax, it will be disqualified from being recognized as exempt.

  4. Certain limited powers do not disqualify if they do not indicate purposes beyond those qualifying as "exclusively" exempt under IRC 501(c)(3).

    Example:

    V a state university, has a police force to regulate traffic, motor vehicles, and speed limits on campus and to issue citations, impose fines, and arrest persons to detain them until city police arrive. Because V’s police powers are not substantial and are limited to its campus, they do not disqualify it from exemption under IRC 501(c)(3).

    1. Although Rev. Rul. 77–165, 1977–1 C.B. 21, dealing with qualification as a political subdivision under IRC 103, does not address IRC 501(c)(3) exemption, it is relevant, as organizations without "substantial sovereign powers" in the IRC 103 context also lack "powers other than those described in IRC 501(c)(3)" under Rev. Rul. 60–384.

  5. Although the power of eminent domain is indisputably a governmental power, it is not necessarily a power of regulation or enforcement within the meaning of Rev. Rul. 60–384, and may not disqualify a separately organized government entity from exemption.

    1. Rev. Rul. 67–290, 1967–2 C.B. 183, describes a public hospital corporation organized under a statute giving it power to acquire property essential to its purposes by eminent domain. Because its eminent domain power is limited to acquiring property for its charitable purpose, and such a limited power is commonly bestowed on non-governmental entities, the hospital corporation qualifies for exemption under IRC 501(c)(3). The ruling reasoned that the limited power of eminent domain is not a "regulatory" or "enforcement" power of the type described in Rev. Rul. 60–384.

  6. If the power of eminent domain is combined with other powers to give an organization purposes broader than those described in IRC 501(c)(3), then the organization does not qualify for exemption. For example, if an organization, in addition to condemning property by the power of eminent domain, has the power to conduct investigations, hear testimony and take proof under oath, issue subpoenas, and recommend standards of maintenance and requirements of applicable health and safety ordinances and zoning, it does not qualify.

Dissolution Provisions

  1. Many instrumentalities have language in their governing instrument providing that upon dissolution, all remaining assets will be distributed to a state or any political subdivision thereof to satisfy IRC 115 requirements. This raises a potential problem, as Reg. 1.501(c)(3)–1(b)(4) requires that upon dissolution assets be distributed to the Federal government, or to a State or local government, for a public purpose. However, if the organization has been created by a state statute, local ordinance, or similar enabling vehicle, and there is no indication that upon dissolution the assets will be distributed for private use, then it can be considered to satisfy the dissolution requirements without explicitly including the phrase "for a public purpose," which would normally be required.

Application Consideration: Exempt Status

  1. Exhibit 7.25.3–1, "INSTRUMENTALITY" EXEMPTION APPLICATION Checksheet for Organizations Closely Affiliated with Government, provides a checksheet of factors to assist in a determination whether an organization qualifies under IRC 501(c)(3).

Application Consideration: Late Filers

  1. Applications from wholly-owned state or municipal instrumentalities frequently involve "late filers" , i.e., organizations not filing within the 15-month period set by Reg. 1.508–(a)(2). Although there is no special exception to the notice requirement for government entities, they can request relief from the filing deadline pursuant to Reg. 301.9100–1, Reg. 301.9100–2, and Reg. 301.91003 in the same manner as other applicants.

IRC 115 Exclusion

  1. IRC 115(1) provides that gross income does not include

    1. income derived from the exercise of any essential governmental function, and

    2. accruing to a state or any political subdivision thereof.

  2. Factors to consider in determining whether income is excluded under IRC 111 are described in Rev. Rul. 57–128, 1957–1 C.B. 311.

    1. An organization seeking exclusion from income tax may request a ruling under IRC 115. The procedures for requesting a ruling are set out in Rev. Proc. 98–1, 1998–1 I.R.B. 11, or its successor.

  3. The fact that an organization’s income may be excluded under IRC 115(1), does not preclude it from also qualifying for exemption under IRC 501(c)(3).

Employment Tax Requirements

  1. As of January 1, 1984, service performed in the employ of an organization exempt from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3) is liable for FICA tax requirements (social security and medicare taxes) on remuneration of $100.00 or more paid to each employee during a calendar year.

  2. Under IRC 3306(c)(8), service performed in the employ of an organization exempt from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3) is excepted from FUTA tax requirements.

  3. Unless covered under an agreement entered into under section 218 of the Social Security Act, under IRC 3121(b)(7), service in the employ of states, political subdivisions, and their instrumentalities is generally excepted from FICA tax requirements. However, under IRC 3121(u)(2), wages of any employees not covered under a section 218 agreement, but who are hired after March 31, 1986, are subject to the medicare portion of the FICA taxes. Further, under IRC 3121(b)(7)(F), regarding services performed after July 1, 1991, the wages of any employees not covered under a section 218 agreement and who are not members of a retirement system of the state, political subdivision, or instrumentality, are subject to FICA tax requirements (social security and medicare taxes).

  4. Under IRC 3306(c)(7), service in the employ of states, political subdivisions, and their instrumentalities is excepted from FUTA tax requirements.

  5. As previously noted, the term "instrumentality" is important in the Code sections applying the FICA and FUTA employment taxes. Therefore, when issuing a favorable determination letter to an organization as being exempt from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3), where the organization appears to be sufficiently connected and controlled by a political subdivision that it is likely to be an instrumentality, the specialist should include specialized language applicable to instrumentalities as provided by IRM 7.21.1, EO Automated Processing Procedures, (formerly 7690, Exhibit 300–26).

  6. Any questions that the organization may have as to whether it is an instrumentality of a state or a political subdivision for FICA or FUTA tax purposes should be addressed to the Office of the Chief Counsel (Tax Exempt/Government Entities), located in National Headquarters.

Return Requirements

  1. IRC 6033 requires any organization exempt from federal income tax under IRC 501(a) to file an annual information return (Form 990), unless excepted, either by statute or pursuant to exercise of the Commissioner’s discretionary authority.

  2. Reg. 1.6033–2(g)(1)(v) provides that an organization that is exempt from tax under IRC 501(a) and that is a state institution, the income of which is excluded from gross income under IRC 115, is not required to file an annual information return.

    1. An organization may request a ruling that it meets the requirements of Reg. 1.6033–2(g)(1)(v) from the Washington POD.

  3. Certain governmental units and affiliates of governmental units are excepted from the requirement to file Forms 990 pursuant to exercise of the Commissioner’s authority in Rev. Proc. 95–48, 1995–2 C.B. 418. The entities covered are:

    1. Governmental unit

    2. Affiliate of a governmental unit described in IRC 501(c)(3) that has a ruling or determination letter

    3. Affiliate of a governmental unit described in IRC 501(c)(3) that does not have a ruling or determination letter from the Service.

  4. A governmental unit is defined as a state or local governmental unit defined in Reg. 1.103–1(b) and either

    1. it is entitled to receive deductible charitable contributions under IRC 170(c)(1), or

    2. it is an Indian tribal government or political subdivision thereof under IRC 7701(a)(40) and IRC 7871.

  5. An affiliate of a governmental unit described in IRC 501(c)(3) that has a ruling or determination from the Service that:

    1. its income from IRC 501(c)(3) activities is excluded under IRC 115;

    2. it is entitled to receive deductible charitable contributions under IRC 170(c)(1) on the basis that they are "for the use of" governmental units; or

    3. it is a wholly owned instrumentality of a state or political subdivision for employment tax purposes.

  6. An affiliate of a governmental unit that is described in IRC 501(c)(3) that does not have a ruling or determination from the Service, but:

    1. it is either operated, supervised, or controlled by governmental units, or by organizations that are affiliates of governmental units, or the members of its governing body are elected by the public at large, pursuant to local statute or ordinance;

    2. it possesses two or more affiliation factors listed in section 4.02 of Rev. Proc. 95–48; and

    3. its filing of Form 990 is not otherwise necessary to the efficient administration of the internal revenue laws.

Information Letter

  1. A state or municipal organization that inquires about its exempt status should be informed in writing that it may qualify for exempt status under IRC 501(c)(3) only if it is organized as a separate entity and if it otherwise meets the organizational and operational tests of IRC 501(c)(3), including the absence of governmental powers.

  2. The information letter should further advise the organization that the gross income of a state or municipal entity may not be subject to tax under IRC 115. The letter should refer to Rev. Proc. 98–1, 1998–1 I.R.B. 10, or its successor, and advise that a ruling may be requested from the Washington POD using the address indicated in the revenue procedure.

  3. IRM 7.25.3-2 contains a pattern letter for use in responding to such inquiries.

Native American (Indian) Tribal Governments

  1. Before 1983, Native American tribal governments were not considered state or local governments under the Code. Although tribal governments were not subject to tax (Rev. Rul. 67–284, 1967–2 C.B. 55), the favorable consequences available to private parties entering into transactions with state governments did not apply to similar transactions with Native American tribal governments. For example, a bequest to a Native American tribe could not be deducted for estate tax purposes under IRC 2055(a)(1).

Current Law
  1. In 1983, Congress sought to equalize this treatment by enacting IRC 7871. IRC 7871(a) provides that, for certain specified federal tax purposes, an Indian tribal government shall be treated as a State. The term "Indian tribal government" is defined in IRC 7701(a)(40) as a governing body of any tribe, band, community, village, or group of Indians, or (if applicable) Alaska Natives, that is determined by the Secretary of the Treasury, after consultation with the Secretary of the Interior, to exercise governmental functions. Neither IRC 7701(a)(40) nor 7871 defines the term "governmental function." Nevertheless, the relevant legislative history indicates that Congress considered the term "governmental function" to be synonymous with the term "sovereign powers."

  2. IRC 7871(d) provides that for the purposes specified in IRC 7871(a), a subdivision of an Indian tribal government shall be treated as a political subdivision of a State if (and only if) the Secretary of the Treasury determines (after consultation with the Secretary of the Interior) that such subdivision has been delegated the right to exercise one or more of the substantial governmental functions of the Indian tribal government.

  3. Neither IRC 7701(a)(40) nor 7871 define the term "political subdivision." The legislative history provides that it is intended that essentially equivalent criteria be used in making determinations as to delegations of sovereign powers by Indian tribal governments to their subdivisions and delegations of sovereign powers by states to their political subdivisions. The determination of an entity’s status as a political subdvision of an Indian tribal government is therefore to be based on the same criteria as have traditionally been applied to states and their political subdivisions under IRC 103. Reg. 1.103–(b) defines a "political subdivision" as either a municipal corporation, or a division of government that has been delegated the right to exercise one of the three sovereign powers.

  4. Rev. Proc. 83–87, 1983–2 C.B. 606, lists Indian tribal governments that are treated similarly to states for federal tax purposes, including IRC 7871 and 7701(a)(40).

  5. Rev. Proc. 84–36, 1984–1 C.B. 510, lists subdivisions of Indian tribal governments that are treated as political subdivisions of states for the same specified purposes under the Internal Revenue Code that are noted in Rev. Proc. 83–87.

  6. Rev. Proc. 84–37, 1984–1 C.B. 513, provides guidance how a governmental unit of an Indian tribe or a political subdivision of an Indian tribal government not included among those listed in Rev. Proc. 83–87 and Rev. Proc. 84–36, can request a determination qualifying it for treatment as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40).

  7. An entity listed in Rev. Proc. 83–87 and treated similarly to a state for federal tax purposes, or listed in Rev. Proc. 84–36 and treated as a political subdivision of a state, is not subject to federal income tax on amounts derived from performing its tribal functions. This non-tax treatment is derived from the Service’s long-standing position, set forth in Rev. Rul. 67–284. Under this revenue ruling an Indian tribal government is not a taxable entity, i.e., it will not qualify for exemption as described under IRC 501(c)(3), rather, it is simply not taxed.

  8. Tribal governments and their political subdivisions are not the only Native American organizations that may apply for recognition of exemption. The Service has processed applications from a variety of Native American related organizations, including: a tribal corporation organized under section 17 of the Indian Reorganization Act of 1934; a separately organized entity created under state law by a tribal government; a separately organized entity created by a tribal government recognized by a particular State but not the federal government; and a tribal government believed to qualify for treatment as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40).

  9. A Native American tribal corporation organized under section 17 of the Indian Reorganization Act of 1934, is treated as a tribal government under federal tax law, i.e., is not a taxable entity. It does not qualify for exemption as described under IRC 501(c)(3), but is simply not taxed.

    1. Rev. Rul. 94–16, 1994–12 I.R.B. 4, in clarifying Rev. Rul. 81–295, 1981–2 C.B. 15, held that an Indian tribal corporation organized under section 17 of the Indian Reorganization Act of 1934 shares the same tax status as the Indian tribal government. Therefore, any income earned by such a corporation, regardless of the location of the business activities that produced the income (either on or off the tribe’s reservation), is not subject to federal income tax.

  10. A separately organized entity created under state law by a tribal government to conduct specific activities may qualify for exemption from federal income tax if it otherwise meets the organizational and operational tests of IRC 501(c)(3), including the absence of substantial sovereign powers.

    1. Rev. Rul. 94–16, 1994–12 I.R.B. 4, in amplifying Rev. Rul. 67–284, 1967–2 C.B. 55, held that a corporation organized by an Indian tribal government under state law does not share the same tax status as the Indian tribal government for federal income tax purposes. Therefore, any income earned by such corporation, regardless of the location of the business activities that produced the income (either on or off the reservation), is subject to federal income tax.

    2. The corporation will qualify for exemption if it conducts charitable and educational activities as a corporation separate from the tribe. Such activities may include tribal history research, cultural activities, and self-help projects for tribe members who are located in areas of economic blight and living on incomes below the poverty level.

    3. These charitable and educational activities are often conducted by an organization as part of an effort to be recognized as an Indian tribe by the federal government. As obtaining tribal recognition usually entails historical documentation, but not political or legislative activity, this activity will not disqualify an organization from obtaining recognition under IRC 501(c)(3).

  11. A separately organized entity created by a tribal government that is recognized by a particular State but not the federal government may qualify for exemption from federal income tax if it otherwise meets the organizational and operational tests of IRC 501(c)(3), including the absence of substantial sovereign powers.

  12. If an application from an Indian tribal government is denied under IRC 501(c)(3), but it appears that the entity will qualify for treatment as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40), the denial should advise that a formal determination of status as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40) may be requested pursuant to Rev. Proc. 84–37, supra.

Financial Support of Other Organizations

  1. Many charitable foundations do not engage in active charitable undertakings themselves, but rather assist the work of religious, charitable, educational, or similar organizations by contributing money to them.

Grant Making Organizations

  1. Grant-making organizations are sometimes controlled by corporate and individual taxpayers who use them as channels for their charitable contributions. Some have very large endowments and make grants totaling millions of dollars annually. This indirect form of charitable activity provides a basis for recognition of exemption under IRC 501(c)(3). Rev. Rul. 67–149, 1967–1 C.B. 133.

Indirect Support of Charity

  1. An organization that owns and leases a building to the member agencies of a community chest may be providing a form of indirect support of charitable activities. If rentals are at rates substantially below fair rental value, the organization may qualify for recognition of exemption. Rev. Rul. 69–572, 1969–2 C.B. 119.

Support of Charity Through Non-exempt Organizations

  1. Some charitable organizations make distributions to nonexempt organizations. These funds must be used for specific projects that further the purposes of the charitable organization.

  2. The charitable organization must retain discretion and control over the use of the funds and maintain records establishing that the funds are used for charitable purposes. An organization’s failure to document that funds distributed to nonexempt organizations or persons were used for exempt purposes could, if substantial, cause the organization to be operated for a substantial nonexempt purpose. Rev. Rul. 68–489, 1968–2 C.B. 210.

U.S. Department of Agriculture Child and Adult Care Food Program

  1. Organizations created to assist in the implementation of the United States Department of Agriculture Child and Adult Care Food Program (USDA CADFP) may qualify for exemption under IRC 501(c)(3) as charitable organizations under the rationale that they lessen the burdens of government. The USDA CADFP is authorized under Section 17 of the National School Lunch Act, as amended, at 42 U.S.C. § 1766.

  2. The CACFP provides assistance to states through grants-in-aid and other means to initiate, maintain, and expand nonprofit food service programs for children or adult participants in nonresidential programs that provide care. In most states, the CACFP is administered by state agencies under USDA guidelines.

  3. The CACFP supports public institutions, private entities exempt under IRC 501(c)(3), and proprietary family day care providers. However, non-exempt family day care providers may participate in the program only under the sponsorship of a "sponsoring organization" that is tax-exempt, or "moving towards that status" by filing an application for recognition of exemption with the Service.

Sponsoring Organization Responsibilities

  1. A "sponsoring organization" is responsible for:

    1. Submitting applications for participation or renewal in CACFP on behalf of sponsored day care providers

    2. Accepting final administrative and financial responsibility for program operations with respect to sponsored day care providers

    3. Monitoring the program at all facilities under its sponsorship

    4. Maintaining records required by USDA

    5. Acting as "fiscal intermediary" for food service funds between the state agency and the sponsored day care provider

  2. A "sponsoring organization" must:

    1. Conduct pre-approval visits to each provider

    2. Verify that the proposed food services do not exceed the providers capability

    3. Provide training for the providers in their responsibilities under CACFP

    4. Review operations to assess compliance with CACFP at least three times a year

  3. Sponsoring organizations receive the following payments under the CACFP program:

    1. Payment for meals (which they must pay over to sponsored providers at a rate established by law;

    2. Administrative payments, which may be the actual expenditures for cost of administering the program or the amount of administrative costs approved by the state agency

    3. One-time start-up payments to develop or expand successful CACFP operations in day care homes.

Private Interest Considerations—One-Person Organizations
  1. Many "sponsoring organizations" applying for recognition of exemption are essentially one-person operations:

    1. The principal serves as an officer and director.

    2. The principal’s compensation is the organization’s primary expense.

    3. Other board members and employees may be members of the principal’s family.

  2. Operating under the control of one person or a small, related group suggests that an organization operates primarily for non-exempt private purposes, rather than exclusively for public purposes. See, e.g., Rev. Rul. 69–545, 1969–2 C.B. 177; compare Rev. Rul. 55–656, 1955–1 C.B. 262 (community nursing bureau qualified for exemption under IRC 501(c)(3)), with Rev. Rul. 61–170, 1961–2 C.B. 112 (private duty nurses; registry distinguished from community nursing bureau on basis that public control and support of latter demonstrated operation for public vs. private benefit).

  3. Sponsoring organizations may raise many of the same issues as Representative Payee Organizations discussed in IRM 7.25.3.11.2.4.

Provider Control
  1. Sponsoring organizations may also be created and controlled by the day care providers they sponsor, to enable the providers to participate in CACFP. As with employee-dominated sponsoring organizations, provider-dominated sponsoring organizations may not be operated exclusively for exempt public purposes.

Selective Sponsorship
  1. Organizations that refuse to sponsor state-licensed or federally-qualified day care providers that meet program requirements, because of their income or education levels, are not operated exclusively to further exempt purposes.

Multiple Sponsorship Organizations Under Single Control
  1. One example of an abusive arrangement that operates primarily for private, non-exempt interests is where an Individual forms multiple sponsoring organizations to increase the amount of reimbursement received under CACFP.

Exemption Criteria

  1. To qualify for exemption under IRC 501(c)(3), a sponsoring organization must meet the following criteria:

    1. A governing body comprised primarily of community members with no financial interest in its activities (in other words, persons other than organization employees, sponsored day care providers, or related parties).

    2. Members of the governing body should not vote on decisions concerning their compensation or that of a related party.

  2. Examples of an IRC 501(c)(3) exemption include—

    1. Decisions about compensation of employees and other parties providing services to the organization should be made by the governing body.

    2. No person receiving compensation for services under CACFP may receive compensation for services from any other sponsoring organization.

    3. Accept any qualified day care provider, consistent with its capacity to provide services to sponsored providers.

Scientific Organizations

  1. Organizations may be described IRC 501(c)(3) if they are organized and operated exclusively for "scientific" purposes.

  2. "Scientific" is not defined in the Code, regulations, or any published rulings. However, a dictionary defines science as "a branch of study that is concerned with observation and classification of facts and especially with the establishment … of verifiable general laws chiefly by induction and hypotheses." Webster’s New Third New World Dictionary.

  3. An organization engaged in surveying scientific and medical literature and abstracting and publishing it free of charge was held to be exempt because it was engaged in the advancement of education and science. Rev. Rul. 66–147, 1966–1 C.B. 137.

  4. In another case, an organization carrying on research and disseminating knowledge in the field of the social sciences was held to be educational and scientific. It performed a substantial part of its research under contract from government agencies and devoted the proceeds to additional research. It performed no contract research for private individuals or organizations. Rev. Rul. 65–60, 1965–1 C.B. 231

Public Versus Private Purposes

  1. The regulations provide that a scientific organization, as with other organizations described in IRC 501(c)(3), must be organized and operated in the public interest, as the purposes specified in IRC 501(c)(3) are limited to public purposes. This means that organizations that primarily pursue business purposes or that serve substantial private interests are not entitled to exemption under IRC 501(c)(3).

  2. Rev. Rul. 69–632, 1969–2 C.B. 120, holds that an organization composed of members of an industry to develop new and improved uses for products of the industry was not an exempt scientific organization because the primary purpose of the association’s research is to serve the private interests of its creators, rather than the public interest.

  3. An organization engaged in nonprofit research on human diseases, developing scientific methods for treatment, and disseminating its results through physicians’ seminars was held to be exempt as an educational organization in Rev. Rul. 65–298, 1965–2 C.B. 163. It planned to make the results of its research, including patents, formulas, etc., generally available to the public. The organization derived its financial support primarily from the donations and registration fees of the participants in its seminars.

Scientific Research as an Exempt Purpose

  1. Scientific organizations generally engage in some form of "research." However, not all research is "scientific" and not all scientific research is carried on in the public interest.

    1. An association composed of the members of a particular industry was not exempt under IRC 501(c)(3) in Rev. Rul. 69–632, 1969–2 C.B. 120. The association sponsored research projects to develop new and improved uses for the industry’s products. Although patents and trademarks resulting from the research were licensed royalty free, the primary beneficiaries of the association’s research program were the members of the industry.

    2. On the other hand, however, an engineering society formed to engage in scientific research in the areas of heating, ventilating, and air conditioning for the benefit of the general public was held exempt under IRC 501(c)(3) in Rev. Rul. 71–506, 1971–2 C.B. 233.

  2. Reg. 1.501(c)(3)–1(d)(5)(i) provides that the determination of whether research is "scientific" does not depend on whether such research is "fundamental" or "basic" as contrasted with "applied" or "practical."

    1. However, the distinction between "fundamental" and "applied" research is important for purposes of the exclusion from unrelated business taxable income provided by IRC 501(c)(9).

Research Incident to Commercial Operations
  1. Scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations such as the inspection of products or the designing of equipment. Reg. 1.501(c)(3)–1(d)(5)(ii); Rev. Rul. 65–1, 1965–1 C.B. 226.

  2. Clinical testing of drugs for pharmaceutical companies is not scientific research as the regulations define the term. Rev. Rul. 68–373, 1968–2 C.B. 206, holds that clinical testing is an activity that is incidental to a pharmaceutical company’s commercial operations.

  3. Similarly, Rev. Rul. 65–1, 1965–1 C.B. 226, holds that an organization promoting the development of new machinery for a particular commercial operation and that had the power to sell, assign, or license the resulting patent rights did not qualify for exemption.

  4. In American Kennel Club, Inc. v. Hoey, Exrx., 148 F.2d. 920 (2nd Cir. 1945), the court held that the AKC is not an exempt scientific organization even though one of its activities is the compilation of data useful to geneticists and other scientists.

  5. In Dumaine Farms v. Commissioner, 73 T.C. 650 (1980), the Tax Court held that an irrevocable trust organized to operate an experimental model demonstration farm is exempt under IRC 501(c)(3). The Trust’s purpose is to demonstrate to local farmers and the general public the economic feasibility of experimental farming practices that will protect the area’s ecology and native wildlife. The Trust intends to keep the public and the farming community informed about its activities, which will be open to the public on a partially restricted basis. The Service had argued that the Trust’s articles empowered it to improve the quality of farming by operating a farm, a substantial nonexempt purpose; the farm served the commercial private interests of its creator; and it failed the "organizational" test because its articles did not describe in detail the manner of operation. However, the court held that the Trust’s agricultural activities were not commercially motivated, but were educational and scientific; the Trust’s articles made clear its intention to devote the farming activities exclusively in furtherance of exempt purposes; and the administrative record affirmatively demonstrated that the creator would not benefit privately from the activities. In interpreting Reg. 1.501(c)(3)–1(b)(1) (ii), pertaining to the "organizational" test, the Court stated that the fact that the Trust did not describe the manner of its operations in detail was inconsequential. In 1980–2 C.B.1, the Commissioner acquiesced in the holding on the operational requirements, but did not acquiesce in the holding on the organizational requirements,

Research in the Public Interest
  1. Reg. 1.501(c)(3)–1(d)(1)(iii) provides that scientific research will be regarded as in the public interest:

    1. If the results of such research (including any patents, copyrights, processes, or formulae resulting from such research) are made available to the public on a nondiscriminatory basis;

    2. If such research is performed for the United States, or any of its agencies or instrumentalities, or for a State or political subdivision thereof;

    3. If such research is directed toward benefiting the public.

  2. Examples of research that meet the last criterion are:

    1. Research carried on for the purpose of aiding in the scientific education of college or university students;

    2. Research carried on for the purpose of obtaining scientific information, which is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public;

    3. Research carried on for the purpose of discovering a cure for a disease; or,

    4. Research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area.

  3. Publication of research results is clearly not the only means by which scientific research can be in the public interest.

  4. Reg. 1.501(c)(3)–1(d)(5)(i) provide that "research" is not synonymous with "scientific." Its character depends on the purpose it serves, and it must be carried on in the public interest.

    1. A research organization, operated by a group of physicians specializing in heart defects, that investigates the causes and treatment of cardiac and cardiovascular conditions and diseases was recognized as exempt under IRC 501(c)(3) in Rev. Rul. 69–526, 1969–2 C.B. 115. The creators conducted medical practices apart from the organization’s research program, but the organization’s facilities were separately maintained and were used exclusively for the organization’s research program. Although some of the creators’ private patients were accepted for study, they were selected on the same criteria as the organization’s other patients. In this case the organization’s research was carried on in the public interest.

Research Performed Under Contract
  1. Research that benefits the public within the meaning of Reg. 1.501(c)(3)–1(d)(1)(iii) will be regarded as carried on in the public interest even though such research is performed pursuant to a contract or agreement under which the sponsor or sponsors of the research have the right to obtain ownership or control of any patents, copyrights, processes, or formulae resulting from such research.

  2. Rev. Rul. 76–296, 1976–2 C.B. 141, distinguishes two situations involving scientific research undertaken pursuant to contracts with private industry.

    1. Commercially sponsored research that otherwise qualifies as scientific research under IRC 501(c)(3) constitutes scientific research carried on in the public interest if the results, including all relevant information, are timely published in a form available to the interested public, even though it is performed pursuant to a contract under which the sponsor has the right to obtain ownership of the patent.

    2. Research is not in the public interest, and constitutes unrelated trade or business within the meaning of IRC 513, if publication is withheld or delayed significantly beyond the time reasonably necessary to establish ownership rights. The organization will agree, on request, to forego or significantly delay publication of results of a particular project to protect the sponsor’s processes, technical data, or patent rights.

Research Conducted Only for the Organization’s Creators
  1. Scientific research does not include activities ordinarily carried on incident to commercial or industrial operations such as the inspection of products or the designing of equipment. (Reg. 1.501(c)(3)–1(d)(5)(ii); Rev. Rul. 65–1, 1965–1 C.B. 226.) Thus, clinical drug testing for pharmaceutical companies is not scientific research as the regulations define the term. (Rev. Rul. 68–373, 1968–2 C.B. 206.) Clinical testing is an activity that is incidental to a pharmaceutical company’s commercial operations.

  2. Research is regarded as in the public interest if all patents or other resulting rights are made "available to the public." However, Reg. 1.501(c)(3)–1(d)(5)(iii) provides that research will be in the public interest even though the sponsor obtains patents or other resulting rights if:

    1. the research results are published;

    2. the research is done for the United States or a local government; or

    3. it is directed toward benefiting the public in some other way, such as to further the education of university students, to develop data for publication, to cure a disease, or to bring new industry to a community.

  3. Rev. Rul. 76–296, 1976–2 C.B. 141, discusses two situations involving commercially sponsored scientific research.

    1. In situation one, the results of the commercially sponsored projects, including all relevant information, are generally published in a form available to the interested public either currently, as developments in the project warrant, or within a reasonably short time after completion of the project. If patent rights are involved, publication is delayed pending reasonable opportunity to establish such rights, such as through the filing of application for patents. This type of research is regarded as carried on in the public interest even though it is performed pursuant to a contract under which the sponsor has the right to obtain ownership of the patent, and constitutes scientific research in the public interest within the meaning of IRC 501(c)(3).

    2. In situation two, the organization will agree, at the request of the sponsor, to forego publication of the results of a project to protect against disclosure of processes or technical data the sponsor wants to keep secret for various business reasons. The organization may also agree to delay publication of results if the sponsor, for business reasons, wants to protect its patent right under the project but wants to defer initiation of patent procedures so as to delay or control the timing of public disclosure of the results of the project. The research connected with these projects is not scientific research carried on in the public interest within the meaning of IRC 501(c)(3) as the research is withheld entirely or delayed significantly beyond the time reasonably necessary to establish patent or other ownership rights in the results of the research in order to accommodate the sponsor’s business interest in maintaining the secrecy of certain processes or to control the timing of public disclosure of the results.

Testing for Public Safety

  1. Organizations that are organized and operated for the purpose of testing products for public safety are exempt under IRC 501(c)(3). However, IRC 170, 2055, 2106, and 2522 make no provision for the deduction of contributions, bequests, or gifts to an organization formed for this purpose.

  2. This provision was added to IRC 501(c)(3) to cover organizations that test consumer products to determine their acceptability for use by the general public. (S. Rept. No. 1622, 83rd. Cong., at page 310.) This was in response to Underwriters Laboratories, Inc. v. Commissioner, 135 F.2d 371 (7th Cir. 1943), cert. denied, 320 U.S. 756 (1943), which held that a testing laboratory was not exempt under IRC 501(c)(3) on the ground that its purpose was, in substantial part, to serve the interests of the manufacturers of electrical equipment.

  3. Rev. Rul. 65–61, 1965–1 C.B. 231, held that an organization engaged in establishing safety standards for pleasure boats, and testing boats and boating equipment for safety is exempt under IRC 501(c)(3).

  4. In contrast, Rev. Rul. 68–373, 1968–2 C.B. 206 held that an organization engaged in clinical drug testing for pharmaceutical companies is not testing for public safety. The organization tests drugs before marketing to enable the companies to comply with Food and Drug Administration rules. This activity serves the private interest of the manufacturers rather than the public interest.

Inurement, Private Benefit, and Intermediate Sanctions

  1. An otherwise qualifying organization will be disqualified for exemption if it excessively benefits private interests, either through inurement of its net earnings to certain "insiders" or by primarily benefiting the interests of persons who, though not "insiders" , do not comprise a charitable class.

  2. Inurement and private benefit are often incorrectly used interchangeably. This can cause confusion and lead to incorrect analysis. The critical distinction is that "private benefit" is broader than "inurement" . Thus, all inurement is private benefit, but not all private benefit is inurement.

  3. The distinction was given added significance by the addition of IRC 4958. The excise tax on "excess benefit transactions" imposed by that section was intended to provide an intermediate sanction short of revocation to transactions constituting inurement.

  4. Technical advice must be requested in any case in which the excise tax on intermediate sanctions is proposed or revocation of exemption because of inurement is an issue, including any case in which those issues are resolved through a closing agreement.

Inurement—Benefits to Insiders

  1. IRC 501(c)(3) expressly forbids the inurement of net earnings to the benefit of a private shareholder or individual.

  2. Reg. 1.501(c)(3)–1(c)(2) clarifies that an organization is not operated exclusively for exempt purposes if its net earnings inure to the benefit of private individuals.

Private Shareholder or Individual

  1. The words "private shareholder or individual" refer to persons having a personal and private interest in the activities of the organization. Reg. 1.501(c)(3)–1(c). It places the focus of the inurement proscription on those who, by virtue of a special relationship with the organization in question, are able to influence the expenditure of its funds or the use of its assets, rather than on the general public. See, for example, Church by Mail, Inc. v. Commissioner, 765 F.2d 1387 (9th Cir. 1985); est of Hawaii v. Commissioner, 71 T.C. 1067 (1979).

  2. IRC 501(c)(3) does not prohibit all dealings between a charitable organization and its founder or with those in controlling positions. An organization’s trustees, officers, members, founders, and contributors may, of course, receive reasonable compensation or fair market value for services or goods, or other expenditures in furtherance of exempt purposes.

  3. However, those in control may not, by reason of their position, acquire any of the charitable organization’s funds. If funds are diverted from exempt purposes to private purposes, exemption is in jeopardy.

  4. Dealings between a private foundation and certain closely related persons are restricted by Chapter 42 of the Code. These are discussed thoroughly in the section on private foundations.

Insider Benefit

  1. The term "insider benefit" provides a good working definition of inurement.

  2. The use of the term "insider" serves to distinguish inurement from the broader concept of private benefit, discussed below.

  3. The use of the term "benefit" highlights the broad interpretation placed on the Code language of "net earnings." The "net earnings" reference goes beyond a narrow accounting definition of net income to encompass almost any use, other than in an arm’s-length transaction or as reasonable compensation, made of an organization’s assets by an insider.

  4. Where an exempt organization engages in a transaction with an insider and there is a purpose to benefit the insider rather than the organization, inurement occurs even though the transaction ultimately proves profitable for the exempt organization. The test is not ultimate profit or loss but whether, at every stage of the transaction, those controlling the organization guarded its interests and dealt with related parties at arm’s-length. See Leon A. Beeghly Fund v. Commissioner, 35 T.C. 490 (1960). (Inurement occurred when organization entered a transaction to benefit the stockholders of a particular business corporation, not to benefit the charity, even though corporation suffered no financial loss.)

  5. The treatment of a first contract between a third party professional fund-raiser and an exempt organization is discussed in United Cancer Council v. Commissioner, 165 F.3rd 1173 (7th Cir. 1999). The circuit court concluded that prohibited inurement cannot result from a contractual relationship negotiated at arm's length with a party having no prior relationship with the organization, regardless of the relative bargaining strength of the parties or the resultant control over the tax-exempt organization created by the contract terms.

Examples

  1. Examples of unreasonable compensation:

    1. Those in control of an organization may not withdraw its earnings under the guise of salary payments. Birmingham Business College, Inc. v. Commissioner, 276 F.2d 476 (5th Cir. 1960).

    2. Compensation arrangements include a variety of benefits in addition to salary, such as welfare benefits, fringe benefits, and deferred compensation. Look to the total compensation to determine if it is reasonable.

    3. Rev. Rul. 69–383, 1969–2 C.B. 113, provides an example of a reasonable compensation arrangement.

    4. In an IRC 7428 action, The Church of the Living Tree v. Commissioner, T.C. Memo 1996–291 (1996), the Tax Court upheld the Service’s determination that the organization, whose secondary purpose was promotion of the (hand) papermaking industry, was not described in IRC 501(c)(3). The organization also provided rent-free facilities to the founder, although the founder received no compensation for his work with the organization. The Service had determined that promotion of the papermaking industry was a substantial non-exempt purpose and that the organization provided private benefit to the founder. The court ruled that the organization had not carried its burden of proof to show the Service’s determination was erroneous.

  2. Payment of excessive rent. Texas Trade School v. Commissioner, 30 T.C. 642, aff’d, 272 F.2d 168 (5th Cir. 1959).

  3. Deferred or retained interests. See Rev. Rul. 66–259, 1966–2 C.B. 214.

  4. Receipt of less than fair market value in sales or exchange of property. Sonora Community Hospital v. Commissioner, 46 T.C. 519 (1966).

  5. Inadequately secured loans.

    • Lowry Hospital Association v. Commissioner, 66 T.C. 850 (1976).

    • But see, Donald G. and Lillian S. Griswold v. Commissioner, 39 T.C. 620 (1962), acq., 1965–1 C.B. 4. (Numerous loans to insiders at current commercial rates that were secured by adequate collateral did not result in inurement.)

Personal Grants

  1. Gifts by a charitable organization to friends and relatives of persons in control of the organization are personal in nature rather than public. The recipients are natural objects of the "donor’s" bounty. Therefore, by aiding them, the organization is serving the insider’s private purposes. This is true even though the recipients may be needy.

    1. Large part of a foundation’s funds used for scholarship grant to the son of a foundation trustee results in inurement of earnings. Charleston Chair Company v. United States, 203 F. Supp. 126 (E.D S.C. 1962).

  2. A private foundation that makes grants to friends and relatives of insiders may face penalties under Chapter 42 of the Code.

Intermediate Sanctions

  1. The Taxpayer Bill of Rights 2 ( "TBOR2" ), P.L. 104–168, enacted July 30, 1996, created a series of new excise taxes, often referred to as "intermediate sanctions" . These "intermediate sanctions" include an excise tax equal to 25 percent of the excess benefit derived by a "disqualified person" (defined below); this tax is payable by those who are "disqualified persons" with respect to "excess benefit transactions." IRC 4958(a).

  2. A disqualified person is defined as any person who is in a position to exercise substantial influence over the affairs of the organization; it includes family members of such an individual, or a 35 percent controlled entity. IRC 4958(f)(1). In the legislative history of TBOR2, the Committee on Ways and Means pronounced that a person having the title of "officer, director, or trustee" does not automatically have the status of a disqualified person.

  3. The term "excess benefit transaction" means any transaction in which an economic benefit is provided by an organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.

Private Benefit

  1. To be charitable, an organization must serve a public rather than a private interest. Reg. 1.501(c)(3)–1(d)(1)(ii). The organization must demonstrate that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled directly or indirectly by such private interests.

  2. A charitable organization can give money, goods, or services to individuals without losing its exempt status. Many forms of charity involve aid to individuals. Help to poor people and to deserving students are traditional examples. Instead, private benefit involves gifts to individuals to serve their private purposes.

  3. The private benefit restriction is not limited to benefits provided to insiders. Rather, the restriction applies to benefits provided to any individual, whether or not the individual is in a position to control or influence the organization. The private benefit restriction operates against all parties who receive a benefit not accorded the public as a whole.

  4. Although even a minimal amount of inurement results in disqualification of an exempt organization, private benefit will not jeopardize tax-exempt status if it is incidental to accomplishment of exempt purposes. However, an activity that primarily serves private interests may jeopardize exempt status if it is carried on to a degree that is more than an insubstantial part of the organization’s activities.

  5. Restrictions on membership, or other demarcations that restrict the class of persons served by an organization can result in the organization primarily serving private interests. In Columbia Park and Recreation Association, Inc. v. Commissioner, 88 T.C. 1 (1987), aff’d in unpublished opinion 838 F. 2d 465 (4th Cir. 1988), the court upheld denial of exemption under IRC 501(c)(3) to an organization formed to develop and operate utilities, systems, services, and facilities "for the common good and social welfare" for a private real estate development with a population of over 100,000 residents. The development was neither an incorporated city nor other form of political subdivision. The court considered this fact significant in concluding that the organization was "...merely an aggregation of homeowners and tenants bound together in a structural unit formed as an integral part of a plan for the development of real estate." As such, it lacked a "sufficient public element" to be a "community at large" in the charitable context.

Incidental Private Benefit
  1. If an organization serves a public interest and also serves a private interest other than incidentally, it is not entitled to exemption under IRC 501(c)(3).

  2. To be incidental, the private benefit must be a necessary concomitant of the activity which benefits the public at large and accomplishes exempt purposes. In other words, the benefit to the public cannot be achieved without necessarily benefiting certain private individuals.

  3. Further, private interests must be benefited only to the extent necessary to accomplish exempt purposes. It is a facts and circumstances test in that public benefit from the organization’s activities must outweigh any individual benefit.

Business Benefits
  1. Private benefit can result from grants, awards, scholarships, or research that create substantial benefits for particular business interests. Specific situations the Service has considered include:

    1. Research and development of new machinery to be used by particular commercial operations. Rev. Rul. 65–1, 1965–1 C.B. 226.

    2. Testing drugs for commercial pharmaceutical companies. Rev. Rul. 68–373, 1968–2 C.B. 206.

    3. Development of new and improved uses for existing products of an industry. Rev. Rul. 69–632 1969–2 C.B. 120.

    4. Testing cargo retainers. Rev. Rul. 78–426, 1978–2 C.B. 175.

    5. Medical peer review boards formed by a state medical association. Rev. Rul. 74–553, 1974–2 C.B. 168.

    6. Promotion and protection of the practice of law by a city bar association. Rev. Rul. 71–505, 1971–2 C.B. 232.

    7. Lawyer referral service. Rev. Rul. 80–287, 1980–2 C.B. 185.

  2. Activities that were in part aimed at promoting the prosperity and standing of the business community served a substantial private purpose. Better Business Bureau of Washington, D. C., Inc. v. United States, 326 U.S. 279 (1945).

  3. A group of local merchants formed an organization to construct and operate a public off-street parking facility in the central business district. The organization set up a free parking validation stamp system for the merchants’ customers. The organization served the merchants’ private interests more than incidentally by encouraging the public to patronize their stores. Rev. Rul. 78–86, 1978–1 C.B. 151.

Employee Benefits
  1. An employee benefit organization funded and controlled by the employer may be operated to serve a business interest rather than an exclusively charitable purpose.

    1. A foundation paid the educational and medical expenses of young performers employed by the founder, who was in show business. These expenditures were a form of compensation to the employees and directly furthered the business interests of the founder. Horace Heidt Foundation v. United States, 170 F. Supp. 634 (Ct.CI. 1959).

    2. A trust created by an employer to pay pensions to retired employees relieves the employer of the burdens of the pension program. Also, payments to retired individuals are not in themselves charitable. Rev. Rul. 56–138, 1956–1 C.B. 202.

    3. A bequest to pay pensions to the retired employees of the testator’s private corporation relieves the employer corporation of paying all the compensation amounts. Rev. Rul. 68–422, 1968–2 C.B. 207. See also, Watson, exr. v. United States, 355 F.2d. 269 (3rd Circ. 1966).

  2. In an employee benefit fund supported by the employees themselves where benefits are awarded in the event of death, illness, or disability, without regard to financial distress, the organization is a sort of mutual benefit association, not a charity. This form of self-help serves the interests of the members, which is not a public purpose.

  3. A different result is possible where benefits to employees are not a form of indirect compensation and where benefits are awarded on truly charitable standards. See William B. Chase v. Commissioner, 19 T.C.M. 234 (1960) (Where organization granted scholarships on the basis of objective criteria to children of employees of related corporations, grants were not a form of indirect compensation to the employees.)

  4. A private foundation that grants scholarships to children of a particular employer should ensure that its program meets the requirements of IRC 4945(d)(3) and (g). If not, it may be subject to penalties.

Member Benefits
  1. Nurses’ Registers.

    1. Maintaining an employment register primarily for the employment of members of a nurses’ association promotes the interests of its individual members. Rev. Rul. 61–170, 1961–2 C.B. 112.

    2. On the other hand, a community nursing bureau, operated as a community project, that maintains a register of all qualified professional and paraprofessional personnel for the benefit of hospitals, health agencies, doctors, and members of the community, was held exempt under IRC 501(c)(3) in Rev. Rul. 55–656, 1955–1 C.B. 149.

  2. A subscription "scholarship" plan for individuals designated by the subscribers serves private rather than public purposes. Rev. Rul. 67–367, 1967–2 C.B. 188.

  3. Bus transportation for members’ children attending a private school serves a private rather than a public interest. Rev Rul. 69–175, 1969–1 C.B. 149.

  4. Navigable waterways:

    1. A nonprofit corporation, formed to dredge a navigable waterway fronting the properties of its members, received contributions solely from its members in proportion to the value of their properties. Evidence showed that the waterway was little used by the general public but its navigability greatly affected the value of members’ properties. It was formed for private purposes of its members. Benedict Ginsberg v. Commissioner, 46 T.C. 47 (1966).

    2. On the other hand, an organization described in Rev. Rul. 70–186, 1970–1 C.B. 128, formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake, benefited the community as a whole. It was financed by lake front property owners, by members of the community adjacent to the lake, and by municipalities bordering the lake.

  5. An organization serves as a recruitment incentive for and provides aerial assistance to the Syracuse Air National Guard. It owns an airplane which it rents at low cost to its members. Its membership is restricted to members of the Syracuse Air National Guard and civilian employees, active and retired members of reserve military units, and personnel of the Federal Aviation Agency. The organization provides no classes or instructional materials, and employs no faculty. The court held that the private benefit to the members is substantial and not incidental to the public benefit of assisting the Syracuse Air National Guard. Syrang Aero Club v. Commissioner, 73 T.C. 717 (1980).

Tax Avoidance
  1. Sometimes a business or professional person will transfer business and personal assets to a controlled nonprofit organization for the purpose of avoiding taxes. The individual will continue to carry on the business or profession as an employee of the transferee organization and will continue to enjoy personal assets such as a home and/or automobile. Transactions of this type are lacking in substance in the sense that the transferor is still, in effect, engaging in a business or profession in an individual capacity. Since the transferor operates the organization essentially as an attempt to reduce personal Federal income tax liability while still enjoying the benefits of earnings, the organization’s primary function is to serve the private interest of its creator rather than a public interest.

Examples of Private Benefit from Tax Avoidance
  1. A doctor transferred assets, including his medical practice, to a nonprofit organization that he formed and controlled. The doctor was then "hired" to conduct "research programs" that consisted of the examination and treatment of patients charged at prevailing rates. In return for his services the doctor received a salary and other benefits. Rev. Rul. 69–266, 1969–1 C.B. 151.

  2. An organization, not affiliated with any particular charitable entity, offered free personal tax and estate planning to encourage donations to charitable organizations. Aiding individuals in their tax and estate planning and giving advice on legal methods of tax avoidance is a commercially available service, not a charitable activity in the generally accepted legal sense. Although funds may have ultimately been made available to charity as a result of the organization’s planning assistance to individuals, the benefits to the public were tenuous in view of the private purposes served by arranging individual’s tax and estate plans. Rev. Rul. 76–442, 1976–2 C.B. 148. See also Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978).

Permissible Benefits

  1. Tax advantages or other incidental benefit to an individual or entity from transactions with a controlled exempt organization does not necessarily result in private benefit or inurement of net earnings.

  2. A charity purchased securities from its creator for less than the fair market value. The creator claimed a charitable contribution equal to the difference between the fair market value of the securities and the price at which they were sold to the charity. Although the transaction may have resulted in an advantage to the creator the charity profited from the transaction and its exemption was not affected. Wiilam Waller, et al. v. Commissioner, 39 T.C. 665 (1963), acq., 1963–2 C.B. 5. See also Rev. Rul. 69–39, 1969–1 C.B. 148.

  3. Where a business corporation donated lands and money to a foundation to establish a public park, exemption was not jeopardized by the donor’s retention of the right to use as a brand symbol a scenic view located in the park. Rev. Rul. 66–358, 1966–2 C.B. 218.

  4. A corporation created an organization to operate a replica of an early 19th Century American village named after the corporation. The corporation donated the land upon which the village was located and provided a substantial amount of financial support. Although the corporation benefits by having its name mentioned in conjunction with the organization’s advertising program, such benefits are merely incidental to benefits flowing to the general public from access to the village and its historic structures. Rev. Rul. 77–367, 1977–2 C.B. 193.

  5. An organization subsidized recent law graduates who provided free legal services to low income residents of economically depressed communities. Any private benefit derived by the legal interns is incidental to the public charitable purpose. Rev. Rul. 72–559, 1972–2 C.B. 247.

Digests of Precedent

  1. Nurses’ registers—A nonprofit community nursing bureau that maintains a register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses, for the benefit of hospitals, health agencies, doctors and individuals, as a community project, qualifies for IRC 501(c)(3) exemption. It receives financial support from community organizations and public contributions. Rev. Rul 55–656, 1955–2 C.B. 262.

  2. Employee benefits—A trust organized to pay pensions to retired employees is not exempt under IRC 501(c)(3). Rev. Rul. 56–138, 1956–1 C.B. 202.

  3. Hospitals—The necessary criteria for a hospital to qualify for exemption as a public charitable organization are outlined. Modified by Rev. Rul. 69–545, to remove the requirement relating to caring for patients without charge or at rates below cost. Rev. Rul. 56–185, 1956–1 C.B. 202.

  4. Nurses’ registers; maintaining an employment registry—A nurses’ association that maintains an employment registry primarily for the employment of members is not entitled to IRC 501(c)(3) exemption. Rev. Rul. 61–170, 1961–2 C.B. 112.

  5. Research and development—An organization that makes research grants for the development of new machinery to be used in particular commercial operations and retains all the rights to the new developments does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 65–1, 1965–1 C.B. 226.

  6. Business benefits—A nonprofit organization that makes funds available to authors and editors for preparing teaching materials and writing text books, and under the terms of the contract with the publisher receives royalties from the sales of published materials and then shares them with those individuals, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–104, 1966–1 C.B. 135.

  7. Trusts—reversionary interest—A trust that provides for the reversion of principal on termination to the creator does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–259, 1966–2 C.B. 214.

  8. Public park—Where a business corporation donated lands and money to a foundation to establish a public park, exemption under IRC 501(c)(3) was not jeopardized by the donor’s retention of the right to use as a brand symbol a scenic view located in the park. Rev. Rul. 66–358, 1966–2 C.B. 218.

  9. Investments benefiting insiders; family controlled foundations—A foundation, controlled by the creator’s family and operated to enable the creator and his family to engage in financial activities beneficial to them, results in the foundation’s ownership of non-income-producing assets which prevents its carrying on a charitable program commensurate in scope with its financial resources. It is not entitled to exemption. Rev. Rul. 67–5, 1967–1 C.B. 123.

  10. Financial support of other organizations—An organization provides financial assistance to exempt organizations by distributing funds at periodic intervals. It carries on no operations other than to receive contributions and incidental investment income, not accumulated. It is exempt from tax. Rev. Rul. 67–149, 1967–1 C.B. 133.

  11. Private benefit; personal grants—An organization whose sole activity is the operation of a "scholarship fund" plan that makes payments to pre-selected, specifically named individuals, does not qualify for exemption. Rev. Rul. 67–367, 1967–2 C.B. 188.

  12. Commercial drug testing—A nonprofit organization primarily engaged in testing drugs for commercial pharmaceutical companies does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 68–373, 1968–2 C.B. 206.

  13. Pension plan—An organization created pursuant to the will of a stockholder of a company to pay pensions to all retired employees of that company does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 68–422, 1968–2 C.B. 207. See also Rev. Rul. 56–138, 1956–1 C.B. 202.

  14. Financial support of other organizations—An organization will not jeopardize its exemption even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for IRC 501(c)(3) purposes. Rev. Rul. 68–489, 1968–2 C.B. 210.

  15. Permissible benefits—A charitable organization’s exemption from tax will not be affected by purchasing securities from its creator (and sole trustee) at the price he paid for them and reselling them at a profit. Rev. Rul. 69–39, 1969–1 C.B. 148.

  16. School bus transportation—A nonprofit organization formed by parents of pupils attending a private school that provides school bus transportation for its members’ children serves a private rather than a public interest. Rev. Rul. 69–175, 1969–1 C.B. 149.

  17. Deferred or retained interests—The exempt status of an organization is not affected by the acceptance of an income-producing asset subject to a reserved life estate in the transferor or in exchange for an annuity specifically charged against the asset. Rev. Rul. 69–176, 1969–1 C.B. 150.

  18. Perpetual care—A testamentary trust established to make annual payments to exempt charitable organizations and to use a fixed sum from annual income for the perpetual care of the testator’s burial lot is not exempt under IRC 501(c)(3). Rev. Rul. 69–256, 1969–1 C.B. 150.

  19. Private benefit—An organization, formed and controlled by a medical doctor to conduct research programs consisting of examining and treating patients who are charged the prevailing fees for services rendered, is not exempt under IRC 501(c)(3). Rev. Rul. 69–266, 1969–1 C.B. 151.

  20. Private benefit—An irrevocable inter vivos trust which provides that a fixed percentage of income must be paid annually to the settlor with the balance to charity is organized and operated for private interests. Rev. Rul. 69–279, 1969–1 C.B. 152.

  21. Hospital specialist—The exempt status of a hospital under IRC 501(c)(3) will not be jeopardized where, after arms’ length negotiations, it enters into an agreement with a hospital based specialist for compensation on the basis of a fixed percentage of the departmental income. Rev. Rul. 69–383, 1969–2 C.B. 113. See also Rev. Rul. 69–545, 1969–2 C.B. 117.

  22. Hospital; office building leased to medical group—The leasing of its adjacent office building, and the furnishing of certain services, by an exempt hospital to a hospital-based medical group is not unrelated trade or business. Rev. Rul. 69–463, 1969–2 C.B. 131.

  23. Financial support of other organizations—A nonprofit organization, created to construct and maintain a building for the exclusive purpose of housing and serving exempt member agencies of a community chest, may be exempt. The performance of a particular activity that is not inherently charitable may nonetheless further a charitable purpose. The overall result in any given case is dependent on why and how that activity is actually being conducted. Rev. Rul. 69–572, 1969–2 C.B. 119.

  24. Industrial association—A nonprofit organization composed of members of a particular industry to develop a new and improved use for existing products of the industry is not exempt under IRC 501(c)(3) but may qualify under IRC 501(c)(6). Rev. Rul. 69–632, 1969–2 C.B. 120.

  25. Resource conservation—A nonprofit organization formed to preserve and improve a lake used extensively as a public recreational facility qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–186, 1970–1 C.B. 128.

  26. Day care center—A children’s day-care center that is primarily funded by Federal grants and is not restricted to children of employees of the sponsoring employer but instead is open to members of the community and selects children on the basis of financial needs and children’s needs, is exempt under IRC 501(c)(3). Rev. Rul. 70–533, 1970–2 C.B. 112.

  27. Cooperative art gallery—A cooperative art gallery formed and operated by a group of artists for the purpose of exhibiting and selling their works does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 71–395, 1971–2 C.B. 228.

  28. City Bar Association—A city bar association exempt under IRC 501(c)(6) that primarily directs its activities to the promotion and protection of the practice of law may not be reclassified as an educational or charitable organization under IRC 501(c)(3). Rev. Rul. 71–505, 1971–2 C.B. 232.

  29. Low income housing—An organization formed to provide low income housing to families but giving preference for housing to employees of a farm proprietorship operated by the individual who created and controls the organization does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 72–147, 1972–1 C.B. 147.

  30. Business benefits; legal aid—An organization formed to provide legal services for low income residents of economically depressed communities is exempt as a charitable organization under IRC 501(c)(3). Rev. Rul. 72–559, 1972–2 C.B. 247.

  31. Medical peer review—A nonprofit organization formed by members of a State medical association to operate medical peer review boards is primarily furthering the common business interests of members and exempt under IRC 501(c)(6) but not exempt under IRC 501(c)(3). Rev. Rul. 74–553, 1974–2 C.B. 168. See also Rev. Rul. 73–567, 1973–2 C.B. 178.

  32. Law library—An organization operating a law library whose rules limit use to members of a local bar association composed of substantially all of the members of the legal profession in the municipality qualifies for exemption under IRC 501(c)(3). Rev. Rul. 75–196, 1975–1 C.B. 155.

  33. Hospitals; purchase of intangible assets by related organization—The purchase, in a transaction not at arm’s length, of all the assets of a profit-making hospital by a nonprofit hospital corporation at a price that includes the value of intangible assets, determined by the capitalization of excess earnings formula by an independent appraiser, does not result in the inurement of the hospital’s net earnings to the benefit of any private shareholder or individual or serve a private interest precluding exemption. Rev. Rul. 76–91, 1976–1 C.B. 149.

  34. Educational; for-profit school converted to nonprofit school—An organization that purchases or leases at fair market value the assets of a former for-profit school and employs the former owners, who are unrelated to the current directors, at salaries commensurate with their responsibilities, is operated exclusively for educational and charitable purposes. An organization that takes over a school’s assets and its liabilities, which exceed the value of the assets and include notes owed to the former owners and current directors of the school, is serving the directors’ private interests and is not operated exclusively for educational and charitable purposes. Rev. Rul. 76–441, 1976–2 C.B. 147

  35. Testing cargo containers—An organization that inspects and certifies the safety of cargo shipping containers is not operated exclusively for the purposes of testing for public safety or for scientific purposes. Rev. Rul. 78–426, 1978–2 C.B. 175. Rev. Rul. 65–61 distinguished.

  36. Benefit to founder, rent-free facility—In an IRC 7428 action, the Tax Court upheld the Service’s determination that the organization, whose secondary purpose was promotion of the (hand) papermaking industry, was not described in IRC 501(c)(3). The organization also provided rent-free facilities to the founder, although the founder received no compensation for his work with the organization. The Service had determined that promotion of the papermaking industry was a substantial non-exempt purpose and that the organization provided private benefit to the founder. The court ruled that the organization had not carried its burden of proof to show the Service’s determination was erroneous. The Church of the Living Tree v. Commissioner, T.C. Memo 1996–291 (1996).

Attempting to Influence Legislation

  1. IRC 501(c)(3) expressly limits the amount of lobbying an organization can do without jeopardizing exempt status, providing "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation…"

    1. The limitation on the lobbying activities of IRC 501(c)(3) organizations was added to the statute by the Revenue Act of 1934. The legislative history is sparse.

  2. In Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983), the Supreme Court addressed the question of whether the IRC 501(c)(3) restriction on lobbying violates constitutional guarantees. The Court unanimously held that the IRC 501(c)(3) restriction on lobbying activities violates neither the freedom of speech guarantee of the First Amendment nor the equal protection doctrine of the Fifth Amendment. Concerning the First Amendment issue, the Court stated that this aspect of the case was controlled by its decision in Cammarano v. United States, 358 U.S. 498 (1959). In Cammarano, the Court upheld a Treasury Regulation (antecedent to the passage of IRC 162(e)), that denied business expense deductions for lobbying activities.

  3. As to TWR’s equal protection claim, the Court stated that the general rule of statutory classifications is that such classifications are valid if they bear a rational relation to a legitimate governmental purpose, and that "[l]egislatures have especially broad latitude in creating classifications and distinctions in tax statutes." 461 U.S. at 547. The Court noted that while statutes are subject to a higher level of scrutiny if they interfere with the exercise of a fundamental right, such as freedom of speech, the IRC 501(c)(3) legislative restriction does not infringe upon freedom of speech; therefore, the statutory distinction in treatment of IRC 501(c)(3) and IRC 501(c)(19) organizations need only have a rational basis. The Court found such a basis.

    1. Regan v. Taxation with Representation of Washington was foreshadowed by Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972); cert. denied, 414 U.S. 864 (1973), where the Tenth Circuit dismissed a claim that the IRC 501(c)(3) prohibition on lobbying and political activities was an unconstitutional restriction on the organization’s freedom of speech.

  4. Reg. 1.501(c)(3)–1(c)(3) state that an organization is not operated exclusively for exempt purposes if it is an "action" organization. The term "action organization" describes both organizations that attempt to influence legislation and organizations that intervene in political campaigns, which are discussed in IRM 7.25.3.17.

  5. The two kinds of legislative action organizations are:

    1. An organization that attempts to influence legislation as a substantial part of its activities. Reg. 1.501(c)(3)–1(c)(3)(ii) provides that an organization will be regarded as attempting to influence legislation if it: contacts or urges the public to contact members of a legislative body for the purpose of proposing, supporting, or opposing legislation, or advocates the adoption or rejection of legislation.

    2. An organization with the two characteristic set out in Reg. 1.501(c)(3)–1(c)(3)(iv): its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation; and it advocates, or campaigns for, the attainment of such main or primary objective or objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results thereof available to the public. In determining whether an organization has such characteristics, all the surrounding facts and circumstances, including the articles and all activities of the organization, are to be considered.

Attempts to Influence Legislation

  1. Attempts to influence legislation are not limited to direct appeals to members of the legislature (direct lobbying). Indirect appeals to legislators through the electorate or general public (indirect or "grass roots" lobbying) also constitute attempts to influence legislation. Both direct and indirect lobbying are nonexempt activities subject to the IRC 501(c)(3) limitation on substantial legislative action.

    1. Whether a communication or an appeal constitutes an attempt to influence legislation is determined on the basis of the facts and circumstances surrounding the communication in question.

    2. For IRC 501(c)(3) purposes, the distinction between direct and indirect lobbying becomes important for public charities making the IRC 501(h) lobbying election. (Discussed at IRM 7.25.3.17.2) There are separate limits for total lobbying—IRC 4911(c)(2) lobbying nontaxable amount—and for indirect Iobbying—IRC 4911(c)(4) grassroots nontaxable amount.

    3. In addition, certain communications made by an IRC 501(c)(3) organization to its members (described in IRC 4911(d)(2)(D)) are not considered attempts to influence legislation, while other communications to members (described in IRC 4911(d)(3)) are considered lobbying.

  2. Attempting to influence legislation includes requesting that an executive body support or oppose legislation. See, Rev. Rul. 67–293, 1967–2 C.B. 185, Roberts Dairy Company v. Commissioner, 195 F.2d 948 (8th Cir. 1952), cert. denied, 344 U.S. 865 (1952). American Hardware and Equipment Company v. Commissioner, 202 F.2d 126 (4th Cir. 1953), cert. denied, 346 U.S. 814 (1953).

  3. Attempting to influence legislation does not include appearing before a legislative committee in response to an official request for testimony.

    1. Rev. Rul. 70–449, 1970–2 C.B. 111, held that a university’s exemption would not be jeopardized when, in response to an official request, it sent representatives who could advise a congressional committee on the possible effects of specific legislation.

  4. The legislative restriction applies to activities undertaken by the organization itself. Thus in Rev. Rul. 72–513, 1972–2 C.B. 246, the legislative activities of a student newspaper did not jeopardize the exemption of the sponsoring university.

  5. Study, research, and discussion of matters pertaining to government and even to specific legislation, may, under certain circumstances, be educational activities rather than attempts to influence legislation. This is so where the study, research, and discussion do not serve merely as a preparatory stage for the advocacy of legislation. (Of course, the primary inquiry is the purpose of the study, research, or discussion.)

    1. In Rev. Rul. 64–195, 1964–2 C.B. 138, and Rev. Rul. 70–79, 1970–1 C.B. 127, a nonprofit organization was held exempt under IRC 501(c)(3) when it engaged in non-partisan study, research, and assembly of materials on prospective court reform legislation and disseminated those materials to the public.

    2. Compare, however, Rev. Rul. 62–71, 1962–1 C.B. 185, which precludes exemption to an organization that, as its primary objective, advocates the adoption of a doctrine or theory that can become effective only by the enactment of legislation.

"Legislation" Defined
  1. Reg. 1.501(c)(3)–1(c)(3)(ii) provides that legislation includes: "... action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure."

  2. The term legislation includes foreign as well as domestic laws. Rev. Rul. 73–440, 1973–2 C.B. 177.

  3. Notice 88–76, 1988–27 I.R.B. 34, clarifies that attempts to influence the confirmation of a federal judicial nominee by the Senate is attempting to influence legislation.

  4. IRC 501(c)(3) does not distinguish between "good" legislation and "bad" legislation. For example, Rev. Rul. 67–293, 1967–2 C.B. 185, holds that an organization substantially engaged in promoting legislation to protect or otherwise benefit animals is not exempt under IRC 501(c)(3) even though the legislation it advocates may be beneficial to the community. Similarly, see Murray Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955); John F. Dulles, Exr. v. Johnson, 273 F. 2d 362 (2nd Cir. 1959).)

    1. Although there is contrary precedent, the majority of courts have held that it is not necessary or possible to distinguish between good and bad legislation. This is in accord with the traditional view dating back many years and now reenforced by dicta of the Supreme Court in Cammarano et ux. v. United States, 358 U.S. 498, 512 (1959), to the effect that the statutory restriction on attempts to influence legislation simply "made explicit" a longstanding judicial principle that "political agitation as such is outside the statute, however innocent the aim."

    2. Direct holdings include League of Women Voters of the United States v. United States, 180 F. Supp. 379 (Ct. CI. 1960), cert. denied, 364 U.S. 822 (1960), and Alan B. Kuper v. Commissioner, 332 F.2d 562 (3rd Cir. 1964), cert. denied, 379 U.S. 920 (1964)).

"Substantial" Defined—No Election Made Under IRC 501(h)
  1. Attempts to influence legislation that are less than a substantial part of the organization’s activities will not deprive it of exemption. Whether a specific activity of an exempt organization constitutes a "substantial" portion of its total activities is a factual issue, and there is no simple rule as to what amount of activities is substantial.

    1. The earliest case on this subject, Seasongood v. Commissioner, supra, held that attempts to influence legislation that constituted five percent of total activities were not substantial.

    2. Seasongood provides only limited guidance because the court’s view of activities to measure is no longer supported by the weight of precedent. Further, it is not clear how the court arrived at the five percent figure.

  2. Most courts have not attempted to measure activities by percentage or have stated that a percentage test is not conclusive.

    1. In Christian Echoes National Ministry v. United States, 470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1973), at 855, the court explicitly rejected using a percentage test to determine whether lobbying activities were substantial, stating "[a] percentage test to determine whether the activities were substantial obscures the complexity of balancing the organization’s activities in relation to its objectives and circumstances."

    2. In Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert, denied, 419 U.S. 1107 (1975), the court used percentage figures to find that an organization’s lobbying activities comprised between 16.6 percent to 20.5 percent of its expenditures in the years in issue. The court concluded that the organization was substantially engaged in lobbying activities. Although the court said that a percentage test is not the only measure of substantiality, it held that in this case the results of such a test were a strong indication that the organization’s purposes were no longer consistent with charity.

  3. Supporting activities, for example, research, must be analyzed to determine if they should be included with attempts to influence legislation. This can be difficult where the activity also serves educational purposes.

    1. In League of Women Voters of the United States v. United States, supra; and Alan B. Kuper v. Commissioner, supra, the courts held that attempts to influence legislation may begin before an organization first addresses itself to the public or to the legislature. Accordingly, they considered time spent discussing public issues, formulating and agreeing on positions, and studying them preparatory to adopting a position, and compared that time with the other activities in determining the substantiality of the attempts to influence legislation.

  4. A private foundation may be liable for Chapter 42 excise taxes on its legislative expenditures under IRC 4945 even though the attempts by an organization to influence legislation have been determined to be insubstantial and the organization’s exemption is not jeopardized by the legislative activity.

  5. For years beginning after December 22, 1987, certain organizations whose IRC 501(c)(3) status is revoked because of substantial lobbying activities are subject to a five-percent excise tax imposed by IRC 4912 on their lobbying expenditures. IRC 4912 also imposes a similar tax at the same rate on any manager of the organization who willfully and without reasonable cause consented to making the lobbying expenditures knowing the expenditures would likely result in the organization’s no longer qualifying under IRC 501(c)(3). There is no limit on the amount of this tax that may be imposed against either the organization or its managers.

  6. The IRC 4912 taxes do not apply to private foundations, which are subject to the tax imposed by IRC 4945. Nor do they apply to any organization that has elected to be subject to the lobbying limitations of IRC 501(h), or is not eligible to make the IRC 501(h) election (churches and certain church-related organizations).

"Substantial" Defined for Organizations That Elect Under IRC 501(h)
  1. To establish more precise standards for determining whether an IRC 501(c)(3) exempt organization’s legislative activities are substantial, Congress enacted IRC 501(h) as part of the Tax Reform Act of 1976. (P.L. 94–455). Eligible public charities (listed in IRC 501(h)(4)) may elect the IRC 501(h) substantiality test. Non-electing organizations (whether eligible or not) will be subject to the ordinary facts and circumstances substantiality test of IRC 501(c)(3).

    Note:

    The IRC 501(h) substantiality test applies for taxable years beginning after December 31, 1976.

  2. On November 5, 1986, a Notice of Proposed Rulemaking (1986 NPRM), containing proposed regulations implementing IRC 501(h) and IRC 4911, was published in the Federal Register. Controversy ensued, particularly over the definition of grass roots lobbying and the allocation rules. The Service and Congress received more than ten thousand letters from charities and their members requesting withdrawal of the proposed regulations. These comments were generated by concerns that the regulations were overly restrictive and would have a "chilling effect" on charities’ involvement in the policy making process.

  3. The Service did not withdraw the 1986 proposed regulations, but publicly stated in an information release, IR–87–49 (April 9, 1987), that it would reconsider key portions of the regulations. Two days of public hearings were held in 1987. In June 1987, the Service announced the establishment of a Commissioner’s Exempt Organizations Advisory Group (as had been suggested by Rep. Dan Rostenkowski, Chairman of the Committee on Ways and Means). At public meetings held on September 17, 1987, and February 26, 1988, possible revisions to the 1986 proposed regulations were discussed with this Advisory Group. Substantial revisions to the regulations were published in proposed form in 1988.

    1. In contrast to the reception accorded the 1986 proposed regulations, the publication of the 1988 proposed regulations resulted in less than 100 written comments. The comments were almost uniformly favorable. The 1988 proposed regulations were discussed with the Commissioner’s Exempt Organizations Advisory Group at a public meeting held on January 10, 1989, and a formal public hearing was held on April 3, 1989.

  4. The final regulations were published in T.D. 8308, 55 FR 35579 (Aug. 31, 1990), and contained few technical changes from the 1988 proposed regulations. They were made effective as of the date of publication.

  5. IRC 501(h) establishes a sliding scale of permissible "lobbying non-taxable amounts" . Nontaxable amounts are computed for both total and grass roots lobbying. Nontaxable amounts are deemed insubstantial, and expenditures under the nontaxable amounts will result in neither tax nor revocation. Expenditures in excess of the nontaxable amounts are called "excess lobbying expenditures" . An excise tax under IRC 4911 is imposed on lobbying expenses that exceed permissible non-taxable amounts. If lobbying expenditures exceed both the permitted total lobbying amount and the grass roots amount, the IRC 4911 tax is imposed on whichever excess is greater.

    Note:

    "Affiliated" organizations are treated as one for purposes of lobbying expenditures.

  6. IRC 4911(a)(2) provides that, for purposes of IRC 4911, the term "excess lobbying expenditures" for a taxable year means the greater of the following amounts:

    1. The amount by which the lobbying expenditures made by the organization during the taxable year exceed the lobbying nontaxable amount for such organization during such taxable year, or

    2. The amount by which the grass roots expenditures made by the organization during the taxable year exceed the grass roots nontaxable amount for such organization for such taxable year.

  7. IRC 4911(c)(2) provides that the nontaxable amount of lobbying expenditures is the lesser of $1,000,000 or an amount determined under a sliding scale, set forth in the statute, of percentage of exempt purpose expenditures. The nontaxable amount of grassroots lobbying expenditures is 25 percent of the nontaxable amount of lobbying expenditures.

  8. If an IRC 501(c)(3) organization engages in lobbying activities, and if it has elected to be covered by the provisions of IRC 501(h), lobbying may cause revocation of its exempt status only if the amounts spent on such lobbying "normally" exceed 150 percent of either of the permissible amounts over a base period, or grass roots expenditures exceed 150 percent of the grassroots lobbying nontaxable amount for the base years. Therefore, the tests of whether an organization is an "action" organization, set forth in Reg. 1.501(c)(3)–1(c)(3) and described below, should not be used to determine whether an organization that has made the IRC 501(h) election has engaged in substantial lobbying activities.

    Note:

    Reg. 1.501(h)–3(c)(7) provides that in general, the term "base years" means the determination year and the three taxable years immediately preceding the determination year. The base years, however, do not include any taxable year preceding the taxable year for which the organization is first treated as described in IRC 501(c)(3).

  9. Reg. 1.501(h)–3(b)(2), however, provides a special exception for an organization’s first election. Under this exception, for the first, second, or third consecutive determination year for which an organization’s first expenditure test election is in effect, the organization will not be denied exemption from tax by reason of IRC 501(h) if, taking into account as base years only those years for which the expenditure test election is in effect the following conditions are met:

    1. The sum of the organization’s lobbying expenditures for such base years does not exceed 150 percent of the sum of its lobbying nontaxable amounts for the same base years; and

    2. The sum of the organization’s grass roots expenditure for those base years does not exceed 150 percent of the sum of its grass roots nontaxable amounts for such base years.

  10. IRC 504 provides that IRC 501(c)(4) status is precluded (after October 3, 1976), for organizations once described as public charities (except for churches, conventions of churches, etc.), but no longer described as public charities because of excessive lobbying.

  11. IRC 504(b) authorized the Secretary of the Treasury to prescribe regulations to prevent avoidance of this rule, including avoidance by transferring all or part of the assets of an IRC 501(c)(3) organization to an organization that is controlled by the same persons who control the IRC 501(c)(3) organization. These regulations are set forth in Reg. 1.504–2.

  12. In determining whether an organization has attempted to avoid IRC 504 by transferring any of its assets, the term "transfer" includes any use by, or for the benefit of, the recipient, except transfers made for adequate and full consideration. Generally, a transfer that involves the following five elements will cause loss of exemption to the recipient:

    1. The transfer is from an IRC 501(c)(3) organization that is determined to be an "action" organization or is denied exemption by IRC 501(h);

    2. At the time of the transfer or at any time during the recipient’s next ten taxable years, the recipient is controlled (directly or indirectly) by the same persons who control the transferor;

    3. The transfer is made (1) after the date that is 24 months before the earliest of the effective date of the determination IRC 501(h) that the transferor is not exempt, the effective date of the Commissioner’s determination that the transferor is an "action" organization, or the date on which the Commissioner proposes to treat it as no longer described in IRC 501(c)(3), and (2) before the transferor again is recognized as an organization described in IRC 501(c)(3);

    4. The recipient is exempt from tax under IRC 501(a) but is neither an organization described in IRC 501(c)(3), nor a qualified pension plan described in IRC 401(a) to which the transferor contributes as an employer; and

    5. The amount of the transfer exceeds the lesser of 30 percent of the net fair market value of the transferor’s assets or 50 percent of the net fair market value of the recipient’s assets, computed immediately before the transfer.

Exempt Purpose Expenditures for Organizations That Elect Under IRC 501(h)

  1. Reg. 56.4911–4 provides rules under IRC 4911(e) for determining an electing public charity’s "exempt purpose expenditures." The regulation also provides that, in determining exempt purpose expenditures, no expenditure shall be counted twice by an organization.

  2. Under Reg. 56.4911–4(b), amounts paid or incurred by an organization that are exempt purpose expenditures include the following:

    1. Amounts paid or incurred to accomplish a purpose enumerated in IRC 170(c)(2)(B) including certain transfers made by the organization;

    2. Amounts paid or incurred as current or deferred compensation for an employee’s services in connection with an IRC 170(c)(2)(B) purpose;

    3. The allocable portion of administrative overhead and other general expenditures attributed to accomplishing IRC 170(c)(2)(B) purposes;

    4. All lobbying expenditures;

    5. Amounts paid or incurred for activities that are not considered lobbying because they are described in Reg. 56.4911–2(c), e.g., nonpartisan analysis, study, and research, or member communications described in Reg. 56.4911–5 that are not lobbying expenditures;

    6. A reasonable allowance for exhaustion, wear and tear, obsolescence or amortization, of assets to the extent used for one or more of the above purposes computed on a straight-line basis; and

    7. Certain fund-raising expenditures (but see IRC 4911(e)(1)(C) and Reg. 56.4911–4(c)(3) and Reg. 56.4911–4(c)(4)).

  3. There are two types of transfers that will be treated as an exempt purpose expenditure:

    1. a transfer made to an organization described in IRC 501(c)(3) in furtherance of the transferor’s exempt purposes that is not earmarked for any purpose other than one described in IRC 170(c)(2)(B). Therefore, a payment of dues by a local or state organization to, respectively, a state or national organization that is described in IRC 501(c)(3) is considered an exempt purpose expenditure of the transferor to the extent it is not otherwise earmarked. Reg. 56.4911–4(d)(2).

    2. a "controlled grant," but only to the extent of the amounts that are paid or incurred by the transferee that would be exempt purpose expenditures if paid or incurred by the transferor. Reg. 56.4911–4(d)(3).

Expenditures That Are Not Exempt Purpose Expenditures for Organizations That Elect Under IRC 501(h)
  1. Under Reg. 56.4911–4(c), exempt purpose expenditures do not include the following types of expenditures:

    1. Amounts paid or incurred that are not described in Reg. 56.4911–4(b);

    2. The amounts of any transfer described in Reg. 56.4911–4(e);

    3. Amounts paid to or incurred for a "separate fund raising unit" of the organization or of an affiliated organization;

    4. Amounts paid to or incurred for any person not an employee, or any organization not an affiliated organization, if paid or incurred primarily for fund raising, but only if such person or organization engages in fund-raising, fund-raising counseling or the provision of similar advice or services;

    5. Amounts paid or incurred chargeable to a capital account, determined in accordance with the principles that apply under IRC 263 or IRC 263A, with respect to an unrelated trade or business;

    6. Amounts paid or incurred for a tax that is not imposed in connection with the organization’s efforts to accomplish an IRC 170(c)(2)(B) purpose, such as taxes imposed under IRC 511(a)(1) and IRC 4911(a); and

    7. Amounts paid or incurred for the production of income.

  2. Reg. 56.4911–4(e) provides that three types of transfers cannot be considered exempt purpose expenditures:

    1. a transfer made to a member of any affiliated group (as defined in Reg. 56.4911–7(e)) of which the transferor is a member. Reg. 56.4911–4(e)(2).

    2. a transfer that the Commissioner determines artificially inflates the amount of the transferor’s or transferee’s exempt purpose expenditures. The regulation provides that this determination generally will be made if a substantial purpose of a transfer is to inflate those exempt purpose expenditures. When this determination is made, the transfer will not be considered an exempt purpose expenditure of the transferor; rather, it will be an exempt purpose expenditure of the transferee to the extent that the transferee expends the transfer in the active conduct of its charitable activities or attempts to influence legislation. Standards similar to those found in Reg. 53.4942(b)–1(b) (relating to operating foundations) may be applied in determining whether the transferee has expended amounts in the "active conduct" of its charitable activities or attempts to influence legislation. Reg. 56.4911–4(e)(3).

    3. a transfer that is not a "controlled grant" and is made to an organization not described in IRC 501(c)(3) that does not attempt to influence legislation. Reg. 56.4911–4(e)(4).

  3. Costs incurred by volunteers in carrying on grass roots lobbying (e.g., going door-to-door to seek signatures for petitions to be sent to legislators in favor of a specific bill) are not lobbying or exempt purpose expenditures made by the organization.

    1. Further, the volunteers may not deduct their out-of-pocket expenditures. See IRC 170(f)(6).

    2. However, the organization’s costs of soliciting the volunteers’ help and its costs of training the volunteers are grass roots expenditures, as are the costs of preparing, copying, distributing, etc., the petitions and any other materials on the same specific subject used in the door-to-door signature gathering effort.

Lobbying Expenditures

  1. For public charities that elect to be covered by IRC 501(h), lobbying expenditures are expenditures made for the purpose of influencing legislation (as defined in IRC 4911(d)). IRC 501(h)(2)(A). An electing public charity’s lobbying expenditures for a year are the sum of its expenditures during that year for direct lobbying communications ( "direct lobbying expenditures" ) plus its expenditures during that year for grass roots lobbying communications ( "grass roots expenditures" ).

Direct Lobbying
  1. "Direct" lobbying involves attempts to influence legislation through communication with any member or employee of a legislative body. It also involves attempts to influence legislation through communication with any government official or employee (other than a member or employee of a legislative body) who may participate in the formulation of the legislation, but only if the principal purpose of the communication is to influence legislation. IRC 4911(d)(1)(B); Reg. 56.4911–2(b)(1)(i).

  2. A communication with a legislator or government official will not be treated as a direct lobbying communication in accordance with Reg. 56.4911–2(b)(1) unless it both:

    • refers to "specific legislation" ; and

    • reflects a view on such legislation.

  3. Therefore, a position letter on a pending bill prepared by an organization’s employee and distributed to members of Congress or personal contacts by the employee with members of Congress or their staffs to seek support for the organization’s position on the bill would constitute direct lobbying. Reg. 56.4911–2(b)(4)(i), Example (1).

  4. In contrast, a letter sent to a member of Congress requesting that he or she write an administrative agency regarding proposed regulations recently published by that agency and also requesting that she state her support for a particular type of permit granted by the agency is not a direct lobbying communication. Reg. 56.4911–2(b)(4)(i), Example (2).

  5. Similarly, sending a paper to a state legislator on a particular state’s environmental problems that does not reflect a view on any specific legislation that the organization either supports or opposes likewise is not a direct lobbying communication. Reg. 56.4911–2(b)(4)(i), Example (3).

Grass Roots Lobbying
  1. "Grass roots" lobbying is the attempt to influence legislation by affecting the opinions of the general public or any segment of the public. IRC 4911(d)(1)(A); Reg. 56.49 11–2(b)(2)(i).

  2. Reg. 56.4911–2(b)(2)(ii) sets forth a three-part test for determining whether communications with the general public will be treated as grass roots lobbying communications. The communication will be considered a grass roots lobbying communication only if it meets all three of the following requirements:

    1. The communication refers to specific legislation;

    2. The communication reflects a view on such legislation; and

    3. The communication encourages the recipient of the communication to take action with respect to such legislation.

  3. The third element (requiring the communication to encourage the recipient to take action) is commonly referred to as the "call to action" requirement. Essentially, what this requirement means is that no matter how clearly an organization identifies the specific legislation and comments on the merits of that legislation (for example, "passage of S. 549 would mean the end of civilization as we know it" ) when it communicates with the general public, the absence of any further statement that encourages the recipient to take action would mean that the communication could not be considered a grass roots lobbying communication.

  4. Reg. 56.4911–2(b)(2)(iii) provides a definition of encouraging a recipient to take action with respect to legislation. To be considered a "call to action," a communication must do any one of the following:

    1. state that the recipient should contact an individual described in Reg. 56.4911–2(b)(1)(i);

    2. state the address, telephone number, or similar information of a legislator or an employee of a legislative body;

    3. provide a petition, tear-off postcard or similar material for the recipient to communicate with any individual described in Reg. 56.4911–2(b)(1)(i); or

    4. specifically identify one or more legislators who will vote on the legislation as: opposing the organization’s view with respect to the legislation; being undecided with respect to the legislation; being the recipient’s representative in the legislature; or being a member of the legislative committee or subcommittee that will consider the legislation. Merely naming the main sponsor(s) of the legislation for purposes of identifying the legislation will not constitute encouraging the recipient to take action.

  5. Unless a communication with the general public meets all three of the Reg. 56.4911–2(b)(2)(ii) requirements, it will not be a grass roots lobbying communication.

  6. In certain cases, a communication that does meet all three of the requirements may not be a grass roots lobbying communication. Reg. 56.4911–2(b)(1)(iii) provides that, solely for purposes of IRC 4911, where a communication refers to and reflects a view on a measure that is the subject of a referendum, ballot initiative or similar procedure, the general public in the State or locality where the vote will take place constitutes the legislative body, and individual members of the general public are considered legislators. Accordingly, if such a communication is made to one or more members of the general public in that state or locality, the communication is a direct lobbying communication (unless it comes under the exception for nonpartisan analysis, study or research.

Legislation
  1. Reg. 56.4911–2(d)(1)(i) provides that "legislation" includes action by the Congress, any state legislature, any local council, or similar legislative body, or by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure.

  2. "Legislation" includes a proposed treaty required to be submitted by the President to the Senate for its advice and consent from the time the President’s representative begins to negotiate its position with the prospective parties to the proposed treaty.

  3. Under Reg. 56.4911–2(d)(1)(ii), "specific legislation" includes both legislation that has already been introduced in a legislative body and specific legislative proposals that the organization either support or oppose.

    1. In the case of a referendum, ballot initiative, constitutional amendment, or other measure that is placed on the ballot by petitions signed by a required number or percentage of voters, an item becomes "specific legislation" when the petition is first circulated among voters for signature.

  4. Before amendment in 1990, the regulations under IRC 4945 provided that "attempts to influence legislation" included communications "with respect to legislation being considered by, or to be submitted imminently to, a legislative body." Reg. 53.4945–2(a)(1) (1990). When the regulations under IRC 4911 were finalized, the standard "to be submitted imminently" was not used in Reg. 56.4911–2(d)(1)(ii) and it was deleted from the IRC 4945 regulations. As the Preamble to the regulations explains, a temporal standard is inappropriate and underinclusive given the nature of the legislative process.

    Example:

    long before many specific legislative proposals are formally introduced as a bill, they are subject to intensive scrutiny, debate, and controversy. Also, effective lobbying could prevent a bill from ever being introduced. Consequently, reference to legislation proposed or adopted in one state that urges its adoption in another state constitutes a specific legislative proposal in the other state even though no such bill has been introduced there. Reg. 56.4911–2(d)(1)(iii), Example (2).

  5. Legislation may be identified either by its formal name or by a term that has been widely used in connection with specific pending legislation,e.g., "the President’s plan for a drug-free America." Reg. 56.4911–2(b)(4)(ii)(B), Example (1).

  6. Legislation may also be identified merely by its content and effect. See Reg. 56.4911–2(d)(1)(iii), Example (1).

Organizations Eligible to Elect Under IRC 501(h)

  1. IRC 501(h)(3) provides that the provisions of IRC 501(h) will apply to any eligible IRC 501(c)(3) organization that has elected to have those provisions apply.

  2. To be eligible to make the IRC 501(h) election, the IRC 501(c)(3) organization must be an organization described in IRC 501(h)(4) and it must not be a disqualified organization described in IRC 501(h)(5).

  3. The IRC 501(c)(3) organizations described in IRC 501(h)(4) are as follows:

    1. Educational institutions as described in IRC 170(b)(1)(A)(ii);

    2. Hospitals and medical research organizations as described in IRC 170(b)(1)(A)(iii);

    3. Organizations that support government schools as described in IRC 170(b)(1)(A)(iv);

    4. Organizations publicly supported by charitable contributions as described in IRC 170(b)(1)(A)(vi);

    5. Organizations publicly supported by admissions, sales, etc. related to their exempt purpose as described in IRC 509(a)(2); and

    6. Organizations that are public charities because they are a supporting organization described in IRC 509(a)(3) of an IRC 501(c)(3) organization that is described in IRC 509(a)(1) or IRC 509(a)(2).

Organizations Not Eligible to Elect Under IRC 501(h)
  1. IRC 501(c)(3) organizations may not elect to be covered by the provisions of IRC 501(h) if they are not described under IRC 501(h)(4) or if they are disqualified under IRC 501(h)(5).

  2. The organizations that are ineligible to make an IRC 501(h) election are as follows:

    1. Churches or conventions or associations of churches as described in IRC 170(b)(1)(A)(i);

    2. Integrated auxiliaries of a church or convention or association of churches (IRC 508(c) and IRC 6033);

    3. Organizations described in IRC 501(c)(3) and affiliated with at least one church or convention or association of churches or an integrated auxiliary (an "affiliated group" within the meaning of IRC 4911(f)(2));

    4. Organizations that are public charities because they are a supporting organization described in IRC 509(a)(3) of certain organizations exempt under IRC 501(c)(4), IRC 501(c)(5), or IRC 501(c)(6);

    5. Organizations engaged in testing for public safety and thus described in IRC 509(a)(4); and

    6. Private foundations.

How IRC 501(h) Election is Made
  1. An eligible organization makes the election under IRC 501(h) by filing the Form 5768. Under IRC 501(h)(6), the election is effective with the beginning of the taxable year in which the Form 5768 is filed.

    Example:

    an eligible organization with the calendar year as its taxable year files Form 5768 making the IRC 501(h) election on December 31, 1996. The organization’s IRC 501(h) election is effective for its taxable year beginning January 1, 1996.

  2. Once the IRC 501(h) election is made, Reg. 1.501(h)–2(a) provides that it is effective (without again filing Form 5768) for each succeeding taxable year for which the organization is an eligible organization and which begins before a notice of revocation is filed.

  3. A newly created organization may submit Form 5768 to elect the expenditure test under IRC 501(h) at the time it submits its Form 1023, Application for Recognition of Exemption.

    1. If the organization is determined to be eligible under IRC 501(h), the election will be effective with the beginning of the taxable year in which the Form 5768 is filed.

    2. If the organization is determined by the Service not to be eligible to make an IRC 501(h) election, Reg. 1.501(h)–2(c) provides that the election will not be effective and the substantial part test will apply from the effective date of its IRC 501(c)(3) classification.

Revocation of IRC 501(h) Election
  1. An organization may voluntarily revoke an expenditure test election by filing a notice of voluntary revocation (Form 5768) with the Ogden Service Center. IRC 501(h)(6)(B) provides that a voluntary revocation is effective with the beginning of the first taxable year after the taxable year in which the notice is filed.

    Example:

    an eligible organization with the calendar year as its taxable year files Form 5768 revoking its IRC 501(h) election on May 31, 1996. The organization’s IRC 501(h) election remains in effect for its taxable year beginning January 1, 1996, but is no longer in effect for its taxable year beginning January 1, 1997.

  2. When an organization voluntarily revokes its election, Reg. 1.501(h)–2(d)(1) provides that the substantial part test of IRC 501(c)(3) (as discussed above) will apply to the organization’s activities in attempting to influence legislation beginning with the taxable year the voluntary revocation is effective.

  3. An organization that voluntarily revokes its election under IRC 501(h) may make the IRC 501(h) expenditure test election again. However, under Reg. 1.501(h)–2(d)(2), the new election may be effective no earlier than the taxable year following the first taxable year for which the voluntary revocation is effective.

  4. Reg. 1.501(h)–2(d)(3) furnishes the following example:

    Example:

    X, an organization whose taxable year is the calendar year, plans to voluntarily revoke its expenditure test election effective beginning with its taxable year 1985. X must file its notice of voluntary revocation on Form 5768 after December 31, 1983, and before January 1, 1985. If X files a notice of voluntary revocation on December 31, 1984, the revocation is effective beginning with its taxable year 1985. The organization may again elect the expenditure test by filing Form 5768. Under Reg. 1.501(h)–2(d)(2), the election may not be made for taxable year 1985. Under Reg. 1.501(h)–2(a), a new expenditure test election will be effective for taxable years beginning with taxable year 1986, if the Form 5768 is filed after December 31, 1985, and before January 1, 1987.

  5. If, while an election under IRC 501(h) by an eligible organization is in effect, the organization ceases to qualify as an eligible organization, its election is automatically revoked.

    1. The revocation is effective at the beginning of the first full taxable year it is determined that the organization is not an eligible organization.

    2. If an organization’s expenditure test election is involuntarily revoked but the organization continues to be described in IRC 501(c)(3), Reg. 1.501(h)–2(e) provides that the substantial part test of IRC 501(c)(3) will apply to the organization’s activities in attempting to influence legislation beginning with the first taxable year the involuntary revocation is effective.

"Action" Organizations

  1. Reg. 1.501(c)(3)–1(c)(3)(i) provides that an organization is not operated exclusively for one or more exempt purposes if it as an "action" organization. An organization is an "action organization" if a substantial part of its activities is attempting to influence legislation by propaganda or otherwise. Reg. 1.501(c)(3)–1(c)(3)(ii).

  2. Reg. 1.501(c)(3)–1(c)(3)(iv) also describes a special kind of "action" organization that has a main or primary objective attainable only by legislation and advocates attainment of that main objective as distinguished from engaging in non-partisan analysis, study, or research. See Rev. Rul. 62–71, supra.

  3. A nonprofit organization formed to implement an orderly change of administration of the office of Governor of a State by assisting the Governor-elect, during the period between his election and inauguration in screening and selecting applicants for State appointive offices and preparing a legislative message and program reflecting the party’s platform and budget, was held to be an "action" organization and did not qualify for exemption. Rev. Rul. 74–117, 1974–1 C.B. 128.

  4. A nonprofit organization that attempts to influence and advocates changes in the laws of a foreign country is an "action" organization within the meaning of Reg. 1.501(c)(3)–1(c)(3), and therefore does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 73–440, 1973–2 C.B. 177.

  5. The Supreme Court, upheld the restriction on lobbying in Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983). An organization contended that the IRC 501(c)(3) restriction on lobbying was unconstitutional on the grounds that it violated both the freedom of speech guarantee of the First Amendment and the equal protection doctrine of the Fifth Amendment. The Court, in a unanimous decision, held the restriction to be constitutional. Concerning the First Amendment issue, the Court held that, in enacting the lobbying restriction, Congress had not infringed on any First Amendment activity, but simply had chosen not to subsidize the lobbying of organizations otherwise described in IRC 501(c)(3). As to the Fifth Amendment claim, which was based on the contention that veterans organizations that qualify for IRC 501(c)(19) exemption and for deductible contributions under IRC 170(c)(3) have no restrictions on their lobbying, whereas IRC 501(c)(3) do, the Court stated that the general rule of statutory classification is that classifications are valid if they bear a rational relation to a legitimate government purpose. It also noted that legislatures have especially broad latitude in creating classifications and distinctions in tax statutes. The Court then found it was not irrational for Congress to decide that, even though it will not subsidize lobbying by charities generally, it will subsidize lobbying by veterans organizations.

Intervention in Political Campaigns

  1. IRC 501(c)(3) precludes exemption for an organization that participates in or intervenes in (including the publishing or distributing of statements) any political campaign on behalf of or in opposition to any candidate for public office. This is an absolute prohibition, with no requirement that the activity be substantial.

Political Activities

  1. Prohibited political activities include, but are not limited to, the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to a candidate. Reg. 1.501(c)(3)–1(3)(iii).

Candidate for Public Office
  1. The term "candidate for public office" means an individual who offers himself, or is proposed by others, as a contestant, for an elective public office, whether such office be national, State or local. Reg. 1.501(c)(3)–1(3)(ii). School board candidates were held to be candidates for public office despite the fact that no candidates were affiliated with any political party. Rev. Rul. 67–71, 1967–1 C.B. 125. Attempting to influence the Senate confirmation of an individual nominated to serve as a federal judge does not constitute intervention or participation in a political campaign within the meaning of IRC 501(c)(3), since a federal judgeship is an appointive office, rather than an elective one. Notice 88–76, 1988–27 I.R.B. 34.

Voter Education Activities
  1. Certain "voter education" activities conducted in a non-partisan manner by an IRC 501(c)(3) organization may not constitute prohibited political activity.

    1. Public forums, conducted by an IRC 501(c)(3) organization in a congressional district during a congressional election campaign in which all legally qualified congressional candidates are invited to participate; topics discussed cover a broad range of issues of interest to the public; questions are prepared and presented by a nonpartisan, independent panel; and each candidate receives an equal opportunity to present his or her views on each issue discussed, do not constitute participation or intervention in any political campaign within the meaning of IRC 501(c)(3). The facts and circumstances establish that both the format and content of the forums are presented in a neutral manner. Rev. Rul. 86–95, 1986–2 C.B. 73.

    2. An organization that annually prepares and makes generally available to the public a compilation of voting records of all Members of Congress on major legislative issues involving a wide range of subjects was held to be exempt under IRC 501(c)(3). The publication contains no editorial opinion, and its contents and structure do not imply approval or disapproval of any Members or their voting records. Rev. Rul. 78–248, 1978–1 C.B. 154, Situation 1.

    3. An organization distributing a questionnaire to all candidates for governor in a particular State was held to be exempt under IRC 501(c)(3). The questionnaire solicits a brief statement of each candidate’s position on a wide variety of issues which are published in a voters guide that is made generally available to the public. Neither the questionnaire nor the voters guide, in content or structure, evidences a bias or preference with respect to the views of any candidate or group of candidates. Rev. Rul. 78–248, 1978–1 C.B. 154, Situation 2.

    4. An IRC 501(c)(3) organization that monitors and reports on governmental activities and developments considered by it to be of important social interest is not participating or intervening in any political campaign when it publishes and distributes a non-partisan newsletter to interested members and others, who together number only a few thousand nationwide. The newsletter is politically non-partisan and consists of congressional incumbents’ voting records on selective issues, along with an expression of the organization’s position on the issues. Publication occurs after congressional adjournment and will not be geared to the timing of any federal election. Rev. Rul. 80–282, 1980–2 C.B. 178.

  2. However, other so-called "voter education" activities may be proscribed by the statute.

    1. An organization that sends a questionnaire to candidates for major public offices and uses the responses to prepare a voters’ guide that is distributed during an election campaign was held not to be exempt under IRC 501(c)(3) since some of the questions evidenced a bias on certain issues. Rev. Rul. 78–248, 1978–1 C.B. 154, Situation 3.

    2. An organization that publishes and distributes to the public a voters’ guide containing voting records of Members of Congress on the single issue of land conservation was held not to be exempt under IRC 501(c)(3) because the emphasis on one area of concern indicates a partisan purpose and constitutes a proscribed political activity. Rev. Rul. 78–248, 1978–1 C.B. 154, Situation 4.

    3. A bar association did not qualify under IRC 501(c)(3) because its practice of rating, and publishing the ratings of, candidates for elective judicial office constituted intervention in a political campaign, although it comprised only a small portion of the association’s total activities, it was clearly in the public interest, and it was conducted on a nonpartisan basis. The Association of the Bar of the City of New York v. Commissioner, 858 F.2d 876, 881 (1988).

Public Discussion of Political Issues
  1. An organization that conducted public forums, lectures, and debates on controversial social, political, and international questions was held to be educational. Although the speakers were frequently controversial, the organization adopted an unbiased position. Rev. Rul. 66–256, 1966–2 C.B. 210.

  2. An organization that operated a broadcasting station was not participating in political activities by providing reasonable air time equally available to all legally qualified candidates for election to public office in compliance with the Federal Communications Act of 1934. The organization neither endorsed a candidate nor any viewpoint expressed by a candidate. Rev. Rul. 74–574, 1974–2 C.B. 161.

  3. An organization formed to elevate the standards of ethics and morality in the conduct of political campaigns that disseminates information concerning general campaign practices, furnishes teaching aids to political science and civics teachers, and publicizes its proposed code of fair campaign practices without soliciting the signing or endorsement of the code by candidates, qualifies as an educational organization under IRC 501(c)(3). Rev. Rul 76–456, 1976–2 C.B. 151.

Student Education
  1. An IRC 501(c)(3) university did not participate in a political campaign when it offered a course in the basic techniques of effective participation in the electoral system. Although the students were required to work on a campaign, the university did not influence the student in his choice of candidate or control the student’s campaign work. Rev. Rul. 72–512, 1972–2 C.B. 246.

  2. An IRC 501(c)(3) university is not participating in political activities when it supports the publication of a daily student newspaper that provides training for students in various aspects of publishing, editing, and managing a daily newspaper, including coverage of political news and the preparation of editorial comments. Rev. Rul. 72–513, 1972–2 C.B. 246

Excise Taxes

  1. IRC 501(c)(3) organizations that make political expenditures will be subject to an excise tax under IRC 4955.

  2. Any amount paid or incurred by an IRC 501(c)(3) organization in connection with any intervention in a political campaign on behalf of, or in opposition to, any candidate for public office is a political expenditure subject to the excise tax under IRC 4955. The initial tax is equal to 10 percent of the amount involved. An additional tax of 100 percent of the amount involved is also imposed if the organization fails to correct the expenditure in a timely manner. The initial tax may be abated if the organization can establish that its making of the expenditure was not willful and flagrant. The tax is imposed even if the political expenditure gives rise to a revocation of the organization’s IRC 501(c)(3) status.

  3. An initial tax of 21/2 percent of the political expenditure (limited to $5,000 of tax with respect to any one expenditure) is imposed on any manager of the organization who, knowing that the expenditure is a political expenditure, agrees to the making of the expenditure, unless such agreement is not willful and is due to reasonable cause. A manager who refuses to agree to part or all of the required correction of the political expenditure also may be subject to an additional tax of 50 percent of the political expenditure (subject to a $10,000 maximum).

  4. When tax is imposed under IRC 4955 to a private foundation, the expenditure in question will not be treated as a taxable expenditure under IRC 4945.

Candidate Controlled Organizations

  1. Candidate controlled organizations are organizations formed primarily to promote the candidacy or prospective candidacy of an individual for public office, as well as organizations that are effectively controlled by a candidate or prospective candidate and that are availed of primarily for those purposes. IRC 4955(d)(2).

  2. For candidate controlled organizations, amounts paid or incurred for any of the following purposes are deemed political expenditures:

    1. Remuneration to the individual (the candidate or prospective candidate) for speeches or other services;

    2. Travel expenses of the individual;

    3. Expenses of conducting polls, surveys, or other studies, or preparing papers or other material for use by the individual;

    4. Expenses of advertising, publicity, and fund-raising for the individual;

    5. Any other expense that has the primary purpose of promoting public recognition, or otherwise primarily accruing to the benefit, of the individual.

Termination Assessments and Injunctions

  1. The Service is authorized to make an immediate determination and assessment of income tax, or of the tax imposed by IRC 4955, for the current or preceding year of an IRC 501(c)(3) organization, if the Service finds that the organization has made political expenditures and that such expenditures constitute a flagrant violation of the prohibition against making political expenditures. For this purpose, the organization’s current taxable year is treated as if it terminates on the date taxability is determined. IRC 6852. Any taxes assessed under IRC 6852 against the organization or its managers become due and payable immediately.

  2. The Service may seek an injunction to bar political expenditures by an IRC 501(c)(3) organization after it has notified the organization of its intention to seek an injunction if the organization does not immediately cease making political expenditures and after the Commissioner personally has determined that the organization has flagrantly participated in a political campaign and that an injunction is appropriate to prevent further abuse. The Service also may seek such other injunctive relief as may be appropriate to ensure that the organization’s funds are preserved for IRC 501(c)(3) purposes. IRC 7409.

Disqualification for IRC 501(c)(4)

  1. IRC 504 precludes qualification under IRC 501(c)(4) for any organization (except for churches, conventions of churches, etc.) that ceases to qualify under IRC 501(c)(3) by reason of participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for public office.

Effect of IRC 527

  1. An IRC 501(c) organization is subject to tax on any amount that it spends on the selection, nomination, election, or appointment of a candidate for public office, but only to the extent of its net investment income. IRC 527(f). An IRC 501(c) organization may set up a separate segregated fund that is used to carry out the political activities of the IRC 501(c) organization. IRC 527(f)(3)

  2. IRC 527 was not intended to affect the prohibition against IRC 501(c)(3) organizations engaging in political activities. Thus, notwithstanding IRC 527, charities may not engage in political activities on behalf of or in opposition to candidates for elective public office nor may they set up separate segregated funds to engage in such activities without endangering their IRC 501(c)(3) exempt status.

Digests of Precedent Rulings

  1. A corporation created to encourage greater participation in government and political affairs through the use of seminars, non-partisan workshops, and through the distribution of educational materials does not qualify for exemption as an educational organization under IRC 501(c)(3). Rev. Rul. 60–193, 1960–1 C.B. 195. Modified by Rev. Rul. 76–456.

  2. A nonprofit organization formed to conduct public forums at which lectures and debates on social, political, and international matters are presented qualifies for exemption even though some of its programs include controversial speakers or subjects. Rev. Rul. 66–256, 1966–2 C.B. 210.

  3. A nonprofit organization created to improve a public educational system is not exempt from tax where it campaigns on behalf of candidates for election to the school board. Rev. Rul. 67–71, 1967–1 C.B. 125.

  4. A university is not participating in political campaigns on behalf of candidates for public office by providing a political science credit course that requires students’ participation in political campaigns of candidates of their choice. Rev. Rul. 72–512, 1972–2 C.B. 246.

  5. A university that provides facilities and faculty advisors for a campus newspaper that publishes the students’ editorial opinions on political and legislative matters has not attempted to influence legislation or participate in political campaigns. Rev. Rul. 72–513, 1972–2 C.B. 246.

  6. An IRC 501(c)(3) organization that operates a broadcasting station presenting religious, educational, and public interest programs, is not participating in political campaigns on behalf of public candidates in violation of the provisions of that section by providing reasonable air time equally available to all legally qualified candidates for election to public office in compliance with section 312(a)(7) of the Federal Communications Act of 1934, as amended, and endorsing no candidate or viewpoint. Rev. Rul. 74–574, 1974–2 C.B. 160.

  7. An organization formed to elevate the standards of ethics and morality in the conduct of political campaigns that disseminates information concerning general campaign practices, furnishes teaching aids to political science and civics teachers, and publicizes its proposed code of fair campaign practices without soliciting the signing or endorsement of the code by candidates qualifies as an educational organization. Rev. Rul. 76–456, 1976–2 C.B. 151.

  8. Certain "voter education" activities conducted in a nonpartisan manner by an organization recognized as exempt under IRC 501(c)(3) will not constitute prohibited political activity disqualifying the organization from exemption. Rev. Rul. 78–248, 1978–1 C.B. 154.

  9. Certain publications of congressional incumbents’ voting records on selected issues in a nonpartisan newsletter do not constitute participation or intervention in any political campaign within the meaning of IRC 501(c)(3). Rev. Rul. 80–282, 1980–2 C.B. 178.

  10. The conduct of public forums involving qualified congressional candidates in which both the format and content of the forums are presented in a neutral manner, by an organization otherwise described in IRC 501(c)(3), will not constitute participation or intervention in any political campaign within the meaning of IRC 501(c)(3). Rev. Rul. 86–95, 1986–2 C.B. 73.

  11. Attempts by an organization recognized as exempt under IRC 501(c)(3) to influence the Senate confirmation of a federal judicial nominee constitute attempts to influence legislation, but do not constitute prohibited political activity. Notice 88–76, 1988–27 I.R.B. 34.

Engaging in a Trade or Business

  1. Reg. 1.501(c)(3)–1(e)(1) provides that an organization may meet the requirements of IRC 501(c)(3) even though it operates a trade or business as a substantial part of its activities, unless its primary purpose is carrying on of a trade or business that does not further charitable purposes.

    1. Whether an organization meets the requirements of IRC 501(c)(3) even though it operates a trade or business depends on "the purposes toward which an organization’s activities are directed, and not the nature of the activities." B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978).

  2. A parallel provision in IRC 502, Feeder Organizations, provides that an organization operated for the primary purpose of carrying on a trade or business shall not be exempt on the ground that all of its profits are payable to an exempt organization.

Substantial Nonexempt Purpose Test

  1. Regs. 1.501(c)(3)–1(c)(1) and 1.501(c)(3)–1(e)(1) provide that the fact that an organization’s primary activity is a trade or business does not, in itself, disqualify the organization from exemption, provided the trade or business furthers or accomplishes exempt purposes. See also, Dumaine Farms v. Commissioner, 73 T.C. 650 (1080).

  2. If an activity serves a substantial nonexempt purpose, however, the organization does not qualify for exemption even if the activity also furthers an exempt purpose. See Schoger Foundation v. Commissioner, 76 T.C. 380 (1981).

Facts and Circumstances

  1. Determining whether an activity serves an exempt purpose requires considering all facts and circumstances. The following factors are especially important:

    1. The manner in which the activities are conducted;

    2. The degree the activities are carried on with a "commercial hue" ;

    3. Competition with commercial firms;

    4. The existence and amount of annual or accumulated profits; and

    5. How the organization sets its prices or fees (are they at or below cost, or at a substantial markup?).

  2. An organization operated for the primary purpose of carrying on a trade or business under the test in (1), above, will not qualify for exemption even though:

    1. All its profits are payable to an exempt organization; or

    2. It has certain religious purposes, its property is held in common, and its profits do not inure to private shareholders or individuals. However, such an organization may qualify under IRC 501(d).

Commercial Acquisitions or Lease Arrangements

  1. Rev. Rul. 64–182, 1964–1 C.B. 186, describes a foundation that derived its income principally from operating a commercial office building yet qualified for exemption under IRC 501(c)(3). Although the organization had no exempt activities other than distributing its funds in contributions and grants and its principal source of income was from the business operation, its contributions and grants constituted a "charitable program commensurate in scope with its financial resources."

    Note:

    It was not necessary to dispose of any IRC 502 problem because IRC 502 has a specific exception for rental income. Similarly, the exclusion of rental income for purposes of the unrelated business income tax obviated any problem in that area.

  2. However, Rev. Rul. 54–420, 1954–2 C.B. 128, holds that a foundation is not exempt under IRC 501(c)(3) where it acquires all of the outstanding stock of a business corporation, dissolves the corporation, and sells, leases, or licenses the assets to an operating company, receiving a substantial portion of the profits of the operating company in return, and using those profits to liquidate the indebtedness incurred in acquiring the business.

  3. In University Hill Foundation v. Commissioner, 446 F.2d 701 (9th Cir. 1971), rev’g 51 T.C. 548 (1969), cert. den., 405 U.S. 965 (1972), the court held an organization that engaged in several transactions to provide funds for an exempt university to be nonexempt under IRC 501(c)(3). The court concluded that the organization was engaged in the business of purchasing and selling businesses and was thus trading on its purported tax exemption. The court also noted that the business was engaged in solely to produce a profit for disbursement to the university and none of the acquired businesses were in any way related to the university’s exempt purposes.

Merchandising Activities

  1. An organization engaged in the retail sale, on a commission basis, of handicraft items produced by needy and deserving women was held to be a charitable organization in Rev. Rul. 66–104, 1966–1 C.B. 135. Although the retail sale of goods is normally a business activity, the ultimate test is purpose. Under the circumstances it was clear that the primary purpose was the charitable purpose of enabling the women to support themselves.

  2. Similarly, a corporation organized for the purpose of operating a book and supply store and a cafeteria on the campus of a university was held exempt under IRC 501(c)(3) in Rev. Rul. 58–194, 1958–1 C.B. 240. The organization was operated for the convenience of the students and faculty, and carried a line of necessary, "everyday" merchandise that could be obtained elsewhere only with some inconvenience. On those facts, Rev. Rul. 58–194 concluded the store was operated primarily to further the educational purposes of the university.

  3. In United Missionary Aviation, Inc. v. Commissioner, T.C.M. (CCH) 1990–566, the Tax Court held an organization formed to support religious missionary work not exempt under IRC 501(c)(3) because it had a substantial nonexempt commercial purpose. The court focused on how the organization carried on its primary activity, a tape and equipment supply division. Although no one factor was determinative, the court considered the following particularly relevant:

    1. The supply division was operated in the same manner as any profitable commercial enterprise;

    2. The majority of equipment and tapes sold by the organization were also sold by commercial firms;

    3. The organization priced its merchandise approximately 20 percent above cost, which produced a net profit margin of approximately eight percent;

    4. The organization had substantial annual and accumulated profits.

  4. In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991), the Court of Appeals upheld a Tax Court decision, CCH T.C. Memo. 1990–484, that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the Seventh Day Adventist Church does not qualify under IRC 501(c)(3). The court found substantial evidence to support a conclusion that the organization’s activities furthered a substantial nonexempt purpose, including;

    1. The organization’s operations were presumptively commercial;

    2. The organization competed directly with other restaurants and food stores;

    3. The organization used profit-making pricing formulas common in the retail food business;

    4. The organization engaged in a substantial amount of advertising;

    5. The organization’s hours of operation were competitive with other commercial enterprises; and

    6. The organization lacked plans to solicit donations.

Student Loans and Employment

  1. Making interest-bearing loans to students was held to be a charitable purpose within the meaning of IRC 501(c)(3) in Rev. Rul. 63–220, 1963–2 C.B. 208, and Rev. Rul. 61–87, 1961–1 C.B. 191. Although making personal loans may be a commercial activity in some circumstances, the low interest rate and the surrounding circumstances showed the primary purpose was to further the education of students.

  2. On the other hand, merely employing students so they can earn enough to continue their education is not in itself an exempt activity. Rev. Rul. 69–177, 1969–1 C.B. 150, held that a subsidiary of a tax-exempt college that hired students to manufacture and sell wood products at a profit was not exempt under IRC 501(c)(3). The students were not employed for the purpose of receiving instruction or training. In effect, the subsidiary was engaging in a trade or business to obtain funds for scholarship purposes. Therefore, IRC 502 precluded exemption.

Foreign Organizations

  1. Foreign organizations that meet the requirements of IRC 501(c)(3) may establish exemption from United States income tax, or establish their charitable status for purposes of the estate and gift taxes. However, apart from treaty provisions, contributions to foreign charities are not deductible under IRC 170(c).

    Note:

    Foreign organizations may, for various reasons, seek recognition of exemption under IRC 501(c)(3) even if they have no taxable income in this country. The Service will recognize their exempt status if they meet the requirements applicable to domestic organizations.

  2. Some foreign charitable organizations may be eligible for recognition of exempt based on a specific provision in a tax treaty their country has with the United States. However, treaties that provide for "reciprocal recognition" generally require that the countries agree in a separate agreement that their exemption standards are "comparable" , or establish the scope of recognition, before the treaty takes effect.

    1. Currently, Canada is the only country in which charitable organizations recognized by a foreign government are recognized exempt under IRC 501(c)(3) without applying to the Service. Canadian organizations are presumed to be private foundations, however, and a Canadian charity must request a determination from the Service if it wants to be considered a public charity eligible for the 50 percent limit on contributions.

    2. The United States has several other treaties that have not yet been fully implemented.

Deductibility of Contributions for Income Tax Purposes

  1. Contributions to charitable foreign organizations are not deductible in computing United States income tax. Under IRC 170(c)(2)(A) of the Code, charitable contributions by donors to organizations formed either outside the United States or under foreign law are not deductible.

  2. Under certain tax treaties, contributions to foreign organizations may be deductible to a limited extent. Generally, tax treaties limit deductibility to the applicable percentage of the taxpayer’s income derived from the treaty-partner.

    1. A contribution to a charitable organization in a country with a fully-implemented tax treaty (currently limited to Canada) may be claimed as a charitable deduction to the extent allowed, even though the organization has not applied for recognition of exemption in the United States.

    2. An organization in a country that has a tax treaty that is not fully implemented through a competent authority agreement can receive deductible contributions to the extent allowed by the particular treaty if it establishes its exempt status with the Service.

Deductibility of Contributions for Estate and Gift Tax Purposes

  1. Bequests to charitable foreign organizations are deductible in computing the taxable estate of a deceased resident or citizen of the United States for United States estate tax purpose under IRC 2055 and 2106.

  2. Gifts of property to foreign charitable organizations are deductible in computing the United States gift tax of a resident or citizen of the United States under IRC 2522.

Application Process for Foreign Organizations

  1. Unless excepted by provisions of a tax treaty, a foreign organization seeking exemption under IRC 501(c)(3) must file an application on the Form 1023 in the same manner as a domestic organization.

Application for Recognition of Exemption

  1. Before the Tax Reform Act of 1969 there was no statutory requirement that an organization make a notice or application with the Service in order to be exempt. An organization was exempt if it met the requirements of IRC 501(c)(3). Although most organizations filed exemption applications, Form 1023, in order to have their exempt status recognized, some did not. The Tax Reform Act changed this.

  2. Under IRC 508(a) an organization organized after October 9, 1969 (except for organizations noted in 3(14)2), shall not be treated as described in IRC 501(c)(3) unless it has given notice to the Service in the manner prescribed by regulations that it is applying for recognition of IRC 501(c)(3) status. This is commonly referred to as the "508(a) notice."

  3. Reg. 1.508–1(a)(2)(i) states that the notice is given by submitting a properly completed and executed exemption application (Form 1023).

  4. Reg. 1.508–1(a)(1)(ii) provides that the application must be filed within 15 months of the end of the month in which the organization was organized or incorporated. However, Reg. 301.9100–1, which provides circumstances under which extensions of time limits for making elections established by regulation may be granted, provides an automatic 12-month extension to the 15-month period established by Reg. 1.508–1(a)(1)(ii). In addition Reg. 301.9100–1 provide circumstances under which an organization can establish reasonable cause for a further extension to be granted.

Exceptions to Notice Requirement

  1. The following organizations whose exempt status is based upon IRC 501(c)(3) are excepted from the IRC 508(a) notice requirements:

    1. churches, their integrated auxiliaries, and conventions or associations of churches,

    2. organizations that normally have gross receipts not in excess of $5,000, and are not private foundations, and

    3. subordinate organizations (other than private foundations) covered by a group exemption letter.

  2. The regulations provide a formula for what constitutes gross receipts normally not in excess of $5,000. Under that formula, if an organization’s gross receipts do not exceed $7,500 during the first taxable year, $12,000 during the first two taxable years, and $15,000 during the first three taxable years, the organization’s gross receipts are deemed to be normally less than $5,000. The regulations also provide detailed rules for the notice requirement of organizations that start out within the formula but exceed the "normally $5,000 test" in a subsequent year. See Reg. 1.508–1(a)(3)(ii).

Organization’s Date of Formation

  1. An organization must have a written document to establish its existence for purposes of the organizational test under IRC 501(c)(3).

  2. The written document is variously referred to as "articles of organization" under Reg. 1.501(c)(3)–1(b)(2) and as the "organizing or enabling document" under Rev. Proc. 90–27, 1990–1 C.B. 514. The terms are interchangeable.

  3. State law determines the date of formation of a corporation incorporated under the laws of the State. The date is generally the date the organizing document (usually called the articles of incorporation) is filed with and approved by an appropriate State official. See Rev. Rul. 75–290, 1975–2 C.B. 215.

  4. For trusts and associations, the date of formation is generally the date the organizing document is signed (or otherwise adopted) by the relevant parties. See the organizational test under IRC 501(c)(3). For 508(a) purposes, a trust created by will is not considered organized before the date of the first distribution of trust corpus to the trustee, or, if earlier, the date the decedent’s estate is considered terminated for federal tax purposes.

  5. An organization is not considered organized for 508(a) purposes until it is described in IRC 501(c)(3) (without regard to IRC 508(a)). See Reg. 1.508–1(a)(2)(iii). For example, if a split-interest trust changes to an exclusively charitable trust by expiration of the non-charitable interests, then the 508(a) filing period begins at the time of the change. However, if an organization’s organizing document requires only a nonsubstantive amendment to comply with the organizational test under IRC 501(c)(3) (e.g., the addition of a proper dissolution clause) and the organization makes the amendment (either on its own initiative or when requested by the Service), the organization will be regarded as satisfying the organizational test from its formation. See Rev. Proc. 84–47, 1 C.B. 545; Rev. Proc. 90–27, 1990–1 C.B. 514.

Untimely and Incomplete Notices

  1. If an organization files its Form 1023 after the 15 month period provided in Reg. 1.508–1(a)(1)(ii) (and the period of any additional extensions granted) it may be recognized as exempt only from the date its application was filed. It follows that the organization may be a taxable organization under such circumstances (and thus would be unable to attract charitable contributions) for the period which precedes the date the application was filed.

    1. Rev. Rul. 77–114, 1977–1 C.B. 152, provides that for purposes of IRC 508(a) the date of notice is the date of the U.S. postmark stamp or, if no postmark, the date the application is stamped as received by the Service.

  2. As mentioned in IRM 7.25.3.21(4), Reg. 301.9100–1 provides an automatic 12-month extension to the 15-month period established by Reg. 1.508–1(a)(1)(ii). In addition, Reg. 301.9100–1 provides that a further extension can be granted if:

    1. the organization establishes that it took all reasonable actions in good faith to make the application; and

    2. granting an extension would cause no detriment to the interests of the Government.

  3. An "incomplete" application does not constitute notice under IRC 508(a). However, an application is not incomplete merely because it needs to be perfected. A completed application may need additional information before a determination of exempt status may be made. In such cases the notice requirement of IRC 508(a) has been met whether or not the additional information is timely received. However, absence of the following information will cause an application to be incomplete:

    1. copy of governing instrument

    2. copy of bylaws or internal rules of operation

    3. balance sheets (last 4 years, if available, or proposed if organization has not been in operation for that long)

    4. classified statements of receipts and disbursements (last 4 years, if available, or proposed if organization has not been in operation for that long) or

    5. any other basic data required by the application or its instructions

  4. Reg. 1.508–1(a)(2)(ii) provides that an incomplete application will be considered timely filed if the organization supplies the necessary additional information requested by the Service within the additional time period provided for in the request.

Exemption Under IRC 501(c)(4) for Late Filer
  1. An organization that otherwise qualifies for recognition of exemption as an organization described in both IRC 501(c)(3) and IRC 501(c)(4), but fails to file timely for purposes of IRC 508, may apply for and obtain exemption as an organization described in IRC 501(c)(4) from the date of its inception to the date it files Form 1023. Rev. Rul. 80–108, 1980–1 C.B. 119.

Employment Tax Liability of a Late Filer
  1. A religious organization (other than a church excepted from the notice requirement) that applies for recognition of exempt status more than 15 months from the end of the month in which it is organized will not be treated as a IRC 501(c)(3) organization for the period before its application was filed. As set out in Rev. Rul. 76–262, 1976–2 C.B. 310, services performed by its employees during that period are not excepted from employment for FICA and FUTA purposes.

Application for Exemption After Reorganization

  1. Organizations that are recognized exempt but change their organizational form must file an application for exemption to establish that the new organization qualifies for exemption. Rev. Rul. 67–390, 1967–2 C.B. 179, describes four specific circumstances under which the new organization must apply for recognition of exemption. They are:

    1. an exempt trust which reorganizes into a corporation;

    2. an exempt association which incorporates,

    3. an exempt corporation reincorporated under Act of Congress; and

    4. an exempt corporation which is reincorporated under the laws of another state.

  2. Rev. Rul. 74–490, 1974–2 C.B. 171, provides that a private foundation remaining in existence after terminating its private foundation status under IRC 507(b)(1)(A), must file a new application, unless specifically excepted by IRC 508(c).

Group Exemption Applications

  1. Exemption from Federal income tax may be obtained on a group basis for subordinate organizations affiliated with and under the general supervision or control of a central organization. A complete description of the requirements for submitting a group exemption application is provided by revenue procedure.

Amateur Athletic Organizations

  1. Organizations associated with amateur athletics may qualify for recognition of exemption under IRC 501(c)(3) under one of several different rationales.

Amateur Athletic Organizations as "Educational" or "Charitable"

  1. Although most of the attention has focused in recent years on amendments to IRC 501(c)(3) provided in the Tax Reform Act of 1976 and on new IRC 501(j), organizations involved with sports may be recognized as described in IRC 501(c)(3) based on prior law:

    1. As "educational" on the grounds that they taught sports to youth or is affiliated with an exempt educational organization (Rev. Rul. 80–215, 1980–2 C.B. 174; Rev. Rul. 77–365, 1977–2 C.B. 192; Rev. Rul. 67–291, 1967–2 C.B 184; Rev. Rul. 64–275, 1964–2 C.B. 142; Rev. Rul. 55–587, 1955–2 C.B. 261);

    2. As "charitable" on the grounds that they combatted juvenile delinquency or lessened the burdens of government (Rev. Rul. 80–215, 1980–2 C.B. 174; Rev. Rul. 59–310, 1959–2 C.B. 146).

  2. The "educational" and "charitable" rationales continue to be valid bases for recognition of exemption, particularly in cases where the applicant’s activities are directed at children or adolescents.

    1. Organizations that qualify as "educational" or "charitable" can avoid the complexities of the "amateur athletic" provisions of IRC 501(c)(3) and IRC 501(j).

Tax Reform Act of 1976

  1. The Tax Reform Act of 1976 amended IRC 501(c)(3) to include organizations that "foster international amateur sports competition (but only of no part of its activities involve the provision of facilities and equipment." (But see the discussion of IRC 501(j), below.)

  2. This amendment posed two problems for the Service:

    1. No guidance was provided as to what was meant by "foster[ing] national or international amateur sports competition."

    2. Most organizations that teach or promote a sport provide some facilities or equipment.

"Qualified Amateur Sports Organizations" Under IRC 501(j)

  1. In an attempt to clarify the amateur athletic provision, Congress amended lRC 501(c) in 1982 by adding IRC 501(j).

  2. IRC 501(j)(1) provides generally that a "qualified amateur sports organization" that otherwise satisfies the requirements of IRC 501(c)(3) will qualify as exempt regardless of whether it provides athletic facilities or equipment and regardless of whether its membership is local or regional in nature.

  3. IRC 501(j)(2) defines a "qualified amateur sports organization" as an organization organized and operated primarily to conduct or to support and develop amateur athletes for national or international competition in sports.

"National or International Sports Competition"

  1. Although IRC 501(j) solved the facilities and equipment dilemma, many other questions remain unresolved. For example, what is the meaning of the phrase "national or international sports competition?"

  2. The legislative history of the Tax Reform Act of 1976 indicates that the amateur athletic provisions were not intended to grant exemption to "social clubs or organizations of casual athletes" or to organizations "whose primary purposes are the recreation of their members." It is therefore necessary to distinguish between social/recreational organizations and organizations that promote serious competition.

  3. The following factors may be relevant in determining whether an organization fosters national or international competition:

    1. Is the sport that the organization supports an event in the Olympic or Pan-American Games?

    2. Are the athletes that the organization supports in the age group from which Olympic-quality athletes are normally chosen?

    3. Are the athletes of a caliber that makes them serious contenders for the Olympic or Pan-American games?

    4. Do the athletes have to demonstrate a certain level of talent and achievement in order to receive support from the organization?

    5. Does the organization provide intensive, daily training, as opposed to sponsoring weekend events that are open to and attract a broad competitors?

    6. Is the organization devoted to improving the performance of a small group of outstanding athletes or does it emphasize the improvement in health of the general public?

    7. Is the organization a member of the United States Olympic Committee?

  4. Although all the facts and circumstances must be considered, these factors are not exhaustive. A "yes" response to these questions, however, strongly indicates that the organization qualifies under IRC 501(j).

Local or Regional Organizations

  1. In some cases the organization’s activities are so clearly local in scope and so far removed from any relationship to national or international competition that however IRC 501(j) is interpreted, the organization cannot qualify.

  2. If an organization is composed of local amateur athletes who primarily play other local teams, the fact that occasionally games are scheduled with teams or organizations in another state would not cause the organization to qualify unless those games can be shown to be part of national competition.

  3. Similarly, even if the organization provides a regional tournament, some link to national or international competition must be established. Such a national or international nexus could possibly be established through the organization’s membership in a national sports association. An assertion by an organization that its is a training ground for collegiate, professional, and/or Olympic players, absent some evidence that there is a reasonable probability that the members will participate in national or international competition, would not suffice to qualify the organization for exemption.

"Instrumentality" Exemption Application

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A municipal hospital, municipal hospital district, fire department, public library, park district, water district, and port authority are examples of organizations that may be created by, controlled by, or closely affiliated with government. A municipal hospital or municipal hospital district should be considered under the health care guidance provided through the Corporate Education Introduction To The Health Care Industry Coursebook, (Catalogue Number 83846) and the applicable checksheets for a municipal hospital. Organizations affiliated with Indian tribal governments also may be processed with the use of this checksheet. The term "instrumentality" has been applied to these types of organizations as a kind of shorthand. Technically the term "instrumentality" only has application under the FICA and FUTA provisions. Therefore, there are special paragraphs that should be included in an exemption letter regarding FICA and FUTA tax obligations. However, for convenience, this guide will also refer to these organizations as instrumentalities. A comprehensive discussion of the issues embraced in the foregoing checksheet is included above at IRM 7.25.3.12 under the heading "Instrumentalities." See also the FY 1996 CPE article entitled "State Institutions — Instrumentalities," and the FY 1997 CPE article entitled "Update on State Institutions — Instrumentalities." There are situations where an organization such as a tourist bureau or a soil and water conservation district that is an instrumentality closely affiliated with government may not qualify under IRC 501(c)(3) but would qualify under IRC 501(c)(4), (5) or (6) if it meets the requirements particular to that exemption provision.

1. Operated Exclusively for Charitable Purposes

An organization, even if affiliated with government, must engage primarily in activities which accomplish one or more exempt purposes specified in IRC 501(c)(3). In addition, it may not serve private interests more than as an insubstantial part of its activities, its net earnings may not inure to the benefit of private individuals, and it may not be an "action organization." Reg. 1.501(C)(3)–1(c). Organizations affiliated with governments may meet any of the charitable purposes set forth in IRC 501(c)(3). Many affiliated organizations meet the "lessening of the burdens of government" purpose set forth in Reg. 1.501(c)(3)–1(d)(2). Also see Rev. Ruls. 85–1 and 85–2, 1985–1 C.B. 178, for a description of the factors that help demonstrate that an organization qualifies under the lessening of the burdens of government purpose.

2. Separately Organized Entity

IRC 501(c)(3) requires the existence of a separately organized entity: a corporation, a trust, or an association. Reg. 1.501(c)(3)–1(b). A separate corporation, trust or association, even if it is owned by a state or municipality, may qualify under IRC 501(c)(3). Rev. Rul. 60–384, 1960–2 C.B. 172, amplifying Rev. Rul. 55–319, C.B. 1955–1, 119. The separately organized entity requirement is generally met if the organization is incorporated under state corporation law. Likewise, if the organization is organized and operated as a trust, it is regarded as a separately organized entity.
If not established as a trust or incorporated under state corporation law, any entity that is considered a "corporation" for federal tax law purposes will be considered a separately organized entity. Under IRC 7701(a)(3), the term "corporation" includes associations. Reg. 301.7701–2 lists six major characteristics that are ordinarily found in a pure corporation. As administratively adapted to cases involving classification of non-profit organizations, these characteristics are: (i) associates, (ii) an objective by the associates to carry on the activity for which the organization was formed, (iii) continuity of life, (iv) centralized management, (v) limited liability, and (vi) free transferability of interests. An organization is an association that will be treated as a corporation and, therefore, separately organized, if it has at least four of these corporate characteristics. Many times an entity can be created by legislation. We would look at the enabling legislation to determine whether a separate organization was created because, for example, it has (1) associates (board of directors), (2) an objective to carry on the purposes for which it was formed (providing health care services to the residents of a particular area), (3) continuity of life (board of directors continue even after death, resignation, retirement, etc.), (4) centralization of management (legislation provided for appointment of an administrator). Many times such legislation will activate the organization as a public body corporate and politic pursuant to a resolution filed by a local governmental legislative body, such as a city or county council, approved by an elected official or the voters, and filed with the secretary of state. See Rev. Rul. 60–384, Examples (1) and (2).

3. Organizational Test — State Corporation

Where an organization is incorporated under a state’s nonprofit, corporation law, it is likely that the enabling document satisfies the organizational test under Reg. 1.501(c)(3)–1(b) (charitable purpose and dedication of assets).

4. Organizational Test — Legislation

Satisfying the organizational test often poses a problem when an instrumentality is created pursuant to a state statute, a local ordinance, or similar enabling legislation. This is so because the enabling document may contain neither "exclusive purposes" language nor a standard dissolution clause. The situation is further compounded by the difficulty an instrumentality faces in having such an enabling instrument amended. Nevertheless, if a careful reading of the enabling document clearly shows that it will operate exclusively for exempt purposes, it will be deemed to have met that portion of the organizational test. Further, if an enabling document, or in the alternative, a state law provision creating an entity or controlling an entity, provides that, upon dissolution, all of an instrumentality’s assets will be transferred to the state or any political subdivision thereof, it will be deemed to have met the dedication of assets portion of the organizational test. In those cases, absent any clear indication that the assets will be distributed for private use, the assumption is that the assets will be used for a public purpose as is required by Reg. 1.501(c)(3)–1(b)(4). Where there is a question of whether an entity satisfies the organizational test, the law of the State in which the organization is created controls for purposes of construing terms. Reg. 1.501(c)(3)–1(b)(5). Therefore, it would be incumbent on the organization to establish by convincing reference to relevant court decisions, opinions of the State attorney-general, or other evidence of applicable state law that its language satisfies the organizational test. In rare circumstances, it may be necessary to require that a separately incorporated entity be established to satisfy the organizational test. Example:
As authorized by state statute an Older Persons’ Commission ( "Commission" ) was established under an Interlocal Agreement between local Townships (Note: Commission was not incorporated under state non-profit corporation law). The activities of Commission included the operation of an older persons’ activity center for the purpose of improving the social, legal, health, housing, educational, emotional, nutritional, recreational, and mobility status of older persons. Under the Interlocal Agreement (i) each of the Townships who were parties thereto made a capital contribution to acquire or construct the activity center; (ii) a Board of Commissioners was elected by the Township Boards and City Council; (iii) Commission was established as an independent entity, separate and distinct from the Townships; (iv) Commission hired its own employees, who could not be employees of the Townships; (v) the funds received by Commission were held in a separate fund and accounted for separately from the other funds of the Townships; (vi) Commission was authorized to hire a director; (vii) upon dissolution, all remaining assets would be distributed to the Townships based on a percentage of their initial contributions for the acquisition of or construction of the activity center, and; (viii) Commission had no sovereign powers.
In this example, Commission was operated exclusively for one or more exempt purposes (the operation of an older persons’ activity center) and it met the requirements of the four major issues as follows: (1) it was a separate entity because under the enabling legislation (Interlocal Agreement) it had (i) associates (Board of Commissioners), (ii) an objective to carry on the purposes for which it was formed (providing activities to older citizens of the community), (iii) continuity of life (Board of Commissioners continued even after death, resignation, retirement, etc.), (iv) centralization of management (Interlocal Agreement provided for the hiring of a director); (2) it satisfied the organizational test because a reading of the Interlocal Agreement showed that it was formed to operate exclusively for exempt purposes (older persons’ activities), and upon dissolution, assets would be distributed to the Townships. There was no indication that the assets would be distributed for private use, so it could be assumed that they would be used for a public purpose as is required by Reg., 1.501(c)(3)–1(b)(4); (3) it was not an integral part of the Townships because the Townships were not substantially involved in its activities, and; (4) it had no disqualifying sovereign powers. Commission is excepted from filing an annual information return on Form 990, Return of Organization Exempt from Income Tax because it is an "affiliate of a governmental unit" within the meaning of section 4 of Rev. Proc. 95–48, 1995–2 CB. 418. Commission is an "affiliate of a governmental unit" within the meaning of section 4 of Rev. Proc. 95–48 in that (1) Commission is controlled by governmental units (its Board of Commissioners is elected by the Township Boards and City Council); (2) Commission satisfies two of the five affiliation factors listed in the revenue procedure (it was created by one or more governmental units, and upon dissolution its assets will be distributed to one or more governmental units), and (3) Commission’s filing of Form 990 is not otherwise necessary for efficient tax administration.

5. Integral Part

An instrumentality that is operated as an integral part of government is not eligible for IRC 501(c)(3) exemption even if it is separately established and it satisfies the organizational test since it would not be subject to federal income taxation under the broad reach of the intergovernmental immunity doctrine. Rev. Rul. 60–384. For example, a committee created by executive order of a governor of a state as an official state agency was an integral part of the state and, therefore, did not come within the scope of IRC 501(c)(3). Rev. Rul. 62–66, 1962–1 C.B. 83. A Lawyer Trust Account Fund was held not to qualify under IRC 501(c)(3) as an integral part of a state because it was created by order of the State supreme court; it operated under rules established by the court; the court had the power to abolish the Fund; the court appointed the Fund’s governing body subject to removal, with or without cause; the court had the authority to require the Fund to maintain records; the Fund’s administrative functions were performed by state employees; the Fund did not have its own employees, and the court had the authority to require the Fund to submit periodic reports. Rev. Rul. 87–2, 1987–1 C. B. 18. It is unusual for an otherwise separately formed organization to be disqualified from exemption because it is operated as an integral part of government. The basis for such a determination is all of the facts and circumstances. Example:
A state statute provided for the creation of a hospital district to construct and operate a county hospital. The enabling statute was worded so that the hospital district was required to serve the health needs of the residents. Under the statute, (i) management of the hospital was vested in a Board of Control; (ii) County Commissioners appointed the members of the Board of Control; (iii) the members of the Board of Control took an oath in the form required of county officers; (iv) the Board of Control was authorized to employ an administrator; (v) bond proceeds were deposited in the county treasury and paid out upon order of the County Commissioners; (vi) contracts for the hospital construction were let out by bid like any other county project; (vii) the administrator and the treasurer of the Board of Control were bonded under the county blanket bond; (viii) the District Attorney, or his assistant, served as attorney for the Board of Control; (ix) the Board of Control had authority to make contributions to the Public Employees’ Retirement System, and; (x) four copies of the audit report for each fiscal year were filed, one with the County Commissioners, one in the county clerk’s office, one with the District Attorney, and one with the State Auditor and Inspector.
This organization had enough corporate characteristics to be considered a separately organized entity both for the purpose of section 501(c)(3) of the Code and Rev. Rul. 60–384, 1960–2 C.B. 172. These characteristics were (i) associates (Board of Control), (ii) an objective by the associates to carry on the activity for which the instrumentality was formed (hospital), (iii) centralized management (hiring of administrator), and (iv) continuity of life (Board of Control continues in perpetuity). Moreover, a broad reading of the enabling statute satisfied the organizational test. However, the hospital in this case was an integral part of the county government and, therefore, under Rev. Rul. 60–384, not described in section 501(c)(3) based on all the facts and circumstances.

An Indian tribal government or political subdivision of an Indian tribal government is not eligible for exemption under IRC 501(a) because it is treated as a state or a political subdivision of a state. An organization formed by an Indian tribal government or a political subdivision of an Indian tribal government does not share the same tax status as the Indian tribal government or political subdivision. It could qualify for exemption as a separately organized entity. To qualify under IRC 501(c)(3), it would have to meet the organizational and operational tests (including the absence of sovereign powers). Similarly, an Indian organization formed under state law may qualify for exemption under IRC 501(c)(3) if it otherwise meets the applicable exemption requirements. An Indian tribal government and its political subdivisions, including Alaska Native governments and their political subdivisions, are treated like states for federal tax purposes. IRC 7871, 7871(d), 7701(a)(40) and Rev. Proc. 67–284, 1967–2 C.B. 55. Rev. Proc. 83–87, 1983–2 C.B. 606, amplified by Rev. Proc. 92–19, 1992–1 C.B. 685, provides a list of Indian tribal governments that are treated as states. Rev. Proc. 84–36, 1984–1 C.B. 510, provides a list of entities that are treated as political subdivisions of states. In addition, Rev. Rul. 81–295, 1981–2 C.B. 15, and Rev. Rul. 94–16, 1994–1 C.B. 17, provide that organizing under sections 16 or 17 or the Indian Reorganization Act of 1974 qualifies an entity for exclusion from federal income tax as a governmental entity. Rev. Rul. 94–65, 1994–1 C.B. 14, provides that a tribal corporation organized under section 3 of the Oklahoma Welfare Act also qualifies an organization for exclusion from federal income tax as a governmental entity. Rev. Proc. 84–37, 1984–1 C.B. 513, provides guidance as to how Indian groups can qualify for treatment as a state or a political subdivision.

6. Regulatory or Enforcement Powers

Rev. Rul. 60–384 provides that even though a wholly-owned state or municipal instrumentality may be a separately organized entity, it is not entitled to IRC 501(c)(3) exemption if it is clothed with powers other than those described in IRC 501(c)(3). For example, where an instrumentality exercises substantial regulatory or enforcement powers in the public interest, it will not qualify. These powers are referred to as sovereign powers.
Three generally acknowledged sovereign powers by which the government governs are the power to tax, the power of eminent domain, and the police power. However, not all government powers are necessarily enforcement or regulatory powers. Thus, the fact that an organization has one of the sovereign powers listed above does not automatically preclude the organization from qualifying under IRC 501(c)(3).
Rev. Rul. 67–290, 1967–2 C.B. 183, holds that a public hospital which has the power to acquire, through eminent domain, property essential to its purposes, qualifies for recognition of exemption as an organization described in IRC 501(c)(3). Thus, the power of eminent domain, if limited to furthering a hospital’s or hospital district’s charitable purpose, does not constitute an enforcement or regulatory power within the meaning of Rev. Rul. 60–384.
Similarly, a limited power to determine a tax rate necessary to support an organization’s operations, a power related more to the disposition of tax revenues than to the exercise of the taxing power of the political unit involved, does not constitute a regulatory or enforcement power within the meaning of Rev. Rul. 60–384. See Rev. Rul. 74–15, 1974–1 C.B. 126, which held that an exempt organization is permitted to certify or determine a tax rate. For purposes of qualification under IRC 501(c)(3), solely, there is no distinction between the power to recommend or certify a tax rate, the power to determine a tax rate, and the power to levy, assess, or impose a tax. The regulatory or enforcement power is the power to collect the tax. Thus, if an organization has the power to collect the tax, it will be disqualified from being recognized as exempt.
Finally, Rev. Rul. 77–165, 1977–1 C.B. 21, considers a public university with a governmental power limited to preserving order and providing for public safety within the confines of its own real property, such as policing and traffic control on the campus. The revenue ruling holds that the organization’s powers are insufficient to constitute the exercise of the state’s police power. Therefore, a limited power equivalent to a university or college campus police force would not disqualify an otherwise qualified instrumentality.
Conversely, Rev. Rul. 74–14, 1974–1 C.B. 125, holds that a public housing authority formed to investigate whether unsanitary or unsafe housing conditions exists does not qualify for exemption under IRC 501(c)(3). In this case, the housing authority has the power to conduct investigations by entering property and issuing subpoenas. Further, it is authorized to make the information it collects available to other agencies for use in enforcing local ordinances. The power to subpoena involves the power to compel testimony under threat of imprisonment if the testimony is not forthcoming. The power to punish is a power of the state alone. In this case, the housing authority’s powers are not limited to those needed to protect its proprietary interests. It possesses powers more related to governance than to the furtherance of a charitable purpose. Thus, Rev. Rul. 74–14 concludes that the housing authority’s investigative powers are enforcement or regulatory powers.

7. Exception From Filing Form 990

Unless specifically excepted, an organization that is recognized as exempt under IRC 501(c)(3) is required to file an annual information return on Form 990, Return of Organization Exempt From Income Tax. Rev. Proc. 95–48, 1995–2 C.B. 418, relieves some organizations that are closely associated with local or state governments from the filing requirement. This revenue procedure supplements Rev. Proc. 83–23, 1983–1 C.B. 687, and specifies two additional classes of organizations that are not required to file the annual information return. These two classes are (1) governmental units, and (2) affiliates of governmental units that are exempt from federal income tax under IRC 501(a). The majority of cases under this revenue procedure will involve "affiliates of governmental units." For most of these organizations to be treated as an "affiliate of a governmental unit" and be excepted from filing the annual information return on Form 990, the following two requirements must be satisfied:
First, the organization must be controlled by a governmental unit. This means that a governmental unit (or a public official acting in his official capacity) must appoint the majority of the members of the organization’s governing body. A governing body elected by the public also satisfies this requirement. For purposes of this control test, a governmental unit is a state, a possession of the United States, or a political subdivision of one of them; the United States; the District of Columbia; or a federally recognized Indian tribal government. Indirect control also satisfies this requirement. Thus, an organization controlled by an organization that is itself a qualifying "affiliate of a governmental unit" under the revenue procedure also qualifies.
Second, the organization must satisfy two of the following five affiliation factors listed in the revenue procedure indicating actual oversight of its financial affairs and activities by the governmental unit.
(a) The organization was created by one or more governmental units, organizations that are affiliates of governmental units, or public officials acting in their official capacity.
(b) The organization’s support is received principally from taxes, tolls, fines, government appropriations, or fees collected pursuant to statutory authority. Amounts received as government grants or other contract payments are not qualifying support under this paragraph.
(c) The organization is financially accountable to one or more governmental units. This factor is present if the organization is (i) required to report to governmental unit(s), at least annually, information comparable to that required by Form 990; and (ii) is subject to financial audit by the governmental unit(s) to which it reports. A report submitted voluntarily by the organization does not satisfy clause (i). Also. reports and audits pursuant to government grants or other contracts do not alone satisfy this paragraph (c).
(d) One or more governmental units, or organizations that are affiliates of governmental units, exercise control over, or oversee, some or all of the organization’s expenditures (although it is not financially accountable to governmental units as described in paragraph (c) of this section).
(e) If the organization is dissolved, its assets will (by reason of a provision in its articles of organization or by operation of law) be distributed to one or more governmental units, or organizations that are affiliates of governmental units within the meaning of section 4 of the revenue procedure.
Finally, the exception under Section 4.02(b) was not intended to except otherwise qualifying entities where efficient administration of the internal revenue laws would be hampered. This would involve situations where the organization is part of an extensive health care system consisting of exempt and taxable entities (such as joint ventures with taxable entities and taxable subsidiaries), or where there is a considerable potential for overly serving private interests.

8. Charitable Hospital

Municipal hospitals and hospital districts that operate health care facilities must also qualify as charitable under IRC 501(c)(3), which can be determined by completing Schedule C of the Form 1023 (this schedule concerns hospitals and medical research organizations).

Pattern Information Letter for Instrumentalities

Dear Sir or Madam:

This responds to your letter requesting information concerning your federal tax status.

No provision of the Internal Revenue Code imposes a tax on the income of governmental units (such as states and their political subdivisions). It has therefore long been the position of the Service that income of governmental units is not generally subject to federal income taxation. If, however, an entity is not itself a governmental unit (or an "integral part" thereof), its income will be subject to tax unless an exclusion or exemption applies.
One exclusion is provided by section 115(1) of the Code, which excludes from gross income, income (A) derived from the exercise of any essential governmental function, and (B) accruing to a state or political subdivision.
Your income may not be subject to tax, either because you are a governmental unit (or an "integral part" thereof), or because your income is excluded under section 115 of the Code. In addition, you may also be eligible to receive charitable contributions which are deductible for federal income, estate, and gift tax purposes; and you are probably exempt from many federal excise taxes.
You may obtain a letter ruling on your status under section 115 of the Code, following the procedures specified in Revenue Procedure 96–1 or its successor (the first Revenue Procedure published each year). You must also pay a user fee as described in that Revenue Procedure.
You may also qualify for exemption from federal income tax as an organization described in section 501(c)(3) of the Code. If you are an entity separate from the state, county, or municipal government, and if you do not have powers or purposes inconsistent with exemption (such as the power to tax or to exercise enforcement or regulatory powers), you would qualify under section 501(c)(3). To apply for exemption, you would need to complete Form 1023 and pay the required user fee.
Sometimes governmental units are asked to provide proof of their status as part of a grant application. If you are applying for a grant from a private foundation, it may be requesting certain information from you because of the restrictions imposed by the Code on such foundations. One such restriction imposes a tax on private foundations that make any "taxable expenditures." Under section 4945(d) and (h) of the Code, "taxable expenditures" include (1) any grant to an organization (unless excepted), unless the foundation exercises "expenditure responsibility" with respect to the grant; and (2) any expenditure for non-charitable purposes. Under section 4942 of the Code, private foundations must also distribute certain amounts for charitable purposes each year— "qualifying distributions" —or incur a tax on the undistributed amount. "Qualifying distributions" include certain amounts paid to accomplish charitable purposes.
Private foundation grants to governmental units for public or charitable purposes are not taxable expenditures under these provisions, regardless of whether the foundation exercises "expenditure responsibility." Under section 53.4945–5(a)(4)(ii) of the Foundation and Similar Excise Taxes Regulations, expenditure responsibility is not required for grants for charitable purposes to governmental units (as defined in section 170(c)(1) of the Code). Similarly, grants to governmental units for public purposes are "qualifying distributions" , under section 53.4942(a)–3(a) of the regulations; and, if they are for charitable purposes, will not be taxable expenditures, under section 53.4945–6(a) of the regulations. Most grants to governmental units will qualify as being for charitable (as well as public) purposes. Because of these restrictions, some private foundations require grant applicants to submit a letter from the Service determining them to be exempt under section 501(c)(3) and classified as a non-private foundation. Such a letter, or an underlying requirement that a grantee be a public charity, is not legally required to be relieved from the restrictions described above, when the prospective grantee is a governmental unit and the grant is for qualifying (public or charitable) purposes.
We believe this general information will be of assistance to you. This letter, however, is not a ruling and may not be relied on as such. If you have any questions, please feel free to contact the person whose name and telephone number are listed in the heading of this letter.

Sincerely,