7.26.3 Private Foundations Defined — IRC 509(a)(1) and 170(b)(1)(A)(vi) Exclusion


  1. This Chapter deals with publicly supported charities described in IRC 170(b)(1)(A)(vi).

    1. IRM discusses the 33 1/3 percent-of-support requirement, otherwise known as the mechanical test.

    2. IRM sets out the alternative to the mechanical test, the facts and circumstances test.

    3. To clarify the broad definition of "support," IRM discusses general support.

    4. IRM deals with governmental support.

    5. IRM defines what is meant by an organization that is "normally" publicly supported.

    6. The discussion of the advance ruling period is contained in IRM

    7. Reliance by grantors and contributors is dealt with in IRM

    8. Community trusts are discussed in IRM

    9. IRM is the Digest of Published Rulings.

  2. Prior to the Tax Reform Act of 1969, IRC 170(b)(1)(A) and the regulations thereunder described those organizations to which an individual donor's contribution deduction limitation was 30% rather than 20% of income (generally changed by the Act to 50% rather than 30%). Passage of the private foundation provisions of the 1969 Act substantially increased the importance of a charitable organization being described in IRC 170(b)(1)(A)(i) through (vi) by excluding such organizations from private foundation status and certain excise tax liability attached to that classification. As a result, the regulations under IRC 170 (b)(1)(A) were amended to make more explicit the rules to be used in determining the proper classification of certain charitable organizations.


  1. An organization described in IRC 170(b)91)(A)(vi) is one which:

    1. is referred to in IRC 170(c)(2), and

    2. normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under IRC 501(a)) from a governmental unit referred to in IRC 170(c)(1) or from direct or indirect contributions from the general public.

Special Rules

  1. There is one circumstance where an organization may qualify as a "public charity" under IRC 509(a)(1) even though it does not satisfy IRC 170(c)(2). If it is created or organized under laws outside the United States or its possessions and it otherwise meets the requirements under IRC 170(b)(1)(A)(vi) it will qualify as a public charity. See Regs. 1.509(a)(2)(a)(1) and (2).

  2. If an organization is described both in IRC 509(a)(1) and also in 509(a)(2)or 509(a)(3), the organization will be treated as described in 509(a)(1). Reg. 1.509(a) – 6.

Types of IRC 170(b)(1)(A)(vi) Organizations

  1. The types of organizations generally contemplated to fall under the IRC 170(b)(1)(vi) "publicly supported" category include:

    1. publicly or governmentally supported museums, libraries, community organizations that promote the fine arts,

    2. American Red Cross, United Way and

    3. other organizations that receive a significant part of their support form government grants and/or contributions from the general public. Reg. 1.170A–9(e)(1).

33 1/3 Percent-of-Support Test

  1. An organization is publicly supported so as to qualify under IRC 170(b)(1)(A)(vi) if it "normally" receives at least 33 1/3% of its total "support" from governmental units, direct or indirect contributions from the general public, or a combination of these sources.

Facts and Circumstances

  1. An organization that does not meet the 33 1/3% test may nonetheless be considered publicly supported if:

    1. it "normally" receives a substantial part of its support from governmental units, the general public or a combination of these sources and

    2. it satisfies a number of other factors that collectively evidence continuing public involvement in its affairs.

Nature of a Publicly Supported Organization

  1. A mandatory consideration in determining whether an organization satisfies the facts and circumstances test is whether it is organized and operated to attract public and governmental support on a continuing basis. In this regard, the Service will favorably consider an organization that maintains a continuous and bona fide program for soliciting funds from the general public, community, or membership group involved, or whose activities are such as to attract support from governmental units or other publicly oriented organizations described in IRC 170(b)(1)(A)(vi) through (vi). Reg. 1.170A–9(e)(3)(ii).

  2. Underlying this approach are three considerations. 1. Whether the scope of the organization's fund-raising activities is reasonable in light of its charitable activities. 2. A new organization may have limited sources amounts of support before it can expand its solicitation program or activities. 3. The facts and circumstances involving each case will vary and must be considered based upon the nature and purpose of the organization.

  3. For example, the regulations point out that a high support percentage of investment income form endowment funds will normally be treated as an adverse factor especially if such funds were originally contributed by a few individuals or members of their families. On the other hand, if such endowments were originally contributed by a governmental unit or by the general public, this would be favorable to a conclusion that the organization is publicly supported.

  4. As indicated above, no one factor will fit all situations or be considered conclusive of an organization's publicly supported nature. Each factor is only meaningful in light of the type of organization involved. However, the regulations provide certain facts and circumstances which, taken as a whole, offer a guide for ascertaining whether an organization has a publicly supported nature. However, before the facts and circumstances test can be used, an organization must meet the 10% support requirement.

Publicly Supported Under the 10 Percent Requirement

  1. Where an organization receives at least 10% but less than 33 1/3% of its total support form contributions made directly or indirectly by the general public or form governmental units, Reg. 1. 170A–9(e)(3) provides that the Service will then look to the factors (described above) to determine whether the organization is in the nature of a publicly supported organization. An organization with at least 10% public support that also shows sufficient characteristics indicating it is in the nature of a publicly supported organization my qualify, as an organization described in IRC 170(b)(1)(A)(vi).

  2. The regulations make clear that the 10% requirement is minimal so that an organization without this minimal amount of public support is not described in IRC 170(b)(1)(A)(vi).

  3. Also, the higher an organization's public support above 10%, the lesser is its burden of establishing its publicly supported nature through other factors. Reg. 1.170A–9(e)(3)(iii). A discussion of these applicable factors is set out below.

Sources of Support

  1. Reg. 1.170A–9(e)(3)(iv) provides that where an organization's public support is derived from a representative number of persons rather than from members of a single family, this factor indicates a publicly supported nature. On the other hand, this factor will not be persuasive when dealing with a new organization or with an organization that can be expected to appeal to a limited number of persons because its activities are limited to a particular region or to a special field.

Representative Governing Body

  1. Reg. 1.170A–9(e)(3)(v) provides that where an organization's governing body represents the broad interests of the public rather than the private interest of a limited number of donors, this factor indicates a publicly supported nature.

  2. In general, the broad interests of the public will be served by a governing body comprised of public officials or their representatives; persons with expertise in the organization's field of operation; community leaders; or persons elected by a broadly based membership.

  3. The regulations provide additional details concerning representative governing bodies.

Availability of Public Facilities

  1. Where an organization provides a facility or service directly for the benefit of the general public on a continuing basis, this factor indicates a publicly supported nature. Reg. 1.170A–9(e)(3)(vi)(a) provides some examples of facilities or services which are for the general public, such as a:

    • museum or library which holds open its building and facilities to the public,

    • symphony orchestra which gives public performances,

    • conservation organization which provides educational services to the public through the distribution of educational materials, or

    • old services from members of the general public.

  2. The fact that an educational or research institution regularly publishes scholarly studies that are widely used by colleges and universities or by the general public is evidence that an organization is publicly supported pursuant to Reg. 1.170A–9(e)(3)(vi)(b).

  3. Additional factors set forth in Reg. 1.170A–9(e)(3)(vi)(c) evidencing that an organization is publicly supported include:

    1. the participation in, or sponsorship of, the programs of the organization by members of the public having special knowledge or expertise, public having special knowledge or expertise, public officials, or civic or community leaders;

    2. the maintenance of a definitive program by an organization to accomplish its charitable work in the community, such as slum clearance or developing employment opportunities; and

    3. the receipt of a significant part of its funds from a public charity or governmental agency to which it is in some way held accountable as a condition of the grant, contract, or contribution.

Membership Organizations

  1. Factors useful in considering whether membership organizations have the requisite publicly supported nature are provided by Reg. 1.170(A)–9(e)(3)(vii) as follows:

    1. whether the solicitation for dues-paying members is designed to enroll a substantial number of persons in the community or area, or in a particular profession or field of special interest (taking into account the size of the area and the nature of the organization's activities);

    2. whether membership dues for individual (rather than institutional) members have been fixed at rates designed to make membership available to a broad cross section of the interested public, rather than to restrict membership to a limited number of persons; an

    3. whether the activities of the organization will be likely to appeal to persons having some broad common interest or purpose, such as educational activities in the case of alumni associations, musical activities in the case of symphony societies, or civic affairs in the case of parent-teacher associations.

Application of the 10% Public Support Requirement

  1. Examples are provided under Reg. 1.170(a)–9(e)(9) which illustrate whether an organization meets the 10% requirement.

    1. Example (2) illustrates an organization which fails to meet the 10% test.

    2. Example (3) illustrates an organization which meets the 10% rule.

Definition of "Support"

  1. For purposes of IRC 170(b)(1)(A)(vi), the term "support" includes the following:

    1. gifts, grants, contributions, membership fees;

    2. net income from unrelated business activities, whether or not such activities are carried on regularly as a trade of business;

    3. gross investment income, such as interest, dividends, rents, and royalties;

    4. tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization; and

    5. the value of services of facilities (exclusive of these generally furnished to the public without charge) furnished by a governmental unit referred to in IRC 170(c)(1) to an organization without charge. See Reg. 1.170A–9(e)(7)(i) which adopts the definition of the term "support" provided in IRC 509(d) (except for 509(d)(2)).

  2. The term "support" does not include the following:

    1. Any amounts an organization receives from the exercise or performance of its charitable, educational, or other purpose or function constituting the basis for its exemption under IRC 501(a).

    2. Any gain upon the sale or exchange of property which would be considered under any section of the Code as gain from the sale or exchange of a capital asset (IRC 509(d)).

    3. Contributions or services for which a deduction is not allowable.

Computing Public Support

  1. In determining to what extent an organization is publicly supported, the organization's total support forms the denominator of the support fraction. The numerator (public support) is determined from the support (subject to certain limitations) from any combination of gifts, grants, contributions and membership fees from the general public, and from governmental units.


    M, an organization described in IRC 170(c)(2), shows that it derived funds from the following sources during taxable years 1995–1998:

    1. interest and dividends $80,000

    2. net income from unrelated business activities $20,000

    3. gifts and contributions from the general public $200,000

    4. capital gains $5,000

    5. admission fees (amounts form the exercise of its exempt function under IRC 501(a)) $5,000


      In this situation M's total support = $300,000, the sum of items a, b, and c; items d, and e are excluded because capital gains and income related to exempt functions are not included in the definition of support for purposes of IRC 170(b)(1)(A)(vi). M organization's public support (numerator of the public support fraction) is $200,000, since of the total support received only item (c), gifts and contributions, qualifies as public support. M's public support fraction is public support $200,000 over total support $300,000 or 66 2/3% public support.

Support from the General Public — 2 Percent Limitation

  1. Support from the general public means any direct or indirect contribution an organization derives from a donor. Thus, contributions from the general public are included in full in the numerator and denominator of the organization's public support fraction except as provided below. See Reg. 1.170A–9(e)(6)(i).

  2. The term "contribution" has the same meaning as it has under IRC 170(c). Thus any payment of money or transfer of property without consideration will be treated as a contribution. The amount includable in computing support with respect to contributions of appreciated property shall be the fair market value of such property at the date of the contribution.

    1. To the extent that a donor's contribution exceeds 2% of an organization's total support, it is not considered public support and, therefore, is excluded from the numerator of the public support fraction.

    2. The entire amount of the contribution is included in the denominator of the fraction.

  3. The 2% limitation applies to any person or persons related to the donor in a manner described in IRC 4946(a)(1)(C) through (G) as if the contribution were made by the donor.


    A husband and wife would be treated as one person for purposes of the 2% limitation.

  4. In most cases, the 2% limitation does not apply to support from other IRC 170(b)(1)(A)(vi) organizations or from governmental units referred to in IRC 170(c)(1). It is also not applicable to support from other organizations which normally receive a substantial part of their support from direct or indirect contributions made by the general public. See Reg. 1.170A–9(e)(9)(1) Example (1), which illustrates the application of the 2% limitation principle.

Special Rules For Earmarked Grants From Public Charities and Governmental Units

  1. There is an exception to the special rule for grants from public charities and governmental units as described in IRM, above.

    1. Where a donor makes an indirect contribution (one which is expressly or impliedly earmarked as being for, or for the benefit of, a particular recipient) through an organization described in IRC 170(b)(1)(A)(vi) or a governmental unit for a particular organization claiming status under IRC 170(b)(1)(A)(vi), such contribution is subject to the 2% limitation. Reg. 1.170A–9(e)(6)(v). (For further details, see Reg. 1.509(a)–3(j).)

    2. In other words, the substance of a transaction will always govern, and if the publicly supported organization or governmental unit is merely a conduit for amounts which have been expressly or impliedly earmarked by a donor as being for the particular organization, the contributions will be treated as having been made by the original donor and the 2% limitation will apply.

Membership Fees

  1. Membership fees are fully included (subject to the 2% limitation) in the numerator and denominator of the public support fraction if made for the recipient organization's support fraction if made for the recipient organization's support rather than to purchase admissions, merchandise, services, or the use of facilities. If made for any of the latter purposes, it is important to determine further whether such membership fees represent amounts derived from unrelated or related business activities because the treatment accorded each varies.

  2. Net income from membership fees that represent income from business activities unrelated to the organization's exempt purposes under IRC 501(a) are included in the denominator, but excluded from the numerator, of the public support fraction. (See IRC 509(d)(3) and IRC 513 for a further discussion of unrelated business activities.)

  3. Membership fees that represent amounts received from business activities related to the organization's exempt purposes under IRC 501(c) are fully excluded from the numerator and denominator of the public support fraction. In this regard, see IRM

Special Rules For Gross Receipts From Related Activities

  1. In computing an organization's public support fraction, gross receipts derived from any trade or business activity the conduct of which is related to the organization's charitable, educational, or other purpose constituting the bases for its exemption under IRC 501(a) are excluded from the numerator and denominator. Rules for determining whether support is or is not related to an organization's exempt purposed are set forth in IRC 513, and Reg. 1.513–1(d).

  2. If an organization is depended for its support primarily on gross receipts from related activities, it is not considered publicly supported under IRC 170(b)(1)(A)(vi) regardless of any other factors. Reg. 1.170A–9(e)(7)(ii).

  3. An organization is considered to be dependent primarily on gross receipts from related activities if it derives almost all support from related activities and an insignificant amount from governmental units and direct or indirect contributions made by the general public.

  4. In the following example, drawn from Reg. 1.170A–9(e)(7)(ii), the organization is dependent primarily on gross receipts from activities related to its exempt purposes so that it cannot qualify as an IRC 170(b)(1)(A)(vi) organization:


    X, an organization described in IRC 501(c)(3), is controlled by A, its president. X received $500,000 during the 4 taxable years immediately preceding its current taxable year under a contract with the Department of Transportation, pursuant to which X has engaged in research to improve a particular vehicle used primarily by the Federal Government. During this same period, the only other support received by X consisted of $5,000 in small contributions primarily from X's employees and business associates. The $500,000 amount constitutes support under IRC 509(d)(2).

Exclusion of Unusual Grants

  1. If an organization cannot meet the one-third public support test or the 10% public support requirement because of one or more unusually large contributions, it may be entitled to exclude such contributions as support in computing whether it is publicly supported. Amounts excluded from an organization's support as unusual grants are entirely excluded from the numerator and denominator of the organization's public support fraction. Reg. 1.170A–9(e)(6)(ii).

  2. All pertinent facts and circumstances are to be considered, but the following factors are considered most important in concluding that a particular contribution should be excluded as an unusual grant:

    1. the contribution will adversely affect the organization's status as normally being publicly supported;

    2. the contribution is unusual as to amount relative to contributions which the recipient organization usually receives, or it is received unexpectedly; and

    3. the donor is a disinterested party with respect to the recipient organization in the sense that the donation is made solely because of the publicly supported nature of the organization.

  3. Additional facts and circumstances concerning the exclusion of unusual grants are contained in Reg. 1.509(a)–3(c)(4) and Rev. Proc. 81–7, 1981 C.B. 621.

  4. A grant that otherwise qualifies for exclusion that is paid over a period of years may be excluded each year a payment i s made. For a definition of the term "grant" , see Reg. 1.509(a)–3(g).

  5. Area Managers may issue "unusual grant" determinations as to the continued classification of an organization as one that is publicly supported.

Support From Governmental Units

  1. Generally, governmental support is accorded favorable treatment when determining whether an organization qualifies under IRC 170(b)(1)(A)(vi). Any amount classified as support from a governmental unit is fully included in the numerator of an organization's public support fraction except for indirect contributions earmarked by individual donors as described in IRM The term "governmental unit" means entities described in IRC 170(c)(1).

  2. Governmental support means only contributions received from governmental units and certain other amounts received in connection with contracts entered into with governmental units that constitute amounts paid for the performance of services or in connection with a government research grant. See Reg. 1.170A–9(e)(8)(i).

Special Rules For Amounts Paid Under Government

  1. Amounts an organization receives from governmental contracts may be classified, depending on the particular facts, either as governmental support or support from activities related to the organization's exempt purposes. The classification is important since:

    1. amounts classified as governmental support will be included in the numerator of the public support fraction;

    2. whereas, if the payments are classified as support from activities related to exempt purposes, they will be excluded from the numerator and denominator of the public support fraction unless the purpose is to permit the recipient organization to provide a facility or service for the direct benefit of the public rather than to serve the direct and immediate needs of the payor. See Reg. 1.170A–9(e)(8)(ii).

  2. the following illustrates amounts paid for direct public benefit under this provision:

    1. amounts paid for the maintenance of library facilities which are open to the public;

    2. amounts paid under government programs to nursing homes or homes for the aged in order to provide health care or domiciliary services to residents of such facilities; and

    3. amounts paid to child placement or child guidance organization under government programs for services rendered to children in the community.

  3. In addition, similar rules applicable to amounts from governmental sources considered to provide direct public benefit are set forth in Reg. 1.509(a)–3(g).

Organizations Normally Publicly Supported

  1. Because an organization's sources of support will vary from year to year, one year is generally not a sufficient period of time to reflect an organization's normal sources of support. Therefore, a four-year computation period is used to determine whether an organization is "normally" publicly supported within the meaning of IRC 170(b)(1)(A)(vi). Reg. 1.170A–9(e)(4).

  2. If an organization satisfies the 33 1/3% public support test or, the 10% public support requirement, on an aggregate basis for the four proceeding taxable years, the organization will then qualify as being "normally" publicly supported for the current year and the immediately succeeding taxable year.

    1. For example, an organization meeting the one-third public support test on an aggregate basis for the years 1990, 1991, 1992, and 1993 will be considered "normally" publicly supported for the years 1994 and 1995.

  3. The following example from Reg. 1.170A–9(e)(4)(iv) illustrates an application of the four year normal support rule.


    X, an organization described in IRC 170(c)(2), meets the 33 1/3 percent-of-support test described in subparagraph (2) of this paragraph in taxable year 1975 on the basis of support received during taxable years 1971, 1972, 1973, and 1974. It therefore "normally" meets the requirements of subparagraph (2) of this paragraph for 1975 and 1976, the taxable year immediately succeeding 1975 (the current taxable year). For the taxable year 1976, X is unable to meet the 33 1/3 percent-of-support test described in subparagraph (2) of this paragraph on the basis of support received during taxable years 1972, 1973, 1974, and 1975. If X can meet the requirements of subparagraph (3) of this paragraph on the basis of taxable years 1972, 1973, 1974, and 1975, X will meet the requirements of subparagraph (3) of this paragraph for 1977 (the taxable year immediately succeeding 1976, the current taxable year) under subdivision (ii) of this subparagraph. However, if on the basis of both the taxable years 1972 through 1975 and 1973 through 1976, X, fails to meet the requirements of both subparagraphs (2)(3) of this paragraph, X will not be described in IRC 170(b)(1)(A)(vi) for 1977. However, X will not be disqualified as a IRC 170(b)(1)(A)(vi) organization for taxable year 1976, because it "normally" met the requirements of subparagraph (2) of this paragraph on the basis of the taxable years 1971 through 1974, unless the provisions of subdivision (v) of this subparagraph become applicable.

  4. Generally, after an organization is considered normally publicly supported, it must then be unable for two consecutive computation periods to satisfy the 33 1/3% public support test or the 10% public support requirement to fall short of being described in IRC 170(b)(1)(A)(vi). there is an exception to this general rule for material changes in sources of support as described below.

Material Changes In Sources of Support

  1. Where a substantial and material change in an organization's support occurs, then, notwithstanding the rule for determining whether an organization is "normally" publicly supported, its status as an organization described in IRC 170(b)(1)(A)(vi) ceases. Once example of such a substantial or material change is where an organization receives an unusually large contribution or bequest that does not qualify as an unusual grant.

  2. The organization may affirm its IRC 170(b)(1)(A)(vi) status for the year of material change by showing that it is publicly supported based on a computation period that includes the year in which the material change occurs plus the four taxable years immediately preceding such year. Regs. 1.170A–9(e)(4)(v)(a).

  3. For example, assume that in 1993 X, an organization described in IRC 170(b)(1)(A)(vi), receives a large grant that does not qualify for exclusion as an unusual grant. Since such grant is considered a substantial and material change, the determination of whether X is "normally" publicly supported for 1993 is based on taxable years 1989 through 1993 (a five year computation period) rather than 1988 through 1991 or 1989 through 1992.

Computation Period For New Organizations

  1. Organizations that have been in existence for at least one taxable year consisting of at least eight months, but for less than five taxable years, can substitute the number of taxable years they have been in existence prior to their current taxable year to determine whether they meet the 33 1/3 or facts and circumstances tests described in IRM and IRM Reg. 1.170–9(e)(4)(vi).


    An exception to this rule is discussed in IRM where there is a material change in sources of support.

    1. An organization that meets the "at least 8 months" requirement has the option of requesting a five year advance ruling period instead of a definitive ruling based on the support it has received to date. Organizations that do not meet the 8 months requirement do not qualify for a definitive ruling and must request a five year advance ruling. Further discussion of the term "eight months" can be found in Rev. Rul. 74–487, 1974–2 C.B. 82.

    2. Where an organization has received a five year advance ruling described in IRM, the computation period will be based on all the years in the 5 year advance ruling period.

Advance Rulings to Newly Created Organizations

  1. Many newly created organizations cannot meet either the four year "normally" publicly supported provisions or the provisions for new organizations to qualify as "normally" publicly supported because they have not been in existence for a sufficient period of time. Nevertheless, a newly created organization may qualify for an advance ruling that it will be treated as an organization described in IRC 170(b)(1)(A)(vi) during an advance ruling period sufficient to enable it to develop an adequate support history on which to base an initial determination as to foundation status.

  2. Briefly, the type of newly created organization that would qualify for an advance ruling is one that can show that its organization structure, proposed programs and activities, and intended method of operations are such as to attract the type of broadly based support form the general public, public charities, and governmental units necessary to meet the public support requirements under IRC 170(b)(1)(A)(vi).

  3. Initially, Reg. 1.170A–9(e)(5)(i) provided for an advance ruling period of two or three years depending on the length of the first tax year. Reg. 1.170–9(e)(5)(iv) provides for an extended advance ruling of an additional three years.

  4. Subsequently, Congress directed the Treasury Department to extend the advance ruling period for newly formed organizations to five years. H.Rept. No. 861, 98th Cong., 2nd Sess. 1090 (1984), 1984–3 (Vol. 2) C.B. 344. the new five year period replaces both the two or three year advance ruling period and the extended advance ruling period for organizations applying on Form 1023 (Rev. March 1986).

  5. A newly created organization subject to the five year advance ruling period may request a ruling or determination letter that it will be treated as an IRC 170(b)(1)(A)(vi) organization for its first five taxable years.

    1. The request must be accompanied by a consent to extend the statute (Form 872–C) that in effect states the organization will be subject to IRC 4940 taxes if it fails to qualify as not a private foundation during the five year advance ruling period.

    2. The organization's first tax year (regardless of length) shall count as the first year in the five year period.

    3. The advance ruling period will end on the last day of the organization's fifth tax year.

Failure to Obtain Advance Ruling

  1. If a newly created organization has not obtained an advance ruling or determination letter, it cannot rely upon the possibility that it will meet the "mechanical test" and "facts and circumstances test" discussed in IRM and IRM Thus, in order to avoid the risk of being classified a private foundation, the organization may comply with the rules governing private foundations by paying any applicable Chapter 42 taxes. Then if the organization subsequently meets the public support requirements for either of the computation periods mentioned in Regs. 1.1270A–9(e)(5)(v)(b) or (c), it will be treated as an IRC 170(b)(1)(A)(vi) organization from its inception and any tax imposed under Chapter 42 will be refunded.

Reliance by Grantors and Contributors

  1. If an organization is not able to meet the public support requirements for its current taxable year or has its advance ruling period terminated prior to the expiration of such ruling period, grantors and contributors will ordinarily not be affected by such change of status until notice is given to the public by a means such as publication in the Internal Revenue Bulletin.

  2. However, grantors and contributors will be affected if they were responsible for, or aware of, the act or failure to act that resulted in the organization's loss of IRC 170(b)(1)(A)(vi) status or acquired knowledge that the Service had given notice that the organization would be deleted from such classification. See Reg. 1.170A–9(e)(4)(v)(b).

  3. In this respect, Regs. 1.170A–9(e)(4)(v)(c) and 1.170A–9(e)(6)(iv)(b), respectively, provide procedures by which potential grantors may obtain advance assurance that they will not be considered responsible for, or aware of, a substantial and material change in support (discussed in IRM or an unusual grant that is not excluded from the support computation (discussed in IRM which may result in a recipient organization's failure to meet the requirements of IRC 170(b)(1)(A)(vi).

  4. Rev. Proc. 81–6, 1981–1 C.B. 620, provides guidelines to determine whether a grantor or contributor will be considered responsible for a substantial and material change in support.

Grantee Ruling Requests on the Effect of Potential Grants

  1. If a grantee organization is concerned that a potential grant may cause it to lose classification under IRC 170(b)(1)(A)(vi), it can request a ruling to determine the effect a particular contribution will have on its status. Such request must contain all the pertinent information necessary to make a determination. The issuance of such letter is at the discretion of the Service but if a favorable ruling is issued, affected grantors and contributors can rely on such ruling. Regs. 1.170A–9(e)(5)(iii)(C).

Special Rule for Older Organizations

  1. A special rule is provided in Regs. 1.170A–9(e)(4)(vii) for older organizations that as of January 1, 1970, possessed outstanding ruling or determination letters classifying them as publicly supported organizations described in IRC 170(b)(1)(A)(vi). Under this rule, such organizations are not subject to the presumption of private foundation status set forth in IRC 508(b) until March 29, 1973. Moreover, grantors to such organizations can rely on the outstanding letter for purposes of IRC 170, 507, 545(b)(2), 556(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2) and 2522 until such time as the Service may expressly revoke the letter (provided the grantor is aware of such revocation), or the Service gives notice to the public of a change in the organization's status through publication in the Internal Revenue Bulletin.

Community Trusts

  1. Community trusts are often established to attract large contributions of a capital or endowment nature for the benefit of a particular community or area, and often such contributions come initially from a small number of donors.

    1. While the community trust generally has a governing body comprised of representatives of the particular community or area, its contributions are often received and maintained in the form of separate trusts or funds, which are subject to varying degrees of control by the governing body.

    2. Usually the separate trusts or funds are managed by banks or other corporate trustees.

  2. To qualify as a publicly supported organization, a community trust:

    1. meet the one-third support test explained earlier, or,

    2. if it cannot meet the test, it must be organized and operated so as to attract new and additional public or governmental support on a continuous basis sufficient to meet the facts and circumstances test, also explained earlier.

  3. Community trusts are generally able to satisfy the requirement of attraction of public support (as contained in the facts and circumstances test) if they seek gifts and bequests from a wide range of potential donors in the community or area served, through banks or trust companies, through attorneys or other professional persons, or in other appropriate ways that call attention to the community trust as a potential recipient of gifts and bequests made for the benefit of the community or area served.

  4. A community trust, however, is not required to engage in periodic, community-wide, fund-raising campaigns directed toward attracting a large number of small contributions in a manner similar to campaigns conducted by a community chest or a united fund. Reg. 1.170A–9(e)(10).

Single Entity

  1. When the Tax Reform Act of 1969 was enacted, a number of community trusts had already been established. The regulations under IRC 170(b)(1)(A)(vi) prior to the Tax Reform Act of 1969 recognized this trend by containing an example describing a typical community trust. However, the regulations failed to address two major problems:

    1. the entity problem—whether an aggregation of trusts could be treated as a single entity for purposes of Subchapter F and related provisions;

    2. the support problem—whether community trusts should be subject to the same support requirements as other IRC 170(b)(1)(A)(vi) organizations.

  2. In order to be treated as a "single entity" , the present regulations under IRC 170(b)(1)(A)(vi) provide that a community trust must satisfy the following requirements—

    1. It must be commonly known as a community trust, fund, foundation or by other similar name conveying the concept of a capital or endowment fund to support charitable activities in the community or area it serves. Reg. 1.170A–9(e)(11)(iii).

    2. All the funds of the organization must be subject to a common governing instrument or a master trust or agency agreement. Reg. 1.170A–9(e)(11)(iv).

    3. The organization must have a common governing body or distribution committee which either directs or, in the case of a fund designated for specified beneficiaries, monitors the distribution of all of the funds exclusively for charitable purposes. Reg. 1.170A–9(e)(11)(v)(A).

    4. the governing body must have the power to modify any restriction or condition on the distribution of funds for any specified charitable purposes or to specified organizations, and to replace any participating trustee, custodian, or agent for breach of fiduciary duty under State law or for failure to produce a reasonable return of net income over a reasonable period of time. Reg. 1.170A–9(e)(11)(v)(B).

    5. The community trust must prepare periodic financial reports treating all of the funds which are held by the community trust, either directly or in component parts, as funds of the organization. Reg. 1.170A–9(e)(11)(vi).

    6. The governing body must also (by resolution or otherwise) commit itself to exercise the powers of modification and removal (indicated in d above) in the interest of the community trust. Reg. 1.170A–9(e)(11)(v)(E).

    7. The governing body must also (by resolution or otherwise) commit itself to obtain information and take other appropriate steps with the view to seeing that each participating trustee, custodian, or agent, with respect to each restricted fund or trust (as defined in Reg. 1.170A–9(e)(13)(x)), and with respect to the aggregate of the unrestricted trusts or funds that are a component part of the community trust administers such trust or fund in accordance with the terms of its governing instrument and accepted standards of fiduciary conduct to produce a reasonable return of net income, with due regard to safety of principal, in furtherance of the exempt purposes of the community trust. Reg. 1.170A–9(e)(11)(F).

  3. These requirements may be satisfied by amendments to the governing instrument of the community trust and by the governing body's adoption of the appropriate resolutions. Sample governing instrument amendments and resolutions are contained in Rev. Rul. 77–333, 1977–2 C.B. 75, and Rev. Rul. 77–334, 1977–2 C.B. 77.

  4. The regulations also contain transitional rules that relate to the adoption of the powers of modification and removal. These rules apply to:

    1. the effect of inconsistent State law requirements, and

    2. the dates by which the community trust must adopt these powers. Generally, a community trust must change its governing instrument (or instrument of transfer) by the later of November 11, 1977, or one year after a gift or bequest is acquired (in the case of an instrument of transfer relating to gifts or bequests acquired before January 1, 1982). However, unless a community trust is barred by its governing instrument from causing proceedings to be instituted by request to the appropriate State authority, the November 11th deadline is effectively extended to January 19, 1978.

Component Part

  1. There are also rules that complement the single entity test in that they provide guidelines for treatment of a trust or fund as a component part of the community trust. Reg. 1.170A–9(e)(11)(i) and (ii). To be treated as a component of a community trust, a trust or fund must meet the following requirements:

    1. be created by a gift, bequest, legacy, devise, or other transfer to a community trust which is treated as a "single entity" ; and,

    2. the trust or fund may not be directly or indirectly subjected by the transferor to any material restriction or condition (as defined in Regs. 1.507–2(a)(8)) with respect to the transferred assets. IRM, below, describes the criteria for determining whether a material restriction or condition has been imposed.

  2. The community trust regulations also provide guidelines with respect to the treatment of trusts, not-for-profit corporations and association not included as component parts. See Reg. 1.170A–9(e)(14).

Material Restrictions

  1. Whether a material restriction or condition has been imposed must be determined from all the facts and circumstances of the transfer. Significant facts and circumstances include the following:

    1. Whether the transferee (including a participating trustee, custodian, or agent) is the owner in fee of the assets it receives;

    2. Whether such assets are to be held and administered by the transferee in a manner consistent with one or more of its exempt purposes;

    3. Whether the governing body of the transferee has the ultimate authority and control over such assets, and the income derived therefrom; and

    4. Whether, and to what extent, the governing body of the transferee is organized and operated so as to be independent from the transferor. Reg. 1.507–2(a)(8)(i).

  2. Certain factors will not adversely affect the determination.

    1. The fund may be given a name that memorializes the donor or his or her family.

    2. The income and assets of the transferred fund may be used for a purpose or a public charity designated in the transfer instrument.

  3. The donor may designate, before or at the time of the creation of the fund, the specific public charity described in IRC 509(a)(1), 509(a)(2), or 509(a)(3) that may receive the income and assets of the fund.

    1. The designation of a specific public charity as the recipient of the income or assets of a fund at the time of creation of the fund must be distinguished from the reservation of the right of the donor to direct the distribution of the income or assets following the gift or to offer advice as to such distribution after the gift is completed.

    2. The reservation of a power to direct or advise as to distribution after the completion of a gift is subject to the rules relating to material restrictions or conditions. These rules are discussed in IRM


      The O private foundation transferred all of its net assets to X Bank as trustee for the P Community Trust, a community trust which is a public charity described in IRC 170(b)(1)(A)(vi). Under the terms of the transfer, X is to hold the assets in trust for P and is directed to distribute the income annually to the Y Church, a public charity. The distribution of income to Y Church is consistent with P's exempt purpose. The distribution of the income is a designated gift meeting the requirements of Reg. 1.507–8(a)(iii)(B). Reg. 1.507–8(a)(v), Example 3.

  4. Transferred assets may be administered in an identifiable fund with restrictions on distributions of principal. The donor may require the transferee to retain the transferred property, so long as continued retention is important to the achievement of exempt purposes. Reg. 1.507–2(a)(8)(iii)(C) and (D).

  5. Adverse factors [Reg. 1.507–2(a)(8)(iv)(A) through (F)] include the following:

    1. The donor or the donor's designee reserves the right to name the distributees or direct the timing of distributions by the transferee (other than by designation in the transfer instrument). See IRM, this text, for a discussion of advised funds where such a reservation may exist.

    2. The transferee is required to take or withhold action with respect to the transferred assets which is not designed to further the transferee's exempt purposes, and if performed by the transferor would have constituted a violation of Chapter 42.

    3. The transferee assumes the transferor's contractual obligations or takes the assets subject to such obligations, for purposes inconsistent with the purposes or best interests of the transferee.

    4. The transferee is required to retain transferred investment assets.

    5. The transferor retains a right of first refusal to the transferred assets.

    6. The transferee is required to maintain relationships with respect to the management of transferred assets, such as continuing relationships with investment counselors.

Advised Funds
  1. Where the only criterion considered by the transferee in making a distribution of income or principal form the transferred assets is advice offered by the transferor, the Service will conclude that a material restriction exists. In all other instances, the issue is one of facts and circumstances. Factors that will be favorably considered [Reg. 1.507–2(a)(8)(iv)(A)(2)] include the following:

    1. There has been an independent investigation by the staff of the transferee evaluating whether the donor's advice is consistent with specific charitable needs most deserving the transferee's support;

    2. The transferee has promulgated guidelines enumerating specific charitable needs consistent with its charitable purposes and the donor's advice is consistent with such guidelines;

    3. The transferee has instituted an educational program publicizing to donors and other persons the above guidelines;

    4. The transferee distributes funds in excess of amounts distributed from the donor's fund to the same or similar types of organizations or charitable needs as those recommended by the donor; and

    5. The transferee's solicitations for funds specifically state that it will not be bound by advice offered by the donor.

  2. Adverse factors [Reg. 1.507–2(a)(8)(iv)(A)(3)] include the following:

    1. The solicitations (written or oral) of funds by the transferee state or imply, or a pattern of conduct on the part of the transferee creates an expectation, that the donor's advice will be followed;

    2. The advice of a donor is limited to distributions of amounts from the donor's fund, and the independent investigation and guidelines described above in (1)a. and b. are not present;

    3. Only the advice of the donor as to distributions of such donor's fund is solicited by the transferee and no procedure is provided for considering advice from persons other than the donor with respect to such fund; and

    4. For the taxable year and all prior taxable years the transferee follows the advice of all donors with respect to their funds substantially all of the time.

Commercial Donor Advised Funds
  1. A growing number of commercial companies promote donor advised funds as exempt entity vehicles for deductible charitable donations by private individuals and interests. These commercially promoted donor advised funds may employ concepts and terminology that are quiet similar to those associated with community trusts qualifying under the Regulations as described in the preceding paragraphs. A community trust must serve a defined community or geographical area. Reg. 1.170A–9(e)(10); Reg. 1.170A–9(e)(11)(iii). Commercially promoted donor advised funds usually fail this requirement.

  2. Two court cases dealing with organizations employing purported donor advised funds outside the traditional community trust structure are National Foundation, Inc. v. United States, 13 Cl. Ct. 486 (1987) and Fund for Anonymous Gifts, CA 95–1629 (D.D.C 1997) vacated on other grounds 194 F.3rd 173 (D.C. Cir. 1999). In the latter case, the Court held that the organization failed to qualify for exemption because the donor exercised significant control over the donation while, at the same time, claiming a charitable deduction for the gift. the Court found that the organization's activity benefits the donor because the donor controls the investment. In National Foundation, Inc., the Claims Court, on the narrow issue of commercial enterprise, found no evidence that the organization was a commercial enterprise.

Application of the Criteria Concerning Material Restrictions
  1. The following are examples under Reg. 1.507–2(a)(8)(v) of the application of the criteria concerning material restrictions:


    (1): The M Private Foundation transferred all of its net assets to the V Community Trust. Prior to the transfer, M's activities consisted of making grants to hospitals and universities to further research into the causes of cancer. Under the terms of the transfer, V is required to keep M's assets in a separate fund and use the income and principal to further cancer research. Although the assets may be used only for a limited purposed, this purpose is consistent with and in furtherance of V's exempt purposes, and therefore does not subject the transferred assets to a material restriction.


    (2): The N Private Foundation transferred all of its net assets to W Community Trust. Under the terms of the transfer, W is required to use the income and principal to endow a chair at a university to be known as the "John J. Doe Memorial Professorship," named after N's creator. Although the transferred assets are to be used for a specified purposed by W, this purposed is in furtherance of W's exempt educational purposes, and there are no conditions on investment or reinvestment of the principal or income. The use of the name of the foundation's creator for the chair is not a material restriction which would prevent the transferred assets from being a component part of W Community Trust.


    (3): The U Private Foundation transferred all of its net assets to Z Bank as trustee for the R Community Trust. Under the terms of the transfer, Z is to hold the assets in trust for R and distribute the income to those public charities described in IRC 170(b)(1)(A)(i) through (vi) that are designated by B, the creator of U. R's governing body has no authority during B's lifetime to vary B's direction. Under the terms of the transfer, it is intended that Z retain the transferred assets in their present form for period of 20 years, or until the date of B's death if it occurs before the expiration of such period. Upon the death of B, R will have the power to distribute the income to such public charities as it selects and may dispose of the corpus as it sees fit. The restrictions imposed are material, and accordingly the transfer will be treated as made to a separate trust rather than to a component part of R Community Trust.

Transitional Rules

  1. Since some established community trusts may have problems in satisfying traditional support requirements under IRC 170(b)(1)(A)(vi), the regulations provide for a 5-year transitional ruling period which was designed to give community trusts the time needed to attract new sources of support to enable them to meet the established support requirements under IRC 170(b)(1)(A)(vi). See in this regard Regs. 1.170A–9(e)(12) and (13).

Digests of Published Rulings

  1. Publicly supported organizations; advance ruling period. The one remaining relevant and current element to Rev. Rul. 74–487, 1974–2 C.B. 82, is that the term "eight months," as used in Regs. 1.170A–9(e)(5)(i), means eight full months.

  2. Publicly-supported organization; unusual contribution. A large inter vivos gift of undeveloped land from a disinterested donor to a normally publicly supported organization exempt under IRC 501(c)(3), conditioned on the land's being used in perpetuity to further the exempt organization's purposes of preserving natural resources, constitutes an unusual grant and will not adversely affect the status of the organization as a publicly supported organization under IRC 170(b)(1)(A)(vi). Rev. Rul. 76–440, 1976–2 C.B. 58.

  3. Publicly supported organization; untimely notification. A corporation that states it is a publicly supported charity when it files its application for recognition of exemption subsequent to the 15-month deadline provided by regulation cannot be treated as an organization described in IRC 501(c)(3) before the date it files its application; financial support received prior to that date may not be used for purposes of determining whether the organization is publicly supported under IRC 170(b)(1)(A)(vi). Rev. Rul. 77–208, 1977–1 C.B. 153.


    IRC 7428(b)(2) mandates a 270 day period for the determination of exemption which supersedes the 15 month period of prior law reflected in Rev. Rul. 77–208.

  4. Publicly supported; business league contribution limitation. Contributions made by an IRC 501(c)(6) business league to an IRC 501(c)(3) organization seeking to be classified as other than a private foundation under IRC 509(a)(1) because it is publicly supported under IRC 170(b)(1)(A)(vi) are subject to the two percent limitation imposed by Regs. 1.170A–9(e)(6). Rev. Rul. 77–255, 1977–2 C.B. 74.

  5. Community trusts; governing instruments. Examples are given of provisions in the governing instruments of community trusts that meet the requirements of Regs. 1.170A–9(e)(11)(v)(B). Rev. Rul. 77–333, 1977–2 C.B. 75.

  6. Community trusts; required resolutions. Examples are given of resolutions adopted by community trusts with respect to the administration of such trusts or funds that satisfy the requirements of Regs. 1.170A–9(e)(11)(v)(E) and (F). Rev. Rul. 77–334, 1977–2 C.B. 77.

  7. Publicly supported organization; limitation of support received from churches. The two percent limitation prescribed by Regs. 1.170A–9(e)(6)(i) does not apply to the support received by an exempt organization described in IRC 170(c)(2) from individual churches described in IRC 170(b)(1)(A)(i) that are publicly supported and entitled to IRC 170(b)(1)(A)(vi) status. Rev. Rul. 78–95, 1978–1 C.B. 71.

  8. Private foundation; supporting organization; community trust. A community trust described in section 1.170A–9(e)(11) of the regulations that was created by a community chest to hold permanently endowed charitable funds and to distribute income to support local charitable organizations that are public charities is a supporting organization under IRC 509(a)(3) and is not a private foundation, even if the publicly supported charities are not specified by name. Rev. Rul. 81–43, 1981–1 C.B. 350.

  9. Professional standards review organization (PSRO). An organization was established to perform the services of a professional standards review organization (PSRO) pursuant to section 249F of the Social Security Amendments of 1972, and was designated as a PSRO for a particular area by the Department of Health and Human Services (HHS). It derives all of its support from contracts with HHS that provide for payment for all reasonable and necessary expenses incurred by it in the performance of its functions. The organization qualifies for exemption under IRC 501(c)(3) and is not a private foundation under IRC 509(a) because it is described in IRC 170(b)(1)(A)(vi). Rev. Rul. 74–553 distinguished Rev. Rul. 81–276, 1981–2 C.B. 128.

  10. Health care organizations; medicare and medicaid payments. Medicare and medicaid payments constitute gross receipts derived from the exercise or performance of a health care organization's exempt activities for purposes of the support test of IRC 170(b)(1)(A)(vi) and 509(a)(2). Rev. Rul. 83-153, 1983–2 C.B. 48.

  11. Publicly supported; substantial and material changes in support. Guidelines set forth the circumstances under which grantors or contributors will not be considered responsible for "substantial and material" changes in sources of financial support. Reg. 1.170A–9, 1.509(a)–3, 601.105, Rev. Proc. 81–6, 1981–1 C.B. 615.

  12. Rev. Proc. 89–23, 1989–1 C.B. 844 amplifies Rev. Proc. 81–6 in the following respects:

    1. All grantors and contributors, including private foundations, may continue to rely on the guidelines in Rev. Proc. 81–6, pending the issuance of regulations implementing the directions of congress in 1984 to permit greater reliance by private foundations on IRS classification of new organizations in the first five years of such organization's existence.

    2. For purposes of IRC 4942(g) (qualifying distributions) and IRC 4945(g) (taxable expenditure), a private foundation making gifts, grants and contributions to another organization may rely on the status of the recipient organization as not a private foundation to the extent provided in Rev. Proc. 89–23.

  13. Publicly supported; unusual grants. Guidelines set forth the circumstances under which grants or contributions will be considered "unusual grants" without benefit of an advance ruling. Reg. 1.170A–9, 1.509(a)–3, 601.105, Rev. Proc. 81–7, 1981–1 C.B. 615.