Publication 557 Contents (Rev. May 2003)

Cat. No. 46573C Introduction ..................... 2 Department

of the Chapter 1. Application, Approval, Treasury Tax-Exempt and Appeal Procedures .......... 2

Internal Application Procedures ........... 3

Revenue Forms Required ............. 3

Service Status for Your Required Inclusions .......... 3

Miscellaneous Procedures ...... 3

Rulings and Determination Organization Letters ................... 4

Effective Date of Exemption ..... 4

Revocation or Modification of

Exemption .............. 4

Appeal Procedures .............. 5

Appeals Office Consideration .... 5

Headquarters 

Consideration ........... 5

Administrative Remedies ....... 5

Appeal to Courts ............ 6

Group Exemption Letter .......... 6

Central Organization

Application Procedure ...... 6

Keeping the Group

Exemption Letter in

Force ................. 7

Events Causing Loss of

Group Exemption ......... 7

Chapter 2. Filing Requirements

and Required Disclosures ........ 7

Annual Information Returns ........ 8

Unrelated Business Income Tax

Return ................... 9

Employment Tax Returns ......... 9

Political Organization Income Tax

Return ................... 10

Reporting Requirements for a

Political Organization ......... 10

Donee Information Return ......... 12

Information Provided to Donors ..... 12

Report of Cash Received .......... 13

Public Inspection of Exemption

Applications, Annual Returns,

and Political Organization

Reporting Forms ............ 13

Required Disclosures ............ 15

Solicitation of Nondeductible

Contributions ............ 15

Sales of Information or

Services Available Free

From Government ........ 15

Dues Used for Lobbying or

Political Activities ......... 15

Miscellaneous Rules ............. 15

Chapter 3. Section 501(c)(3)

Organizations ................ 16

Contributions .................. 16

Application for Recognition of

Exemption ................. 17

Articles of Organization ........... 19

Educational Organizations and

Private Schools ............. 21

Organizations Providing

Insurance ................. 23

Other Section 501(c)(3)

Organizations .............. 24

Private Foundations and Public

Charities .................. 26

Lobbying Expenditures ........... 45
Chapter 4. Other Section 501(c) Chapter 1 provides general information requesting forms or otherwise) will be expedited

Organizations ................ 46 about the procedures for obtaining recognition if you indicate in your correspondence the ap501(c)(4) — Civic Leagues and of tax-exempt status. propriate Code section.

Social Welfare Organizations .... 47 Chapter 2 contains information about annual

501(c)(5) — Labor, filing requirements and other matters that may Comments and suggestions. We welcome

Agricultural, and Horticultural affect your organization’s tax-exempt status. your comments about this publication and your

Organizations .............. 47 Chapter 3 contains detailed information on suggestions for future editions.

501(c)(6) — Business Leagues, various matters affecting section 501(c)(3) orga- You can e-mail us while visiting our web site

Etc. ..................... 48 nizations, including a section on the determina- at www.irs.gov.

501(c)(7) — Social and tion of private foundation status. You can write to us at the following address:

Recreation Clubs ............ 49 Chapter 4 includes separate sections for

501(c)(8) and 501(c)(10) — specific types of organizations described in sec- Internal Revenue Service

Fraternal Beneficiary tion 501(c). TEGE & Specialty Branch Societies and Domestic W:CAR:MP:T:T

Fraternal Societies ........... 50 Organizations not discussed in this publica- 1111 Constitution Ave. NW

501(c)(4), 501(c)(9), and tion. Certain organizations that may qualify for Washington, DC 20224 501(c)(17) — Employees’ exemption are not discussed in this publication,

Associations ............... 50 although they are included in the Organization

Reference Chart We respond to many letters by telephone. 501(c)(12) — Local Benevolent . These organizations (and the

Life Insurance Associations, Code sections that apply to them) are as follows. Therefore, it would be helpful if you would inMutual Irrigation and clude your daytime phone number, including the

Telephone Companies, and Corporations organized under Acts area code, in your correspondence.

Like Organizations of Congress ................ 501(c)(1) ........... 52 If you wish telephone assistance, please call Teachers’ retirement fund 501(c)(13) — Cemetery 1–877–829–5500. This toll-free telephone associations ................ 501(c)(11) Companies ................ 53 service is available Monday through Friday from Mutual insurance companies ..... 501(c)(15) 501(c)(14) — Credit Unions 8:00 a.m. to 6:30 p.m. Eastern time. Corporations organized to finance and Other Mutual Financial crop operations .............. 501(c)(16) Organizations .............. 54 Employee funded pension trusts 501(c)(19) — Veterans’ (created before June 25, 1959) . . . 501(c)(18)

Organizations .............. 55 Withdrawal liability payment fund . . 501(c)(22)

501(c)(20) — Group Legal Veterans’ organizations (created

Services Plan Organizations ..... 55 before 1880) ................ 501(c)(23)

Religious and apostolic associations 501(d) 1. 501(c)(21) — Black Lung

Benefit Trusts Cooperative hospital service .............. 55

organizations ............... 501(e) 501(c)(2) — Title-Holding Cooperative service organizations of Corporations for Single operating educational organizations 501(f) Application, Parents .................. 56

501(c)(25) — Title-Holding Section 501(c)(24) organizations (section

Corporations for Multiple 4049 ERISA trusts) are neither discussed in the Approval, and Parents .................. 57 text nor listed in the Organization Reference

501(c)(26) — State-Sponsored Chart. Appeal High-Risk Health Coverage Likewise, farmers’ cooperative associations

Organizations .............. 57 that qualify for exemption under section 521,

501(c)(27) — State-Sponsored qualified state tuition programs described in sec- Procedures

Workers’ Compensation tion 529, and pension, profit-sharing, and stock

Reinsurance Organizations ..... 57 bonus plans described in section 401(a) are not

discussed in this publication. If you think your

Chapter 5. How To Get Tax Help ...... 59 organization falls within one of these categories, Introduction

contact the Internal Revenue Service (IRS) for If your organization is one of the organizations Organization Reference Chart ........ 60 any additional information you need. For tele- described in this publication and is seeking rec- phone assistance, call 1-877-829-5500. ognition of tax-exempt status from the IRS, you Index .......................... 62 Check the Table of Contents at the begin- should follow the procedures described in this

ning of this publication to determine whether chapter and the instructions that accompany the your organization is described in this publica- appropriate application forms. tion. If it is, read the chapter (or section) that For information on section 501(c)(3) organi- Introduction applies to your type of organization for the spe- zations, see chapter 3. If your organization is cific information you must give when applying for This publication discusses the rules and proce- seeking exemption under one of the other recognition of exemption. dures for organizations that seek recognition of paragraphs of section 501(c), see chapter 4.

exemption from federal income tax under sec- Organization Reference Chart. This chart tion 501(a) of the Internal Revenue Code (the Topics Code). It explains the procedures you must fol- enables you to locate at a glance the section of This chapter discusses: the Code under which your organization might low to obtain an appropriate ruling or determination letter recognizing your organization’s qualify for exemption. It also shows the required • Application procedures that generally ap- exemption, as well as certain other information application form and, if your organization meets ply to all organizations discussed in this that applies generally to all exempt organiza- the exemption requirements, the annual return publication, including the application to be filed (if any), and whether or not a contribu- tions. To qualify for exemption under the Code, forms, your organization must be organized for one or tion to your organization will be deductible by a

more of the purposes specifically designated in donor. It also describes each type of qualifying • Rulings and determination letters (approvthe Code. Organizations that are exempt under organization and the general nature of its activi- als/disapprovals),

section 501(a) of the Code include those organi- ties. • Appeal procedures available if an adverse zations described in section 501(c). Section You may use this chart to determine the determination letter is proposed, and 501(c) organizations are covered in this publica- Code section that you think applies to your ortion. ganization. Any correspondence with the IRS (in • Group exemption letters.

Page 2 Chapter 1 Application, Approval, and Appeal Procedures
Incorporation (and the Certificate of Incorpora- • Representative copies of advertising Application tion, if available), Articles of Association, Trust placed, Indenture, Constitution, or other enabling docuProcedures ment. If the organization does not have an or- • Copies of publications, such as

ganizing document, it will not qualify for exempt magazines,

Oral requests for recognition of exemption will status. • Distributed written material used for exnot be considered by the IRS. Your application Bylaws. Bylaws alone are not organizing pressing views on proposed legislation, for tax-exempt status must be in writing using documents. However, if your organization has and

the appropriate forms as discussed below. adopted bylaws, include a current copy. The • Copies of leases, contracts, or agree- bylaws need not be signed if submitted as an ments into which your organization has Forms Required attachment. entered. If your organization’s name has been offi- Most organizations seeking recognition of ex- cially changed by an amendment to your or- emption from federal income tax must use spe- ganizing instruments, you should also attach a Miscellaneous Procedures cific application forms prescribed by the IRS. conformed copy of that amendment to your ap- Two forms currently required by the IRS are plication. For prompt action on your application, be sure to Form 1023, Application for Recognition of Ex- attach all schedules, statements, and other doc- emption Under Section 501(c)(3) of the Internal Conformed copy. A conformed copy is a uments required by the application form. If you Revenue Code, and Form 1024, Application for copy that agrees with the original and all amend- do not attach them, you may have to resubmit Recognition of Exemption Under Section ments to it. If the original document required a your application or you may otherwise encoun- 501(a). For information about how to obtain the signature, the copy should either be signed by a ter a delay in obtaining recognition of exemption. principal officer or, if not signed, be accompa- latest revision, see chapter 5.

Forms 1023 and 1024 contain instructions nied by a written declaration signed by an au- Incomplete application. If the application

and checklists to help you provide the informa- thorized officer of the organization. With either does not contain the required information, it may option, the officer must certify that the document tion required to process your application. Incom- be returned with a letter of explanation without

plete applications will not be processed. is a complete and accurate copy of the original. being considered on its merits. If the completed

Some organizations do not have to use spe- A certificate of incorporation should be approved application is resubmitted within the time period

cific application forms. The application your or- and dated by an appropriate state official. indicated in the letter from the IRS, it will be

ganization must use is specified in the chapter in Every attachment should show your considered received on the original submission organization’s name, address, and EIN. It this publication dealing with your kind of organi- date. In that case, if the original submission was

zation. It is also shown in the Organization Ref- should also state that it is an attachment to your timely, the application will be considered timely

erence Chart. application form and identify the part and line filed as discussed in chapter 3, under ApplicaWhen no specific application form is pre- item number to which it applies. tion for Recognition of Exemption.

scribed for your organization, application for ex- Do not submit original documents be- Application made under wrong paragraph of emption is by letter to the IRS. Send the cause they become part of the IRS file and section 501(c). Occasionally, an organization application to the appropriate address shown on cannot be returned. may appear to qualify for exemption under a Form 8718, User Fee for Exempt Organization

Determination Letter Request. The letter must paragraph of section 501(c) that is different from Description of activities. Your application the one for which the organization applied. If the be signed by an authorized individual such as an must include a full description of the purposes application was made on Form 1024, which ap- officer of the organization or a person authorized and the activities of your organization. When plies to more than one paragraph of section by a power of attorney. (See Power of attorney describing the activities in which your organiza- 501(c), the organization may be recognized as under Miscellaneous Procedures, later.) Send tion expects to engage, you must include the

the power of attorney with the application letter exempt under any paragraph to which the form standards, criteria, procedures, or other means applies if the organization has agreed to have its when you file it. The letter should also contain that your organization adopted or planned for application considered under that paragraph. It the name and telephone number of the person carrying out those activities. must also supply any additional information re- to contact. The information described below To determine the information you need to quired for the application under the new para- under Required Inclusions must be sent with the provide, you should study the part of this publi- graph. letter. cation that applies to your organization. The

appropriate chapter will describe the purposes Different application form needed. If a difUser fee. The law requires the payment of a and activities that your organization must pur- ferent application form is required for your or- user fee for determination letter requests such sue, engage in, and include in your application in ganization, the IRS will so advise your as your application for recognition of tax-exempt order to achieve exempt status. organization and will provide the appropriate status. You should use Form 8718 to figure the Often your organization’s articles of organi- application form for your convenience in reapp- amount of your fee and to pay it. Your payment zation (or other organizing instruments) contain lying under that paragraph, if you wish to do so. must accompany your request. The IRS will not descriptions of your organization’s purposes Although supporting information previously fur- process a request unless the fee has been paid. and activities. nished need not be duplicated, you must provide

To find the correct amounts for user any necessary additional information required

Financial data. You must include in your ap- fees and the length of time to process a for the application. If your reply is not received

request, call 1-877-829-5500 for assis- plication financial statements showing your re- within a limited time, your application will be

TIP

tance. ceipts and expenditures for the current year and processed only for the paragraph under which

the 3 preceding years (or for the number of you originally applied.

years your organization was in existence, if less When a specific application form is needed

Required Inclusions than 4 years). For each accounting period, you for the paragraph under which your organization

must describe the sources of your receipts and qualifies, that form is required before a letter

Every exempt organization must have an em- the nature of your expenditures. You must also recognizing exemption can be issued. This in- ployer identification number (EIN), whether or include a balance sheet for the current year. cludes cases in which an exemption letter is

not it has any employees. If you have not yet begun operations, or have modified to recognize an organization’s exempt If your organization does not have an EIN, operated for less than 1 year, a proposed budget status under a paragraph other than the para- your application for recognition of exemption for 2 full accounting periods and a current state- graph under which it originally established exshould include a completed Form SS–4, Appli- ment of assets and liabilities will be acceptable. emption.

cation for Employer Identification Number.

Other information. The IRS may require you IRS responses. Organizations that submit a

Organizing documents. Each application for to provide additional information necessary to complete application will receive an acknowlexemption must be accompanied by a con- clarify the nature of your organization. Some edgment from the IRS. Others will receive a

formed copy of your organization’s Articles of examples are: letter requesting more information or returning

Chapter 1 Application, Approval, and Appeal Procedures Page 3
an incomplete application. Applicants also will Internal Revenue Service This includes standards, procedures, or other

be notified if the application is forwarded to the Attention: EO Letter Rulings means adopted or planned by the organization

Headquarters of the IRS for consideration. P.O. Box 27720, McPherson Station for carrying out its activities, expected sources

These letters will be sent out as soon as possi- Washington, DC 20038 of funds, and the nature of its contemplated

ble after receipt of the organization’s application. expenses.

These requests, like applications for recogni- When an organization does not supply the

Withdrawal of application. An application tion of exemption, must be accompanied by the information previously mentioned under Applimay be withdrawn at any time before the issu- appropriate user fee. cation Procedures, or fails to furnish a suffiance of a ruling or determination letter upon the ciently detailed description of its proposed

written request of a principal officer or author- Referral to Headquarters. EO Examinations activities to permit a conclusion that it will clearly

ized representative of your organization. How- Area Manager, EO Determinations Area Man- be exempt, a record of actual operations may be

ager, or Appeals Area Director, SB/SE - TE/GE, ever, the withdrawal will not prevent the required before a ruling or determination letter is will refer to Headquarters any exempt organiza- issued. information contained in the application from tion issue concerning qualification for exemption being used by the IRS in any subsequent exami- or foundation status for which there is no pub- nation of your organization’s returns. The infor- Adverse determination. If an organization is lished precedent or for which there is reason to mation forwarded with an application will not be unable to describe fully its purposes and activi- believe that nonuniformity exists. An EO Exami- returned to your organization and, generally, ties, resulting in a refusal by the IRS to issue a nations, an EO Determinations, or an Appeals when an application is withdrawn, the user fee ruling or determination letter, that refusal is con- Office may request technical advice on any paid will not be refunded. sidered an adverse determination, which the technical or procedural question that cannot be organization can appeal. See Appeal Proce- resolved on the basis of law, regulations, or a Requests for withholding of information dures, later. clearly applicable revenue ruling or other pub- from the public. The law requires many ex- lished precedent. An organization may request empt organizations and private foundations to Effective Date of Exemption that an issue be referred to EO Technical, Head- make their application forms and annual infor- quarters, for technical advice if it feels that a lack mation returns available for public inspection. A ruling or determination letter recognizing ex- of uniformity exists as to the disposition of the emption is usually effective as of the date of The law also requires the IRS to make available issue or if an issue is so unusual or complex as formation of an organization if, during the pe- for public inspection, in accordance with section to warrant consideration by Headquarters. If a riod before the date of the ruling or determina- 6104 of the Code and the related regulations, determination letter is issued based on technical tion letter, its purposes and activities were those your approved application for recognition of ex- advice from Headquarters regarding qualifica- required by the law. (See Application for Recog- emption (including any papers submitted in sup- tion for exemption or foundation status, no fur- nition of Exemption in chapter 3 for the special port of the application) and the ruling or ther administrative appeal is available on the rule for organizations applying for recognition of determination letter (discussed later, under Rul- issue that was the subject of technical advice. exemption under section 501(c)(3).) Upon ob- ings and Determination Letters). Power of attorney. If your organization ex- taining recognition of exemption, the organiza- Any information submitted in the application pects to be represented by an agent or attorney, tion may file a claim for a refund of income taxes or in support of it that relates to any trade secret, whether in person or by correspondence, you paid for the period for which its exempt status is

patent, process, style of work, or apparatus, must file a power of attorney with your exemp- recognized.

upon request, may be withheld from public in- tion application specifically authorizing the If an organization is required to alter its activi- spection if the Commissioner determines that agent or attorney to represent your organization. ties or substantially amend its charter to qualify, the disclosure of such information would ad- Form 2848, Power of Attorney and Declaration the ruling or determination letter recognizing ex- versely affect the organization. Your request of Representative, may be used for this pur- emption will be effective as of the date specimust: pose. fied in the letter. If a nonsubstantive

amendment is made, such as correction of a 1) Identify the material to be withheld (the Reminder. The law requires payment of a clerical error in the enabling instrument or the document, page, paragraph, and line) by user fee for determination letter requests. Use addition of a dissolution clause, exemption will clearly marking it, “Not Subject To Public Form 8718 to figure the amount and pay the fee. ordinarily be recognized as of the date of forma- Inspection.” Payment must accompany each request. tion if the activities of the organization before the

ruling or determination are consistent with the 2) Include the reasons for your organization’s exemption requirements. position that the information is of the type

that may be withheld from public inspec- A ruling or determination letter recognizing

tion. Rulings and exemption may not be relied upon if there is a

material change, inconsistent with exemption, in 3) Be filed with the documents in which the Determination Letters the character, the purpose, or the method of material to be withheld is contained. operation of the organization. A ruling or determination letter will be issued to

your organization if its application and support- Where to file. Your application for recognition Revocation or Modification ing documents establish that it meets the partic- of tax-exempt status must be filed with the IRS ular requirements of the section under which it is of Exemption at the address shown on Form 8718. claiming exemption. However, the IRS will not Your application will be considered by the A ruling or determination letter recognizing ex- ordinarily issue rulings or determination letters Manager, EO Determinations, who will either emption may be revoked or modified by: recognizing exemption if an issue involving the

issue a favorable determination letter to your organization’s exempt status is pending in litiga- 1) A notice to the organization to which the organization, issue an adverse determination tion or is under consideration within the IRS. ruling or determination letter originally was letter denying the exempt status claimed in the Advance ruling. A ruling or determination let- issued, application, or refer the case to the Exempt ter may be issued in advance of operations if Organizations Technical Office (EO Technical) 2) Enactment of legislation or ratification of a your organization can describe its proposed op- in the Headquarters of the IRS for a ruling. tax treaty, erations in enough detail to permit a conclusion

Requests other than applications. that it will clearly meet the particular require- 3) A decision of the United States Supreme

Requests other than applications for ments of the section under which it is claiming Court,

recognition of exemption (for example, exemption. A restatement of the organization’s 4) Issuance of temporary or final regulations, requests for rulings involving feeder organiza- purpose or a statement that it will be operated in or tions, application of excise taxes to activities of furtherance of that purpose will not satisfy this

private foundations, taxation of unrelated busi- requirement. The organization must describe 5) Issuance of a revenue ruling, a revenue

ness income, etc.) should be sent to: fully the activities in which it expects to engage. procedure, or other statement published in

Page 4 Chapter 1 Application, Approval, and Appeal Procedures
the Internal Revenue Bulletin or Cumula- tion), may be used for this purpose. These forms ask the Appeals Office to request technical adtive Bulletin. may be obtained from the IRS. For more infor- vice.

mation, get Publication 947, Practice Before the Any determination letter issued on the basis

When revocation takes effect. If the organi- IRS and Power of Attorney. of technical advice from Headquarters may not

zation omitted or misstated a material fact, oper- be appealed to the Appeals Office for those

ated in a manner materially different from that Appeals Office issues that were the subject of the technical

originally represented, or, with regard to organi- Consideration advice.

zations to which section 503 applies, engaged in

a prohibited transaction (such as diverting The protest to the Appeals Office should be filed Headquarters Consideration corpus or income from its exempt purpose), the with the local Appeals Office considering the revocation or modification may be retroactive. application and contain all of the following infor- If an application is referred to IRS Headquarters

mation. for issuance of a ruling and an adverse ruling is Material change in organization. If there is a

material change, inconsistent with exemption, in issued, the organization will be informed of the 1) The organization’s name, address, and basis for the conclusion, its right to file a protest the character, purpose, or method of operation employer identification number. within 30 days, and its right to have a conference of the organization, revocation or modification

will ordinarily take effect as of the date of that 2) A statement that the organization wants to at Headquarters.

material change. protest the determination.

Administrative Remedies Relief from retroactivity. If a ruling or de- 3) The date and symbols on the determinatermination letter was issued in error or is no tion letter. In the case of an application under section longer in accord with the holding of the IRS, and 4) A statement of facts supporting the 501(c)(3) of the Code, all of the following ac- if section 7805(b) relief is granted, retroactivity organization’s position in any contested tions, called administrative remedies, must be of the revocation or modification ordinarily will factual issue. completed by your organization before an unfa- be limited to a date not earlier than that on which vorable ruling or determination letter from the the original ruling or determination letter was 5) A statement outlining the law or other au- IRS can be appealed to the courts. modified or revoked. For more information on thority the organization is relying on.

requesting section 7805(b) relief, see Revenue 6) A statement as to whether a conference at 1) The filing of a substantially completed ap- Procedure 2003-4 (or later update). the Appeals Office is desired. plication Form 1023 (described earlier in

Foundations. The determination of the ef- this chapter) or the filing of a request for a The statement of facts (item 4) must be de- fective date is the same for the revocation or determination of foundation status (see clared true under penalties of perjury. This may modification of foundation status or operating Private Foundations and Public Charities be done by adding to the protest the following in chapter 3). foundation status unless the effective date is signed declaration: expressly covered by statute or regulations. 2) In the case of a late-filed application, reWritten notice. “Under penalties of perjury, I declare questing relief under section 301.9100 of If an EO area manager con- that I have examined the statement of the Income Tax Regulations regarding ap- cludes, as a result of examining an information

return or considering information from any other facts presented in this protest and in plications for extensions of time for making any accompanying schedules and source, that a ruling or determination letter an election or application for relief from tax statements and, to the best of my should be revoked or modified, the organization (see Application for Recognition of Exemp- knowledge and belief, it is true, correct, will be advised in writing of the proposed action tion in chapter 3). and complete.” and the reasons for it. 3) The timely submission of all additional in- The organization will also be advised of its Signature. formation requested to perfect an exemp- right to protest the proposed action by request- tion application or request for ing Appeals Office consideration. The appeal If the organization’s representative submits the determination of private foundation status. procedures are discussed next. protest, a substitute declaration must be included, stating: 4) Exhaustion of all administrative appeals

available within the IRS, including protest 1) That the representative prepared the pro- of an adverse ruling in the Headquarters test and accompanying documents, and Appeal Procedures original jurisdiction exemption application

2) Whether the representative knows person- cases.

If an organization applies for tax-exempt status ally that the statements of fact contained in The actions just described will not be consid- and receives an adverse determination letter, the protest and accompanying documents ered completed until the IRS has had a reasona- the organization will be advised of its right to are true and correct. ble time to act upon the appeal or protest, as the protest the determination by requesting Appeals Be sure the protest contains all of the infor- case may be. Office consideration. The organization must mation requested. Incomplete protests will be An organization will not be considered to send its protest to the EO area manager of the returned for completion. have exhausted its administrative remedies office issuing the adverse letter. The letter must If a conference is requested, it will be held at before the earlier of: be sent within 30 days from the date of the the Appeals Office, unless the organization re- adverse determination letter and must state quests that the meeting be held at a field office 1) The completion of the steps just listed and whether it wishes an Appeals Office conference. convenient to both parties. the sending by certified or registered mail

Representation. A principal officer or trustee The Appeals Office, after considering the of a notice of final determination, or

may represent an organization at any level of organization’s protest as well as information 2) The expiration of the 270-day period in

appeal within the IRS. Or, the organization may presented in any conference held, will notify the which the IRS has not issued a notice of

be represented by an attorney, certified public organization of its decision and issue an appro- final determination and the organization accountant, or individual enrolled to practice priate determination letter. An adverse decision has taken, in a timely manner, all reasona- before the IRS. may be appealed to the courts (discussed later). ble steps to secure a ruling or determina- If the organization’s representative attends a Appeals offices must request technical ad- tion.

conference without a principal officer or trustee, vice from EO Technical, IRS Headquarters, on

the representative must file a proper power of any exempt organization issue concerning qualattorney or a tax information authorization ification for exemption or foundation status for 270-day period. The 270-day period will be

before receiving or inspecting confidential infor- which there is no published precedent or for considered by the IRS to begin on the date a

mation. Form 2848, or Form 8821, Tax Informa- which there is reason to believe that substantially completed Form 1023 is sent to the

tion Authorization, as appropriate (or any other nonuniformity exists. If an organization believes IRS. See Application Procedures, earlier, for

properly written power of attorney or authoriza- that its case involves such an issue, it should information needed to complete Form 1023.

Chapter 1 Application, Approval, and Appeal Procedures Page 5
If the application does not contain all of the tion for exemption and submitted a statement governing instruments or internal regulations as

required items, it will not be further processed that the underlying facts and applicable law are well as any information about changes in its

and may be returned to the applicant for comple- the same as in the period considered by the character, purposes, or method of operation.

tion. The 270-day period, in this event, will not court.

be considered as starting until the date the appli- Employer identification number. If the cencation is remailed to the IRS with the requested tral organization does not have an employer

information, or, if a postmark is not evident, on identification number (EIN), it must send a comthe date the IRS receives a substantially com- Group Exemption pleted Form SS–4 with its exemption applicapleted application. tion. Each subordinate must have its own EIN

Letter even if it has no employees. The central organiAppeal to Courts zation must send with the group exemption apA group exemption letter is a ruling or determi- plication a completed Form SS–4 on behalf of

If the IRS issues an unfavorable determination nation letter issued to a central organization each subordinate not having an EIN.

letter or ruling to your organization and you have recognizing on a group basis the exemption

exhausted all the administrative remedies just Information required for subordinate under section 501(c) of subordinate organizadiscussed, your organization can seek judicial organizations. In addition to the information tions on whose behalf the central organization required to obtain recognition of its own exemp- remedies. has applied for recognition of exemption. tion, the central organization must submit infor- For example, if your organization has paid A central organization is an organization mation for those subordinates to be included in the tax resulting from the unfavorable determi- that has one or more subordinates under its the group exemption letter. The information nation and met all other statutory prerequisites, general supervision or control. should be forwarded in a letter signed by a it can file suit for a refund in a United States A subordinate organization is a chapter, principal officer of the central organization set- District Court or the U.S. Court of Federal local, post, or unit of a central organization. A ting forth or including as attachments the follow- Claims. Or, if your organization elected not to central organization may be a subordinate itself, ing. pay the tax deficiency resulting from the unfa- such as a state organization that has

vorable determination and met all other statutory subordinate units and is itself affiliated with a 1) Information verifying that the subordinates: prerequisites, it can file suit for a redetermina- national (central) organization.

tion of the tax deficiencies in the United States A subordinate organization may or may not a) Are affiliated with the central organiza- Tax Court. For more information on these types be incorporated, but it must have an organizing tion, of suits, get Publication 556, Examination of document. A subordinate that is organized and Returns, Appeal Rights, and Claims for Refund. b) Are subject to its general supervision or operated in a foreign country may not be in- control, In certain situations, your organization can cluded in a group exemption letter. A

file suit for a declaratory judgment in the U.S. subordinate described in section 501(c)(3) may c) Are all eligible to qualify for exemption

District Court for the District of Columbia, the not be included in a group exemption letter if it is under the same paragraph of section

U.S. Court of Federal Claims, or the U.S. Tax a private foundation described in section 509(a). 501(c), though not necessarily the parCourt. This remedy is available if your organiza- If your organization is a subordinate one con- agraph under which the central organition received an adverse notice of final deter- trolled by a central organization (for example, a zation is exempt,

mination, or if the IRS failed to make a timely church, the Boy Scouts, or a fraternal organiza- d) Are not private foundations if the appli- determination on your initial or continuing qualifi- tion), you should check with the central organi- cation for a group exemption letter in- cation or classification as an exempt organiza- zation to see if it has been issued a group volves section 501(c)(3), tion. However, your exempt status claim must exemption letter that covers your organization. If

be as: it has, you do not have to file a separate applica- e) Are all on the same accounting period

tion unless your organization no longer wants to as the central organization if they are to • An organization qualifying under section be included in the group exemption letter. be included in group returns, and 501(c)(3), If the group exemption letter does not cover f) Are organizations that have been • An organization to which a deduction for a your organization, ask your central organization formed within the 15-month period pre- contribution is allowed under section about being included in the next annual group ceding the date of submission of the 170(c)(2), ruling update that it submits to the IRS. group exemption application if they are

• An organization that is a private founda- claiming section 501(c)(3) status and

tion under section 509, or Central Organization are subject to the requirements of secApplication Procedure tion 508(a) and wish to be recognized • A private operating foundation under sec- as exempt from their dates of creation tion 4942(j)(3). If your organization is a central organization with (a group exemption letter may be isaffiliated subordinates under its control, it may sued covering subordinates, one or

Adverse notice of final determination. The apply for a group exemption letter for its subordi- more of which have not been organized

adverse notice of final determination referred to nates, provided it has obtained recognition of its within the 15-month period preceding

above is a ruling or determination letter sent by own exemption. You should make the applica- the date of submission, if all subordicertified or registered mail, holding that your tion for such subordinates by letter instead of nates are willing to be recognized as

organization: submitting either Form 1023 or 1024. This pro- exempt only from the date of applicacedure relieves each of the subordinates cov- tion). • Is not described in section 501(c)(3) or ered by a group exemption letter from filing its section 170(c)(2) of the Code, own application. A central organization obtains 2) A detailed description of the purposes and

• Is a private foundation as defined in sec- its own recognition of exemption by sending its activities of the subordinates, including the

tion 4942(j)(3), or application to the IRS address shown on Form sources of receipts and the nature of ex8718 for the area in which the central penditures. • Is a public charity described in a part of organization’s principal place of business or section 509 or section 170(b)(1)(A) other 3) A sample copy of a uniform governing in- principal office is located. than the part under which your organiza- strument (such as a charter or articles of If the central organization has previously ob- tion requested classification. association) adopted by the subordinates, tained recognition of its own exemption, it must or, in its absence, copies of representative indicate its employer identification number, the instruments. Favorable court rulings - IRS procedure. If date of the letter recognizing its exemption, and

a suit results in a final determination that your the IRS office that issued it. It need not forward 4) An affirmation to the effect that, to the best

organization is exempt from tax, the IRS will documents already submitted. However, if it has of the officer’s knowledge, the purposes

issue a favorable ruling or determination letter, not already done so, the central organization and activities of the subordinates are as

provided your organization has filed an applica- must submit a copy of any amendment to its stated in (2) and (3), above.

Page 6 Chapter 1 Application, Approval, and Appeal Procedures
5) A statement that each subordinate to be scribed below under Information Required Submitting the required information anincluded in the group exemption letter has Annually). nually does not relieve the central orgiven written authorization to that effect, ganization or any of its subordinates of CAUTION

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4) The annual filing of an information return signed by an authorized officer of the the duty to submit any other information that (Form 990, for example) by the central or- subordinate, to the central organization may be required by an EO area manager to ganization if required. (see also New 501(c)(3) organizations that determine whether the conditions for continued

want to be included, The continued effectiveness of a group exemp- exemption are being met. later in this section).

tion letter as to a particular subordinate is 6) A list of subordinates to be included in the based on these four conditions, as well as on the group exemption letter to which the IRS Events Causing continued conformity by the subordinate to the has issued an outstanding ruling or deter- requirements for inclusion in a group exemption Loss of Group Exemption mination letter relating to exemption. letter, the authorization for inclusion, and the A group exemption letter no longer has effect, 7) If the application for a group exemption annual filing of any required information return for either a particular subordinate or the group letter involves section 501(c)(3) and is for the subordinate. as a whole, when: subject to the provisions of the Code requiring that it give timely notice that it is 1) The central organization notifies the IRS not a private foundation (see Private Foun- Information Required Annually that it is going out of existence, dations in chapter 3), an affirmation to the

effect that, to the best of the officer’s To maintain a group exemption letter, the central 2) The central organization notifies the IRS,

knowledge and belief, no subordinate to organization must submit annually, at least 90 by its annual submission or otherwise, that

be included in the group exemption letter days before the close of its annual accounting any of its subordinates will no longer fulfill

period, all of the following information. the conditions for continued effectiveness, is a private foundation as defined in secexplained earlier, or tion 509(a). 1) Information about all changes in the pur8) For each subordinate that is a school 3) The IRS notifies the central organization or poses, character, or method of operation the affected subordinate that the group ex- claiming exemption under section of the subordinates included in the group emption letter will no longer have effect for 501(c)(3), the information required by Rev- exemption letter. some or all of the group because the con- enue Ruling 71–447 and Revenue Proce- 2) A separate list (that includes the names, ditions for continued effectiveness of a dure 75–50 (these requirements are fully mailing addresses, actual addresses if dif- group exemption letter have not been ful- described in chapter 3, under Private

ferent, and EINs of the affected subordi- filled. Schools; see also Schedule B, Form nates) for each of the three following 1023). When notice is given under any of these three categories. conditions, the IRS will no longer recognize the 9) For any school affiliated with a church, the exempt status of the affected subordinates until information to show that the provisions of a) Subordinates that have changed their they file separate applications on their own be- Revenue Ruling 75–231 have been met. names or addresses during the year. half or the central organization files complete

10) A list of the names, mailing addresses, ac- b) Subordinates no longer to be included supporting information for their reinclusion in the

tual addresses if different, and EINs of in the group exemption letter because group exemption at the time of its annual subsubordinates to be included in the group they no longer exist or have disaffiliated mission. However, when the notice is given by

exemption letter. A current directory of or withdrawn their authorization to the the IRS and the withdrawal of recognition is

subordinates may be furnished instead of central organization. based on the failure of the organization to comthe list if it includes the required informa- ply with the requirements for recognition of c) Subordinates to be added to the group tion and if the subordinates not to be in- tax-exempt status under the particular subsec- exemption letter because they are cluded in the group exemption letter are tion of section 501(c), the revocation will ordinar- newly organized or affiliated or because identified. ily take effect as of the date of that failure. The they have recently authorized the cen- notice, however, will be given only after the tral organization to include them. appeal procedures described earlier in this New 501(c)(3) organizations that want to be An annotated directory of subordinates will chapter are completed. included. A new organization, described in not be accepted for this purpose. If there section 501(c)(3), that wants to be included in a were none of the above changes, the central group exemption letter, must submit its authori- organization must submit a statement to that zation (as explained in item number 5 above, effect. under Information required for subordinate organizations) to the central organization before the 3) The information required to be submitted

end of the 15th month after it was formed in by a central organization on behalf of sub- 2. order to satisfy the requirement of section ordinates to be included in the group ex508(a). The central organization must also in- emption letter is required for subordinates

clude this subordinate in its next annual submis- to be added to the letter. (This information

sion of information as discussed below under is listed in items 1 through 9, under Infor- Filing Information Required Annually. mation required for subordinate organizations, earlier. However, if the information

Keeping the Group upon which the group exemption letter was Requirements

Exemption Letter in Force based applies in all material respects to

these subordinates, a statement to this ef- and Required Continued effectiveness of a group exemption fect may be submitted instead of the information required by items 1 through 4 of letter is based on the following conditions.

that list.) Disclosures

1) The continued existence of the central organization. The organization should send this information to: 2) The continued qualification of the central Introduction

organization for exemption under section Ogden Service Center Most exempt organizations (including private 501(c). Mail Stop 6271 foundations) must file various returns and re3) The submission by the central organization 1000 South 1200 West ports at some time during (or following the close

of the information required annually (de- Ogden, UT 84404–4749 of) their accounting period.

Chapter 2 Filing Requirements and Required Disclosures Page 7
Topics normally are not more than $25,000. (See

This chapter discusses: Annual Information the instructions for Form 990 for more

information about what constitutes annual

• Annual information returns that must be Returns gross receipts that are normally not more

than $25,000.), filed

Every organization exempt from federal income 14) A private foundation exempt under section • The unrelated business income tax return tax under section 501(a) must file an annual 501(c)(3) and described in section 509(a). • Employment tax returns information return except: (Required to file Form 990–PF), or

• A return to report taxable income from po- 1) A church, an interchurch organization of 15) A United States possession organization

litical organizations local units of a church, a convention or described in section 501(a) [other than a

association of churches, or an integrated private foundation] that normally does not • Reporting requirements for certain political

auxiliary of a church (as defined later have more than $25,000 in annual gross organizations

under Religious Organizations in chapter receipts from sources within the United

• A return to report the sale of certain 3), States and has no significant activity in the

donated property United States. For further information, see 2) A church-affiliated organization that is ex- Revenue Procedure 2003-21, Internal • Information to provide to donors clusively engaged in managing funds or Revenue Bulletin 2003-6.

• A report of cash received maintaining retirement programs,

• Public inspection of certain documents 3) A school below college level affiliated with Forms 990 and 990–EZ. Exempt organizaa church or operated by a religious order, tions, other than private foundations, must file • Certain required disclosures and the pen- even though it is not an integrated auxiliary their annual information returns on Form 990, or alties for not making them of a church, Form 990–EZ.

Generally, political organizations with gross 4) A mission society sponsored by or affili- Useful Items receipts of $25,000 ($100,000 for a qualified ated with one or more churches or church

state or local political organization (QSLPO)) or You may want to see: denominations, more than half of the more for the tax year are required to file Form society’s activities are conducted in, or diPublication 990 (990–EZ) unless specifically excepted from rected at, persons in foreign countries, filing the annual return. The following political

❏ 15 Circular E, Employer’s Tax Guide 5) An exclusively religious activity of any re- organizations are not required to file Form 990

ligious order, (Form 990–EZ). ❏ 598 Tax on Unrelated Business Income

of Exempt Organizations 6) A state institution, the income of which is • A state or local committee of a political

excluded from gross income under section party.

Form (and Instructions) 115, • A political committee of a state or local

7) A corporation described in section candidate. ❏ 990 Return of Organization Exempt 501(c)(1) [a corporation that is organized From Income Tax • A caucus or association of state or local under an Act of Congress and is: officials. ❏ 990–EZ Short Form Return of

Organization Exempt From Income a) an instrumentality of the United States, • A political organization that is required to and Tax report as a political committee under the

b) exempt from federal income taxes], Federal Election Campaign Act. ❏ Schedule A (Form 990 or 990–EZ)

Organization Exempt Under Section • A 501(c) organization that has expendi- 8) A black lung benefit trust described in sec- 501(c)(3) tures for influencing or attempting to influ- tion 501(c)(21) [Required to file Form ence the selection, nomination, election or ❏ Schedule B (Form 990 or 990–EZ) 990–BL, Information and Initial Excise Tax appointment of any individual for a federal, Schedule of Contributors Return for Black Lung Benefit Trusts and state or local public office. Certain Related Persons. See chapter 4 ❏ 990–PF Return of Private Foundation or for more information.], Section 4947(a)(1) Nonexempt Form 990–EZ. This is a shortened version

Charitable Trust Treated as a 9) A stock bonus, pension, or profit-sharing of Form 990. It is designed for use by small

trust that qualifies under section 401. [re- exempt organizations and nonexempt charitable Private Foundation

quired to file Form 5500, Annual Return/ trusts.

❏ 990–T Exempt Organization Business Report of Employee Benefit Plan An organization may file Form 990–EZ, in- ], Income Tax Return stead of Form 990, if it meets both of the follow10) A religious or apostolic organization de- ing requirements. ❏ 1120–POL U.S. Income Tax Return for scribed in section 501(d) [required to file Certain Political Organizations Form 1065, U.S. Return of Partnership In- 1) Its gross receipts during the year were less

❏ 8300 Report of Cash Payments Over come], than $100,000.

$10,000 Received in a Trade or 11) A foreign organization described in section 2) Its total assets ( line 25, column (B) of Business 501(a) [other than a private foundation] Form 990–EZ) at the end of the year were

❏ that normally does not have more than less than $250,000. 8868 Application for Extension of Time to

File an Exempt Organization Return $25,000 in annual gross receipts from If your organization does not meet either of sources within the United States and has

❏ these conditions, you cannot file Form 990–EZ. 8870 Information Return for Transfers no significant activity in the United States. Instead you must file Form 990. Associated with Certain Personal For further information, see Revenue ProBenefits Contracts cedure 94–17, 1994–1 C.B. 579, Group return. A group return on Form 990

may be filed by a central, parent, or like organi- ❏ 8871 Political Organization Notice of 12) A governmental unit or an affiliate of a zation for two or more local organizations, none Section 527 Status governmental unit that meets the require- of which is a private foundation. This return is in ments of Revenue Procedure 95–48, ❏ 8872 Political Organization Report of addition to the central organization’s separate 1995–2 C.B. 418, Contributions and Expenditures annual return if it must file a return. It cannot be

13) An exempt organization (other than a pri- included in the group return. See the instructions

See chapter 5 for information about getting vate foundation, discussed in chapter 3) for Form 990 for the conditions under which this

these publications and forms. having gross receipts in each tax year that procedure may be used.

Page 8 Chapter 2 Filing Requirements and Required Disclosures
In any year that an organization is Organization with gross receipts over $1 scheduled instruction or curriculum related to

properly included as a subordinate or- million. For an organization that has gross the destinations being visited. The travel tours

ganization on a group return, it should receipts of over $1 million for the year, the pen- made available to ABC’s members do not conTIP

not file its own Form 990. alty is $100 a day up to a maximum of $50,000. tribute importantly to the accomplishment of

ABC’s educational purpose. Rather, ABC’s pro- Managers. If the organization is subject to Schedule A (Form 990 or 990–EZ). Orga- gram is designed to generate revenues for ABC this penalty, the IRS may specify a date by nizations, other than private foundations, that by regularly offering its members travel services. which the return or correct information must be are described in section 501(c)(3) and that are Therefore, ABC’s tour program is an unrelated supplied by the organization. Failure to comply otherwise required to file Form 990 or 990–EZ trade or business. with this demand will result in a penalty imposed must also complete Schedule A of that form. For additional information on unrelated busi- upon the manager of the organization, or upon ness income, see Publication 598. Schedule B (Form 990 or 990–EZ). Orga- any other person responsible for filing a correct

nizations that file Form 990 or 990–EZ use this return. The penalty is $10 a day for each day

schedule to provide required information regard- that a return is not filed after the period given for

ing their contributors. filing. The maximum penalty imposed on all per- Employment sons with respect to any one return is $5,000. Form 990–PF. All private foundations exempt

under section 501(c)(3) must file Form 990–PF. Exception for reasonable cause. No pen- Tax Returns

These organizations are discussed in chapter 3. alty will be imposed if reasonable cause for

failure to file timely can be shown. Every employer, including an organization exDue date. Form 990, 990–EZ, or 990–PF empt from federal income tax, who pays wages

must be filed by the 15th day of the 5th month to employees is responsible for withholding, deafter the end of your organization’s accounting positing, paying, and reporting federal income

period. Thus, for a calendar year taxpayer, Form Unrelated Business tax, social security and Medicare (FICA) taxes,

990, 990–EZ, or 990–PF is due May 15 of the and federal unemployment tax (FUTA), unless

following year. Income Tax Return that employer is specifically excepted by law

from those requirements or if the taxes clearly Use Form 8868 to request an automatic 3-month extension of time to file Even though an organization is recognized as do not apply.

tax exempt, it still may be liable for tax on its For more information, get a copy of Publica- Form 990, 990–EZ, or 990–PF and

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unrelated business income. Unrelated business tion 15, Circular E, Employer’s Tax Guide, which also to apply for an additional (not automatic) income is income from a trade or business, summarizes the responsibilities of an employer, 3-month extension if needed. regularly carried on, that is not substantially re- Publication 15–A, Employer’s Supplemental Do not apply for both the automatic 3-month lated to the charitable, educational, or other pur- Tax Guide, Publication 15–B, Employer’s Tax extension and the additional 3-month extension pose that is the basis for the organization’s Guide to Fringe Benefits, and Form 941, at the same time. For more information, see exemption. An exempt organization that has Employer’s Quarterly Federal Tax Return. Form 8868 and its instructions. $1,000 or more of gross income from an unre- Penalty. If any person required to collect, lated business must file Form 990–T. Application for exemption pending. An or- truthfully account for, and pay over any of these The obligation to file Form 990–T is in addi- ganization that claims to be exempt under sec- taxes willfully fails to satisfy any of these require- tion to the obligation to file the annual informa- tion 501(a) of the Code but has not established ments or willfully tries in any way to evade or tion return, Form 990, 990–EZ, or 990–PF. its exempt status by the due date for filing an defeat any of them, that person will be subject to

information return should complete and file Estimated tax. Exempt organizations must a penalty. The penalty, often called the trust

Form 990 or 990–EZ (or Form 990–PF if it make quarterly payments of estimated tax on fund recovery penalty is equal to the tax

considers itself a private foundation). If the unrelated business income. An organization evaded, not collected, or not accounted for and

organization’s application is pending with the must make estimated tax payments if it expects paid over. The term person includes:

IRS, it must so indicate on Form 990, 990–EZ, its tax for the year to be $500 or more. • An officer or employee of a corporation, or or 990–PF (whichever applies) by checking the Travel tour programs. Travel tour activities application pending block at the top of page 1 • A member or employee of a partnership. that are a trade or business are an unrelated of the return. trade or business if the activities are not sub- For more information on the filing require- Exception. The penalty is not imposed on stantially related to the purpose to which tax ments, see the instructions for Forms 990, any unpaid volunteer director or member of a exemption was granted to the organization. 990–EZ, and 990–PF. board of trustees of an exempt organization if Whether travel tour activities conducted by the unpaid volunteer serves solely in an honor- State reporting requirements. Copies of an organization are substantially related to the ary capacity, does not participate in the Form 990, 990–EZ, or 990–PF may be used to organization’s tax exempt purpose is deter- day-to-day or financial operations of the organi- satisfy state reporting requirements. See the mined by looking at all the relevant facts and zation, and does not have actual knowledge of instructions for those forms. circumstances, including, but not limited to, how the failure on which the penalty is imposed. a travel tour is developed, promoted, and oper- This exception does not apply if it results in Form 8870. Organizations that filed a Form ated. no one being liable for the penalty. 990, 990–EZ, or 990–PF, and paid premiums

or received transfers on certain life insurance, Example. ABC, a university alumni associa- FICA and FUTA tax exceptions. Payments

annuity, and endowment contracts (personal tion, is tax exempt as an educational organiza- for services performed by a minister of a church

benefit contracts), must file Form 8870. For tion under section 501(c)(3) of the Code. As part in the exercise of the ministry, or a member of a

more information, see Form 8870 and its in- of its activities, ABC operates a travel tour pro- religious order performing duties required by the

structions. gram. The program is open to all current mem- order, are generally not subject to FICA or FUTA

bers of ABC and their guests. ABC works with taxes. Penalties for failure to file. An exempt organ- travel agents to schedule approximately ten ization that fails to file a required return must pay FUTA tax exception. Payments for serv- tours annually to various destinations around a penalty of $20 a day for each day the failure ices performed by an employee of a religious, the world. Members of ABC pay $1,000 to XYZ continues. The same penalty will apply if the charitable, educational, or other organization Travel Agency to participate in a tour. XYZ pays organization does not give all the information described in section 501(c)(3) that are generally ABC a per person fee for each participant. Al- required on the return or does not give the cor- subject to FICA taxes if the payments are $100 though the literature advertising the tours en- rect information. or more for the year, are not subject to FUTA courages ABC members to continue their taxes. Maximum penalty. The maximum penalty lifelong learning by joining the tours, and a

for any one return is the smaller of $10,000 or faculty member of ABC’s related university fre- FICA tax exemption election. Churches

5% of the organization’s gross receipts for the quently joins the tour as a guest of the alumni and qualified church-controlled organizations

year. association, none of the tours include any can elect exemption from employer FICA taxes

Chapter 2 Filing Requirements and Required Disclosures Page 9
by filing Form 8274, Certification by Churches come in excess of the $100 specific deduction Section 501(c)(3) organizations are

and Qualified Church-Controlled Organizations precluded from, and suffer loss of ex- allowed under section 527 of the Code.

Electing Exemption from Employer Social Se- emption for, engaging in any political CAUTION

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A political organization that has curity and Medicare Taxes. campaign on behalf of, or in opposition to, any $25,000 ($100,000 for a qualified state To elect exemption, Form 8274 must be filed candidate for public office. or local political organization) or more

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before the first date on which a quarterly em- in gross receipts for the tax year must file Form ployment tax return would otherwise be due Due date. Form 1120–POL is due by the 15th 990 or 990–EZ (and Schedule B of the form), from the electing organization. The organization day of the 3rd month after the end of the tax unless excepted. See Forms 990 and 990–EZ, may make the election only if it is opposed for year. Thus, for a calendar year taxpayer, Form earlier. religious reasons to the payment of FICA taxes. 1120–POL is due on March 15 of the following

The election applies to payments for serv- year. If any due date falls on a Saturday, Sunices of current and future employees other than Political organization. A political organiza- day, or legal holiday, the organization may file

services performed in an unrelated trade or tion is a party, committee, association, fund, or the return on the next business day.

business. other organization (whether or not incorporated) Form 1120–POL is not required of an organized and operated primarily for the pur- Revoking the election. The election can be exempt organization that makes ex- pose of directly or indirectly accepting contribu- revoked by the IRS if the organization fails to file penditures for political purposes if its

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tions or making expenditures, or both, for an Form W–2, Wage and Tax Statement, for 2 gross income does not exceed its directly con- exempt function. years and fails to furnish certain information nected deductions by more than $100 for the tax

upon request by the IRS. Such revocation will Exempt function. An exempt function year.

apply retroactively to the beginning of the 2-year means influencing or attempting to influence the

period. selection, nomination, election, or appointment Failure to file. A political organization that

of any individual to any federal, state, local pub- fails to file Form 1120–POL, or fails to include Definitions. For purposes of this election, lic office or office in a political organization, or the required information on the form, is subject the term church means a church, a convention the election of the Presidential or Vice Presiden- to a penalty of $20 per day for each day such or association of churches, or an elementary or tial electors, whether or not such individual or failure continues. The maximum penalty im- secondary school that is controlled, operated, or electors are selected, nominated, elected, or posed on failures regarding any one return is the principally supported by a church or by a con- appointed. It also includes certain office ex- lesser of $10,000 or 5% of the gross receipts of vention or association of churches. penses of a holder of public office or an office in the organization for the year. In the case of an The term qualified church-controlled or- a political organization. organization having gross receipts exceeding ganization means any church-controlled sec- $1,000,000 for any year, the penalty is in- tion 501(c)(3) tax-exempt organization, other Certain political organizations are re- creased to $100 per day with a maximum pen- than an organization that both: quired to notify the IRS that they are alty of $50,000. section 527 organizations. These orga- CAUTION

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For more information about filing Form 1) Offers goods, services, or facilities for nizations must use Form 8871. Some of these 1120–POL, refer to the instructions accompa- sale, other than on an incidental basis, to section 527 organizations must use Form 8872 nying the form. the general public at other than a nominal to file periodic reports with the IRS disclosing

charge that is substantially less than the their contributions and expenditures. For a dis- Failure to pay on time. An organization that cost of providing such goods, services, or cussion on these forms, see Reporting Require- does not pay the tax when due generally may facilities, and ments for a Political Organization, later. have to pay a penalty of 1/2 of 1% of the unpaid

tax for each month or part of a month the tax is 2) Normally receives more than 25% of its Political organization taxable income. not paid, up to a maximum of 25% of the unpaid support from the sum of governmental Political organization taxable income is the ex- tax. The penalty will not be imposed if the organ- sources and receipts from admissions, cess of: ization can show that the failure to pay on time sales of merchandise, performance of was due to reasonable cause. services, or furnishing of facilities, in activi- 1) Gross income for the tax year (excluding ties that are not unrelated trades or busi- exempt function income) minus nesses.

2) Deductions directly connected with the

Effect on employees. If a church or quali- earning of gross income. Reporting

fied church-controlled organization has made an

election, payment for services performed for that To figure taxable income, allow for a $100 spe- Requirements for a cific deduction, but do not allow for the net oper- church or organization, other than in an unrelated trade or business, will not be subject to ating loss deduction, the dividends-received Political Organization deduction, and other special deductions for cor- FICA taxes. However, the employee, unless oth- porations. Certain political organizations are required to erwise exempt, will be subject to self-employ- notify the IRS that the organization is to be ment tax on the income. The tax applies to Exempt organization not a political organi- treated as a section 527 political organization. income of $108.28 or more for the tax year from zation. The organization is also required to periodically that church or organization, and no deductions An organization exempt under section report certain contributions received and expen- for trade or business expenses are allowed 501(c) of the Code that spends any amount for ditures made by the organization. To notify the against this self-employment income. an exempt function must file Form 1120–POL IRS of section 527 treatment, an organization Schedule SE (Form 1040), Self-Employment for any year which it has political taxable in- must file Form 8871. To report contributions and Tax, should be attached to the employee’s in- come. These organizations must include in expenditures, certain tax-exempt political orga- come tax return.

gross income the lesser of: nizations must file Form 8872.

Form 8871. A political organization must elec- 1) The total amount of its exempt function tronically file Form 8871 to notify the IRS that it is expenditures, or Political Organization to be treated as a section 527 organization.

2) The organization’s net investment income. However, an organization is not required to file Income Tax Return Form 8871 if:

Separate fund. A section 501(c) organiza- • It reasonably expects its gross receipts to Generally, a political organization is treated as tion can set up a separate segregated fund that always be less than $25,000. an organization exempt from tax. Certain politi- will be treated as an independent political organcal organizations, however, must file an annual ization. The earnings and expenditures made by • It is a political committee required to report

income tax return, Form 1120–POL, for any under the Federal Election Campaign Act the separate fund will not be attributed to the

year they have political organization taxable in- of 1971 (FECA) (2 U.S.C. 431(4). section 501(c) organization.

Page 10 Chapter 2 Filing Requirements and Required Disclosures
• It is a state or local candidate committee. The tax is computed by multiplying the If an organization receives contributions of

organization’s taxable income by the highest $200 or more from one contributor for the calen- • It is a state or local committee of a politi- corporate tax rate. dar year, the organization must disclose the cal party. donor’s name, address, occupation, employer, Fraudulent returns. Any individual or cor- • It is a section 501(c) organization that has and the date the contributions were made. poration that willfully delivers or discloses to the made an “exempt function expenditure”. For additional information that is required, IRS any list, return, account, statement or other see Form 8872. All other political organizations are required to document known to be fraudulent or false as to

file Form 8871. any material matter will be fined not more than Due dates. The due dates for filing Form

$10,000 ($50,000 in the case of a corporation) 8872 vary depending on whether the form is due An organization must provide on Form 8871: or imprisoned not more than 1 year or both. for a reporting period that occurs during a calendar year in which a regularly scheduled election 1) Its name and address (including any busi- Waiver of penalties. The IRS may waive is held, or any other calendar year ( a non-elec- ness address, if different) and its electronic any additional tax assessed on an organization tion year). mailing address, for failure to file Form 8871 if the failure was due In election years, Form 8872 must be filed to reasonable cause and not willful neglect. 2) Its purpose, on either a quarterly or a monthly basis. Both a

Additional information. pre-election report and a post-election report are 3) The names and addresses of its officers, For more information

also required to be filed in an election years. on Form 8871, see the form and its instructions. highly compensated employees, contact For a discussion on the public inspection re- In non-election years, the form must be filed person, custodian of records, and mem- quirements for the form, see Public Inspection of on a semiannual or monthly basis. A complete bers of its Board of Directors, Exemption Applications, Annual Returns, and listing of these filing periods are in the Form

4) The name and address of, and relationship Political Organization Reporting Forms, 8872 instructions. later.

to, any related entities (within the meaning An election year is any year in which a

of section 168(h)(4) of the Code), and Form 8872. Every tax-exempt section 527 po- regularly scheduled general election for federal

litical organization that accepts a contribution or office is held (an even-numbered year). A 5) Whether it intends to claim an exemption makes an expenditure, for an exempt function non-election year is any odd-numbered year. from filing Form 8872 or Form 990 (Form during the calendar year, must file Form 8872 990–EZ). How to file. For Forms 8872 filed before except: June 30, 2003, complete and file Form 8872 in

Before filing Form 8871, the political • A political organization that is not required one of two ways:

organization must have its own EIN to file Form 8871 (discussed earlier). 1) Electronically via the IRS Internet web site even if it has no employees. To get an

TIP

• A political organization that is subject to at www.irs.gov/polorgs, or EIN, file Form SS-4 with the IRS. Form SS-4 can tax on its income because it did not file or

be obtained by downloading it from the IRS 2) By sending a signed copy of the form to amend Form 8871.

Internet web site at www.irs.gov or by calling the Internal Revenue Service Center, • A qualified state or local political organiza- 1–800–TAX–FORM. Ogden, UT 84201. tion (QSLPO), discussed below. The form must be signed by an official author- Due dates. The initial Form 8871 must be All other tax-exempt section 527 organizations ized by the organization to sign Form 8872. filed within 24 hours of the date on which the that accept contributions or make expenditures An organization that files Form 8871 elec- organization was established. If there is a mate- for an exempt function are required to file Form tronically will receive a user ID and a password rial change an amended Form 8871 must be 8872. needed to file Form 8872 electronically. If an filed within 30 days of the material change. organization does not receive its user ID and When the organization terminates its existence, Qualified state or local political organization. password, it may request one by writing to the it must file a final Form 8871 within 30 days of A state or local political organization may be a following address: QSLPO if: termination. Internal Revenue Service

If the due date falls on a Saturday, Sunday, Room 4010 1) All of its political activities relate solely to or legal holiday, the organization may file on the P.O. Box 2508 state or local public office (or office in a next business day. Cincinnati, OH 45201 state or local political organization).

How to file. An organization must file Form 2) It is subject to a state law that requires it to 8871 electronically via the IRS Internet web site report (and it does report) to a state Organizations required to file Form

at www.irs.gov/polorgs (Keyword: political 8872 on or after June 30, 2003, must agency information about contributions orgs). file the form electronically if the organiDUE

and expenditures that is similar to the in- zation expects to have contributions or expendi- formation that the organization would oth- Failure to file. An organization that is re- tures exceeding $50,000. erwise be required to report to the IRS. quired to file Form 8871, but fails to do so on a

timely basis, will not be treated as a tax-exempt 3) The state agency and the organization Penalty for failure to file. A penalty will be section 527 organization for any period before make the reports publicly available. imposed if the organization is required to file the date Form 8871 is filed. Also, the taxable Form 8872 and it: 4) No federal candidate or office holder: income of the organization for that period will • Fails to file the form by the due date, or include its exempt function income (including a) Controls or materially participates in the

contributions received, membership dues, and direction of the organization, • Files the form but fails to report all of the

political fund-raising receipts) minus any deduc- information required or reports incorrect b) Solicits contributions for the organiza- tions directly connected with the production of information. tion, or that income.

Failure to file an amended Form 8871 will c) Directs the disbursements of the organ- The penalty is 35% of the total amount of

cause the organization not to be treated as a ization. contributions and expenditures to which a failure

relates. tax-exempt section 527 organization. If an organization is treated as not being a tax-exempt Information required on Form 8872. If an Fraudulent returns. Any individual or corsection 527 organization, the taxable income of organization pays an individual $500 or more for poration that willfully delivers or discloses any

the organization will be determined by consider- the calendar year, the organization is required to list, return, account, statement or other docuing any exempt function income and deductions disclose the individual’s name, address, occu- ment known to be fraudulent or false as to any

during the period beginning on the date of the pation, employer, amount of the expense, the material matter, will be fined not more than

material change and ending on the date that the date the expense was paid, and the purpose of $10,000 ($50,000 in the case of a corporation),

amended Form 8871 is filed. the expense on Form 8872. or imprisoned not more than 1 year, or both.

Chapter 2 Filing Requirements and Required Disclosures Page 11
Waiver of penalties. The IRS may waive type that generally is not sold in a comany additional tax assessed on an organization mercial transaction outside the donative Information Provided

for failure to file Form 8872 if the failure was due context. For example, a donor who, for a

to reasonable cause and not willful neglect. payment, is granted admission to a relig- to Donors

ious ceremony for which there is no admisA charitable organization must give a donor a sion charge is provided an intangible

disclosure statement for a quid pro quo contribu- religious benefit. A donor is not provided

Donee Information tion over $75. A donor cannot deduct a charita- intangible religious benefits for payments

ble contribution of $250 or more unless the made for tuition for education leading to a Return donor has a written acknowledgement from the recognized degree, travel services, or concharitable organization. sumer goods.

In certain circumstances, an organization Dispositions of donated property. If an or- 4) The donor makes a payment of $75 or less may be able to meet both of these requirements ganization receives charitable deduction per year and receives only annual mem- with the same written document. property and within 2 years sells, exchanges, or bership benefits that consist of:

disposes of the property, the organization must Disclosure of a) Any rights or privileges (other than the file Form 8282, Donee Information Return.

However, an organization is not required to file Quid Pro Quo Contributions right to purchase tickets for college athletic events) that the taxpayer can exer- Form 8282 if :

A charitable organization must provide a written cise often during the membership • The property is valued at $500 or less, or disclosure statement period, such as free or discounted ad- to donors of a quid pro

quo contribution over $75. missions or parking or preferred access • The property is distributed for charitable to goods or services, or purposes. Quid pro quo contribution. This is a payment a donor makes to a charity partly as a b) Admission to events that are open only Form 8282 must be filed within 125 days after to members and the cost per person of contribution and partly for goods or services. For the disposition. A copy of Form 8282 must be which is within the limits for low-cost example, if a donor gives a charity $100 and given to the previous donor. If the organization articles described in Revenue Proce- receives a concert ticket valued at $40, the do- fails to file the required information return, penal- dure 90-12 (as adjusted for inflation). nor has made a quid pro quo contribution. In this ties may apply. example, the charitable contribution part of the

Charitable deduction property. This is payment is $60. Even though the deductible part Good faith estimate of fair market value.

any property (other than money or publicly of the payment is not more than $75, a disclo- An organization may use any reasonable

traded securities) for which the donee organi- sure statement must be filed because the method to estimate the fair market value (FMV)

zation signed an appraisal summary or Form donor’s payment (quid pro quo contribution) is of goods or services it provided to a donor, as

8283, Noncash Charitable Contributions. more than $75. long as it applies the method in good faith.

Publicly traded securities. These are se- Disclosure statement. The organization may estimate the FMV of The required written

curities for which market quotations are readily goods or services that generally are not com- disclosure statement must:

available on an established securities market as mercially available by using the FMV of similar

of the date of the contribution. 1) Inform the donor that the amount of the or comparable goods or services. Goods or

contribution that is deductible for federal services may be similar or comparable even if Appraisal summary. If the value of the income tax purposes is limited to the ex- they do not have the unique qualities of the donated property exceeds $5,000, the donor cess of any money (and the value of any goods or services being valued. must get a qualified appraisal for contributions of property other than money) contributed by property (other than money or publicly traded the donor over the fair market value of Example 1. A charity provides a one-hour securities). The donee organization is not a goods or services provided by the charity, tennis lesson with a tennis professional for the qualified appraiser for the purpose of valuing the and first $500 payment it receives. The tennis pro- donated property. For more information, get fessional provides one-hour lessons on a com- Publication 561, Determining the Value of 2) Provide the donor with a good faith esti- mercial basis for $100. A good faith estimate of Donated Property. mate of the fair market value of the goods the lesson’s FMV is $100. or services that the donor received.

Form 8283. For noncash donations over

The charity must furnish the statement in con- Example 2. For a payment of $50,000, a $5,000, the donor must attach Form 8283 to the

nection with either the solicitation or the receipt museum allows a donor to hold a private event tax return to support the charitable deduction.

The donee must sign Part IV of Section B, Form of the quid pro quo contribution. If the disclosure in a room of the museum. A good faith estimate

statement is furnished in connection with a par- of the FMV of the right to hold the event in the 8283 unless publicly traded securities are

ticular solicitation, it is not necessary for the museum can be made by using the cost of donated. The person who signs for the donee

must be an official authorized to sign the organization to provide another statement when renting a hotel ballroom with a capacity, ameniit actually receives the contribution. ties, and atmosphere comparable to the mu- donee’s tax or information returns, or a person

specifically authorized to sign by that official. No disclosure statement is required if any of seum room, even though the hotel ballroom

The signature does not represent concurrence the following are true. lacks the unique art displayed in the museum

room. If the hotel ballroom rents for $2,500, a in the appraised value of the contributed prop- 1) The goods or services given to a donor good faith estimate of the FMV of the right to erty. A signed acknowledgement represents re- have insubstantial value as described in hold the event in the museum is $2,500. ceipt of the property described on Form 8283 on Revenue Procedure 90–12, in Cumulative the date specified on the form. The signature Bulletin 1990–1, and Revenue Procedure Example 3. For a payment of $1,000, a also indicates knowledge of the information reporting requirements on dispositions, as previ- 92–49, in Cumulative Bulletin 1992–1. charity provides an evening tour of a museum

conducted by a well-known artist. The artist ously discussed. A copy of Form 8283 must be 2) There is no donative element involved in a does not provide tours on a commercial basis. given to the donee. particular transaction with a charity (for ex- Tours of the museum normally are free to the ample, there is generally no donative ele- public. A good faith estimate of the FMV of the ment involved in a visitor’s purchase from evening museum tour is $0 even though it is a museum gift shop). conducted by the artist.

3) There is only an intangible religious benefit

provided to the donor. The intangible relig- Penalty for failure to disclose. A penalty is

ious benefit must be provided to the donor imposed on a charity that does not make the

by an organization organized exclusively required disclosure of a quid pro quo contribufor religious purposes, and must be of a tion of more than $75. The penalty is $10 per

Page 12 Chapter 2 Filing Requirements and Required Disclosures
contribution, not to exceed $5,000 per fund-rais- Annual return. An exempt organization must • Technical advice memoranda relating to a

ing event or mailing. The charity can avoid the make available for public inspection, upon re- disapproved application for tax exemption

penalty if it can show that the failure was due to quest and without charge, a copy of its original or the revocation or modification of a

reasonable cause. and amended annual information returns. Each favorable determination letter,

information return must be made available from • Any letter or document filed with or issued Acknowledgement of the date it is required to be filed (determined by the IRS relating to whether a proposed without regard to any extensions), or is actually Charitable Contributions of or accomplished transaction is a prohib- filed, whichever is later. An original return does $250 or More ited transaction under section 503, not have to be made available if more than 3

years have passed from the date the return was • Any letter or document filed with or issued A donor can deduct a charitable contribution of required to be filed (including any extensions) or by the IRS relating to an organization’s $250 or more only if the donor has a written was filed, whichever is later. An amended return status as an organization described in acknowledgement from the charitable organiza- does not have to be made available if more than section 509(a) or 4942(j)(3), unless the let- tion. The donor must get the acknowledgement 3 years have passed from the date it was filed. ter or document relates to the by the earlier of: An annual information return includes an ex- organization’s application for tax exempact copy of the return (Form 990, 990–EZ, 1) The date the donor files the original return tion, and

990–BL, 990–PF, or 1065), and amended re- for the year the contribution is made, or • Any other letter or document filed with or turn if any, and all schedules, attachments, and

2) The due date, including extensions, for fil- issued by the IRS which, although it re- supporting documents filed with the IRS. It does lates to an organization’s tax-exempt sta- ing the return. not include Schedule A of Form 990–BL, Form tus as an organization described in section The donor is responsible for requesting and ob- 990–T, Schedule K–1 of Form 1065, or Form 501(c) or 501(d), does not relate to that 1120–POL. In the case of a tax-exempt organi- taining the written acknowledgement from the organization’s application for tax exemp- zation other than a private foundation, an annual donee. tion. information return does not include the names

Quid pro quo contribution. If the donee pro- and addresses of contributors to the organizavides goods or services to the donor in ex- tion. Time, place, and manner restrictions. The

change for the contribution (a quid pro quo annual returns and exemption application must Exemption application. An exempt organiza- contribution), the acknowledgement must in- be made available for inspection, without tion must also make available for public inspec- clude a good faith estimate of the value of the charge, at the organization’s principal, regional, goods or services. See Disclosure of Quid Pro tion without charge its application for tax-exempt and district offices during regular business Quo Contributions, earlier. status. An application for tax exemption includes hours. The organization may have an employee the application form (such as Form 1023 or Form of acknowledgement. Although there present during inspection, but must allow the 1024), all documents and statements the IRS individual to take notes freely and to photocopy is no prescribed format for the written acknowl- requires the organization to file with the form, edgement, it must provide enough information to at no charge if the individual provides the photo- any statement or other supporting document substantiate the amount of the contribution. For copying equipment. Generally, regional and dis- submitted by an organization in support of its more information, get IRS Publication 1771, trict offices are those that have paid employees application, and any letter or other document Charitable Contributions – Substantiation and who together are normally paid at least 120 issued by the IRS concerning the application. Disclosure Requirements. hours a week. The application for exemption does not in- If the organization does not maintain a per- clude:

manent office, it must make its application for tax • Any application from an organization that exemption and its annual information returns is not yet recognized as exempt, Report of Cash available for inspection at a reasonable location

• Any material that is required to be withheld of its choice. It must permit public inspection Received within a reasonable amount of time after receiv- from public inspection, see Material required to be withheld from public inspec- ing a request for inspection (normally not more

An exempt organization that receives, in the than 2 weeks) and at a reasonable time of day. tion, next,

course of its activities, more than $10,000 cash At its option, it may mail, within 2 weeks of • In the case of a tax-exempt organization in one transaction (or 2 or more related transac- receiving the request, a copy of its application other than a private foundation, the names tions) that is not a charitable contribution, must for tax exemption and annual information re- and addresses of contributors to the or- report the transaction to the IRS on Form 8300, turns to the requester in lieu of allowing an ganization, or Report of Cash Payments Over $10,000 Re- inspection. The organization may charge the

ceived in a Trade or Business. • Any applications filed before July 15, requester for copying and actual postage costs

1987, if the organization did not have a only if the requester consents to the charge.

copy of the application on July 15, 1987. An organization that has a permanent office,

but has no office hours or very limited hours Public Inspection If there is no prescribed application form, see during certain times of the year, must make its

section 301.6104(d)–1(b)(3)(ii) of the regula- documents available during those periods when of Exemption tions for a list of the documents that must be office hours are limited or not available as

made available. though it were an organization without a perma- Applications, Annual Material required to be withheld from pub- nent office.

Returns, and Political lic inspection. Material that is required to be

withheld from public inspection includes: Furnishing copies. An exempt organization

Organization Reporting also must provide a copy of all, or any specific • Trade secrets, patents, processes, styles part or schedule, of its three most recent annual of work, or apparatus for which withhold- Forms information returns and/or exemption applica- ing was requested and granted, tion to anyone who requests a copy either in

The following rules apply to private foundations • National defense material, person or in writing at its principal, regional or

as well as other tax-exempt organizations. Pri- district office during regular business hours. If • Unfavorable rulings or determination let- vate foundations filing annual returns are sub- the individual made the request in person, the ters issued in response to applications for ject to the public disclosure requirements under copy must be provided on the same business tax exemption, section 6104(d) of the Code. day the request is made unless there are unuIncluded in this section is a discussion on the • Rulings or determination letters revoking sual circumstances. Unusual circumstances are

public inspection requirements for political orga- or modifying a favorable determination let- defined in section 301.6104(d)–1(d)(1)(ii) of the

nizations filing Forms 8871 and 8872. ter, regulations.

Chapter 2 Filing Requirements and Required Disclosures Page 13
The organization must honor a written re- the person requesting inspection within the The organization can make its application

quest for a copy of documents or specific parts and returns widely available by posting the ap- same time period. In that case, the organization

or schedules of documents that are required to plication and returns on a World Wide Web may charge the requester for copying and actual

be disclosed. However, this rule only applies if page. For the rules to follow so that the Internet postage costs only if the requester consents to

the request: the charge. If the local or subordinate organiza- posting will be considered widely available, see

tion receives a written request for a copy of its section 301.6104(d)–2(b) of the regulations. • Is addressed to the exempt organization’s application for exemption, it must fulfill the re- If the organization has made its application principal, regional, or district office, quest in the time and manner specified earlier. for tax exemption and/or annual returns widely

• Is sent to that address by mail, electronic The requester has the option of requesting available, it must inform any individual requestmail (e-mail), facsimile (fax), or a private ing a copy where the documents are available, from the central or parent organization, at its

delivery service approved by the IRS, and including the address on the World Wide Web, if principal office, inspection or copies of the appli- applicable. If the request is made in person, the cation for group exemption and the material sub- • Gives the address to where the copy of mitted by the central or parent organization to notice must be provided immediately. If the re- the document should be sent. quest is made in writing, the notice must be include a local or subordinate organization in the provided within 7 days. group ruling. If the central or parent organization The organization must mail the copy within 30 submits to the IRS a list or directory of local or days from the date it receives the request. The Harassment campaign. If the tax-exempt or- subordinate organizations covered by the group organization may request payment in advance ganization is the subject of a harassment cam- exemption letter, it must make the list or direc- and must then provide the copies within 30 days paign, the organization may not have to fulfill tory available for public inspection, but it is re- from the date it receives payment. requests for information. For more information, quired to provide copies only of those pages of see section 301.6104(d)–3 of the regulations. Fees for copies. The organization may the list or directory that refer to particular local or charge a reasonable fee for providing copies. It subordinate organizations specified by the re- Political organization reporting forms. can charge no more for the copies than the per quester. The central or parent organization must Forms 8871 and 8872 (discussed earlier under page rate the IRS charges for providing copies. fulfill such requests in the time and manner Reporting Requirements for a Political Organi- That rate is stated in section 601.702(f)(5)(iv)(B) specified earlier. zation) are open to public inspection. of the regulations. (As of June 2001, the rate A local or subordinate organization that does was $1.00 for the first page and 15 cents for Form 8871. Form 8871 (including any sup- not file its own annual information return (be- porting papers) and any letter or other document each additional page.) The organization can cause it is affiliated with a central or parent the IRS issues with regard to Form 8871 is open also charge the actual postage costs it pays to organization that files a group return) must, to public inspection at the IRS in Washington, provide the copies. upon request, make available for public inspec- DC.

Regional and district offices. Generally, tion, or provide copies of, the group returns filed Copies of Form 8871 that have been filed will the same rules regarding public inspection and by the central or parent organization. However, be made available on the IRS Internet web site

providing copies of applications and annual re- if the group return includes separate schedules (www.irs.gov/polorgs) 48 hours after the noturns that apply to a principal office of an exempt for each local or subordinate organization in- tice has been filed and are considered widely organization also apply to its regional and dis- cluded in the group return, the local or available as long as the organization provides trict offices. However, a regional or district office subordinate organization receiving the request the IRS web site address to the person making is not required to make its annual information may omit any schedules relating only to other the request. In addition, the organization must return available for inspection or to provide cop- organizations included in the group return. The make a copy of these materials available for ies until 30 days after the date the return is local or subordinate organization must permit public inspection during regular business hours required to be filed (including any extensions) or public inspection, or comply with a request for at the organization’s principal office and at each is actually filed, whichever is later. copies made in person, within a reasonable of its regional or district offices having at least 3

Local and subordinate organizations. A amount of time (normally not more than 2 paid employees. weeks) after receiving a request made in person local or subordinate organization is an exempt Form 8872. Form 8872 (including Sched- for public inspection or copies and at a reasona- organization that did not file its own application ules A and B) is open to public inspection. Cop- ble time of day. for tax exemption because it is covered by a ies of Form 8872 that are required to be filed In lieu of allowing an inspection, the local or group exemption letter. Generally, a local or electronically will be made available on the In- subordinate organization may mail a copy of the subordinate organization of an exempt organi- ternet web site (www.irs.gov/polorgs) within applicable documents to the person requesting zation must, upon request, make available for 48 hours after it has been filed. inspection within the same time period. In this public inspection, or provide copies of: An organization is required to file Form 8872 case, the organization can charge the requester electronically if it has, or has reason to expect to 1) The application submitted to the IRS by for copying and actual postage costs only if the have, contributions or expenditures exceeding requester consents to the charge. If the local or the central or parent organization to obtain $50,000 for the tax year. subordinate organization receives a written re- the group exemption letter, and In addition, the organization is required to quest for a copy of its annual information return, 2) Those documents which were submitted make a copy of this form available for public it must fulfill the request by providing a copy of by the central or parent organization to in- inspection during regular business hours at the the group return in the time and manner speci- clude the local or subordinate organization organization’s principal office and at each of its fied earlier. The requester has the option of in the group exemption letter. regional or district offices having at least 3 paid requesting from the central or parent organiza- employees. However, if the central or parent organization tion, at its principal office, inspection or copies of

submits to the IRS a list or directory of local or group returns filed by the central or parent or- Penalties. The penalty for failure to allow pubsubordinate organizations covered by the group ganization. The central or parent organization lic inspection of annual returns is $20 for each

exemption letter, the local or subordinate organi- must fulfill such requests in the time and manner day the failure continues. The maximum penalty

zation is required to provide only the application specified earlier. on all persons for failures involving any one

for the group exemption ruling and the pages of If an organization fails to comply, it may be return is $10,000.

the list or directory that specifically refer to it. liable for a penalty. See Penalties, later. The penalty for failure to allow public inspecThe local or subordinate organization must tion of exemption applications is $20 for each

permit public inspection or comply with a re- day the failure continues. Making applications and returns widely

quest for copies made in person, within a rea- The penalty for willful failure to allow public available. An exempt organization does not

sonable amount of time (normally not more than inspection of a return or exemption application is have to comply with requests for copies of its

2 weeks) after receiving a request made in per- $5,000 for each return or application. The pen- annual returns or exemption application if it

son for public inspection or copies and at a alty also applies to a willful failure to provide makes them widely available. However, making

reasonable time of day. In lieu of allowing an copies. these documents widely available does not reinspection, the local or subordinate organization The penalty for failure to allow public inspec- lieve the organization from making its documay mail a copy of the applicable documents to tion of a political organization’s section 527 no- ments available for public inspection.

Page 14 Chapter 2 Filing Requirements and Required Disclosures
tice (Form 8871) is $20 for each day the failure tion, an organization of the type to which However, an organization described in (1), (2),

continues. this disclosure requirement applies. or (3) does not have to provide the notice if it

The penalty for failure to allow public inspec- establishes that substantially all the dues paid to

it are not deductible anyway or if certain other tion of a section 527 organization’s contributions Fund-raising solicitation. This disclosure reand expenditures report (Form 8872) is $20 for conditions are met. For more information, see quirement applies to a fund-raising solicitation if

each day the failure continues. The maximum Revenue Procedure 98–19 in Cumulative Bulle- all of the following are true.

penalty on all persons for failures involving any tin 1998–1 or later update.

one report is $10,000. 1) The organization soliciting the funds nor- If the organization does not provide the

mally has gross receipts over $100,000 required notice, it may have to pay a tax that is

per year. reported on Form 990–T. But the tax does not

apply to any amount on which the section 527 2) The solicitation is part of a coordinated Required Disclosures tax has been paid on Form 1120–POL. See fund-raising campaign that is soliciting Political Organization Income Tax Return, ear- more than 10 persons during the year. lier. Certain exempt organizations must disclose to 3) The solicitation is made in written or For more information about nondeductible the IRS or the public certain information about printed form, by television or radio, or by dues, see Deduction not allowed for dues used their activities. Generally, an organization dis- telephone. for political or legislative activities under closes this information by entering it on the ap- 501(c)(6) — Business Leagues, Etc. propriate lines of its annual return. In addition,

there are disclosure requirements for: Penalties. Failure by an organization to make

the required statement will result in a penalty of • Solicitation of nondeductible contributions, $1,000 for each day the failure occurred, up to a

maximum penalty of $10,000 for a calendar Miscellaneous Rules • Sales of information or services that are

available free from the government, and year. No penalty will be imposed if it is shown

that the failure was due to reasonable cause. If Organizational changes and exempt status. • Dues paid to the organization that are not the failure was due to intentional disregard of the If your exempt organization changes its legal deductible because they are used for lob- requirements, the penalty may be higher and is structure, such as from a trust to a corporation, bying or political activities. not subject to a maximum amount. you must file a new exemption application to

establish that the new legal entity qualifies for

Solicitation of Nondeductible Sales of Information or exemption. If your organization becomes inactive for a period of time but does not cease Contributions Services Available Free From being an entity under the laws of the state in Government which it was formed, its exemption will not be Solicitations for contributions or other payments terminated. However, unless you are covered by by certain exempt organizations (including lob- Certain organizations that offer to sell to individ- one of the filing exceptions, you will have to bying groups and political action committees) uals (or solicit money for) information or routine continue to file an annual information return dur- must include a statement that payments to those services that could be readily obtained free (or ing the period of inactivity. If your organization organizations are not deductible as charitable for a nominal fee) from the federal government has been liquidated, dissolved, terminated, contributions for federal income tax purposes. must include a statement that the information or or substantially contracted, you should file The statement must be included in the fund-rais- service can be so obtained. The statement must your annual return of information by the 15th day ing solicitation and be conspicuous and easily be made in a conspicuous and easily recog- of the 5th month after the change and follow the recognizable. nized format when the organization makes an applicable instructions to the form. offer or solicitation to sell the information or If your organization amends its articles of Organizations subject to requirements. An service. Organizations affected are those ex- organization or its internal regulations (bylaws), organization must follow these disclosure re- empt under section 501(c) or 501(d) and political you should send a conformed copy of these quirements if it is exempt under section 501(c), organizations defined in section 527(e). changes to the appropriate EO area manager. other than section 501(c)(1), or under section (An organization that is covered by a group 501(d), unless the organization is eligible to re- Penalty. A penalty is provided for failure to exemption letter should send two copies of ceive tax deductible charitable contributions comply with this requirement if the failure is due these changes.) If you did not give the IRS a under section 170(c). These requirements must to intentional disregard of the requirement. The copy of the amendments previously, you may be followed by, among others: penalty is the greater of $1,000 for each day the include it when you file Form 990 (or 990–EZ or failure occurred, or 50% of the total cost of all Form 990–PF), if that return is required. 1) Social welfare organizations (section offers and solicitations that were made by the

501(c)(4)), organization the same day that it fails to meet Change in accounting period. The procethe requirement. dures that an organization must follow to change 2) Labor unions (section 501(c)(5)), its accounting period differ for an individual or3) Trade associations (section 501(c)(6)), Dues Used for Lobbying ganization and for a central organization that

seeks a group change for its subordinate organi- 4) Social clubs (section 501(c)(7)), or Political Activities zations.

5) Fraternal organizations (section 501(c)(8) Certain exempt organizations must notify any- Individual organizations that wish to and 501 (c)(10)) (however, fraternal orga- one paying dues to the organization whether change annual accounting periods generally nizations described in section 170(c)(4) any part of the dues is not deductible because it need only file an information return for the short must follow these requirements only for is related to lobbying or political activities. period indicating that a change is being made. solicitations for funds that are to be used An organization must provide the notice if it is However, if the organization has changed its for noncharitable purposes not described exempt from tax under section 501(a) and is one accounting period within the previous 10 years, in section 170(c)(4)), of the following. it must file Form 1128, Application to Adopt,

6) Any political organization described in sec- Change, or Retain a Tax Year. Form 1128 is 1) A social welfare organization described in tion 527(e), including political campaign attached to the short period return. See Reve- section 501(c)(4) that is not a veterans’ committees and political action commit- nue Procedure 85–58. organization. tees, and Central organizations may obtain approval 2) An agricultural or horticultural organization 7) Any organization not eligible to receive for a group change in an annual accounting described in section 501(c)(5). tax-deductible contributions if the organi- period for their subordinate organizations on a

zation or a predecessor organization was, 3) A business league, chamber of commerce, group basis only by filing Form 1128 with the

at any time during the 5-year period end- real estate board, or other organization de- Service Center where it files its annual informaing on the date of the fund-raising solicita- scribed in section 501(c)(6). tion return. For more information, see Revenue

Chapter 2 Filing Requirements and Required Disclosures Page 15
Procedure 76–10, as modified by Revenue Pro- Instrumentalities. A state or municipal instru- your organization, the donor cannot deduct any

cedure 79–3 or later update. mentality may qualify under section 501(c)(3) if it part of the contribution unless the donor intends

is organized as a separate entity from the gov- to, and does, make a payment greater than the Form 1128 must be filed by the 15th day of ernmental unit that created it and if it otherwise fair market value of the goods or services. If a the 5th month following the close of the short meets the organizational and operational tests deduction is allowed, the donor can deduct only period. of section 501(c)(3). Examples of a qualifying the part of the contribution, if any, that is more

instrumentality might include state schools, uni- than the fair market value of the goods or servversities, or hospitals. However, if an organiza- ices received. You should determine in advance

tion is an integral part of the local government or the fair market value of any goods or services to

possesses governmental powers, it does not be given to contributors and tell them, when you

qualify for exemption. A state or municipality publicize the fund-raising event or solicit their 3. itself does not qualify for exemption. contributions, how much is deductible and how

much is for the goods or services. See Disclo- Payments made as a result of September 11, sure of Quid Pro Quo Contributions in chapter 2. 2001, Terroristic Attacks. Payments made

Section on or after September 11, 2001 by a 501(c)(3) Exemption application not filed. Donors

organization to individuals and their families be- may not deduct any charitable contribution to an cause of death, injury, wounding, or illness of an organization that is required to apply for recogni- 501(c)(3) individual as a result of the terrorist attacks tion of exemption but has not done so. against the United States on September 11,

2001, or for an attack involving anthrax, occur- Separate fund—contributions to which are Organizations ring on or after September 11, 2001, and before deductible. An organization that is exempt

January 1, 2002, are treated as related to the from federal income tax other than as an organicharity’s exempt purpose provided that the pay- zation described in section 501(c)(3) may, if it

ments are consistently applied and are made desires, establish a fund, separate and apart Introduction

using a reasonable and objective formula. from its other funds, exclusively for religious,

An organization may qualify for exemption from charitable, scientific, literary, or educational purfederal income tax if it is organized and operated Topics poses, fostering national or international amaexclusively for one or more of the following pur- This chapter discusses: teur sports competition, or for the prevention of

poses. cruelty to children or animals.

• Contributions to 501(c)(3) organizations If the fund is organized and operated exclu- Charitable. sively for these purposes, it may qualify for ex- • Applications for recognition of exemption Religious. emption as an organization described in section

• Educational organizations and certain 501(c)(3), and contributions made to it will be Educational. other 501(c)(3) organizations deductible as provided by section 170. A fund

Scientific. with these characteristics must be organized in • Private foundations and public charities such a manner as to prohibit the use of its funds Literary. • Lobbying expenditures upon dissolution, or otherwise, for the general

Testing for public safety. purposes of the organization creating it.

Fostering national or international amateur Useful Items Personal benefit contracts. Generally, no

sports competition (but only if none of its activi- You may want to see: charitable deduction will be allowed for a transties involve providing athletic facilities or equip- fer to, or for the use of, a 501(c)(3) or (c)(4)

ment; however, see Amateur Athletic Forms (and Instructions) organization if in connection with the transfer:

Organizations, later in this chapter).

❏ • The organization directly or indirectly 1023 Application for Recognition of The prevention of cruelty to children or ani- Exemption Under Section 501(c)(3) pays, or previously paid, a premium on a

mals. personal benefit contract for the transferor, of the Internal Revenue Code or

To qualify, the organization must be a corpo- ❏ 8718 User Fee for Exempt Organization

Determination Letter Request • There is an understanding or expectation ration, community chest, fund, or foundation. A that anyone will directly or indirectly pay a trust is a fund or foundation and will qualify.

See chapter 5 for information about getting premium on a personal benefit contract for However, an individual or a partnership will not the transferor. qualify. publications and forms.

Examples. Qualifying organizations include: A personal benefit contract with respect to

the transferor is any life insurance, annuity, or

Nonprofit old-age homes, Contributions endowment contract, if any direct or indirect

beneficiary under the contract is the transferor, Parent-teacher associations, any member of the transferor s family, or any Contributions to domestic organizations de- Charitable hospitals or other charitable organi- other person designated by the transferor. scribed in this chapter, except organizations zations, testing for public safety, are deductible as chari- Certain annuity contracts. If an organizaAlumni associations, table contributions on the donor’s federal in- tion incurs an obligation to pay a charitable gift

come tax return. annuity, and the organization purchases an an- Schools, nuity contract to fund the obligation, individuals Fund-raising events. If the donor receives Chapters of the Red Cross or Salvation Army, receiving payments under the charitable gift an- something of value in return for the contribution, nuity will not be treated as indirect beneficiaries Boys’ or Girls’ clubs, and a common occurrence with fund-raising efforts, if the organization owns all of the incidents of part or all of the contribution may not be deducti- Churches. ownership under the contract, is entitled to all ble. This may apply to fund-raising activities payments under the contract, and the timing and such as charity balls, bazaars, banquets, auc- amount of the payments are substantially the Child care organizations. The term edu- tions, concerts, athletic events, and solicitations same as the timing and amount of payments to cational purposes includes providing for care for membership or contributions when merchan- each person under the obligation ( as such obli- of children away from their homes if substan- dise or benefits are given in return for payment gation is in effect at the time of the transfer). tially all the care provided is to enable individuals of a specified minimum contribution.

(the parents) to be gainfully employed and the If the donor receives or expects to receive Certain contracts held by a charitable reservices are available to the general public. goods or services in return for a contribution to mainder trust. An individual will not be conPage 16 Chapter 3 Section 501(c)(3) Organizations
sidered an indirect beneficiary under a life the provisions allowing certain lobbying ex- • Airborne Express (Airborne): Overnight Air insurance, annuity, or endowment contract held penditures) or participate to any extent in a Express Service, Next Afternoon Service, by a charitable remainder annuity trust or a char- political campaign for or against any candi- and Second Day Service. itable remainder unitrust solely by reason of date for public office. See Political activity,

being entitled to the payment if the trust owns all next, and Lobbying Expenditures, near the • DHL Worldwide Express (DHL): DHL

of the incidents of ownership under the contract, end of this chapter. “Same Day” Service, and DHL USA Overand the trust is entitled to all payments under the night.

contract. Political activity. If any of the activities • Federal Express (FedEx): FedEx Priority (whether or not substantial) of your organization Excise tax. Overnight, FedEx Standard Overnight, If the premiums are paid in con- consist of participating in, or intervening in, any nection with a transfer for which a deduction is FedEx 2Day, FedEx International Priority, political campaign on behalf of (or in opposition not allowable under the deduction denial rule, and FedEx International First. to) any candidate for public office, your organi- without regard to when the transfer to the chari- zation will not qualify for tax-exempt status • United Parcel Service (UPS): UPS Next table organization was made, an excise tax under section 501(c)(3). Such participation or Day Air, UPS Next Day Air Saver, UPS equal to the amount of the premiums paid by the intervention includes the publishing or distribut- 2nd Day Air, and UPS 2nd Day Air A.M. organization on any life insurance, annuity, or ing of statements. endowment contract. The excise tax does not Whether your organization is participating or Amendments to enabling instrument re- apply if all of the direct and indirect beneficiaries quired. If an organization is required to alter intervening, directly or indirectly, in any political under the contract are organizations. campaign on behalf of (or in opposition to) any its activities or to make substantive amendA charitable organization liable for excise candidate for public office depends upon all of ments to its enabling instrument, the ruling or taxes must file Form 4720, Return of Certain determination letter recognizing its exempt sta- the facts and circumstances of each case. Cer- Excise Tax on Charities and Other Persons tain voter education activities or public forums tus will be effective as of the date the changes Under Chapters 41 and 42 of the Internal Reve- conducted in a non-partisan manner may not be are made. If only a nonsubstantive amendnue Code. Generally, the due date for filing prohibited political activity under section ment is made, exempt status will be effective as

Form 4720 occurs on the fifteenth day of the fifth 501(c)(3), while other so-called voter education of the date it was organized, if the application month following the close of the organization s activities may be prohibited. was filed within the 15-month period, or the date

taxable year. the application was filed. If your organization is uncertain as to

the effect of its voter education activi- Extensions of time for filing. There are two

ties, you should request a letter ruling ways organizations seeking exemption can receive an extension of time for filing Form 1023. Application for from the Internal Revenue Service. Send the

request to: 1) Automatic 12-month extension. Organi- Recognition of Internal Revenue Service zations will receive an automatic 12-month Attention: EO Letter Rulings Exemption extension if they file an application for rec- P.O. Box 27720, McPherson Station ognition of exemption with the IRS within Washington, DC 20038 12 months of the original deadline. To get This discussion describes certain information to Requests may also be hand delivered be- this extension, an organization must add be provided upon application for recognition of tween the hours of 8:00 a.m. and 4:00 p.m. to: the following statement at the top of its exemption by all organizations created for any of Courier’s Desk application: “Filed Pursuant to Section the purposes described earlier in this chapter. Internal Revenue Service 301.9100–2.” For example, the application must include a con- Attention: T:EO formed copy of the organization’s articles of in- 2) Discretionary extensions. An organiza- 1111 Constitution Avenue, N.W. corporation, as discussed under Articles of tion that fails to file a Form 1023 within the Washington, DC 20224 Organization later in this chapter. See the or- extended 12-month period will be granted

ganization headings that follow for specific infor- an extension to file if it submits evidence

mation your organization may need to provide. A receipt will be given at the courier’s desk. (including affidavits) to establish that:

The package should be marked: RULING Form 1023. Your organization must file its ap- REQUEST SUBMISSION. a) It acted reasonably and in good faith,

plication for recognition of exemption on Form and

1023. See chapter 1 and the instructions accom- Effective date of exemption. Most organiza- b) Granting a discretionary extension will panying Form 1023 for the procedures to follow tions described in this chapter that were organ- not prejudice the interests of the gov- in applying. Some organizations are not re- ized after October 9, 1969, will not be treated as ernment. quired to file Form 1023. These are discussed tax exempt unless they apply for recognition of later in this section. exemption by filing Form 1023. These organiza- Form 1023 and accompanying statements tions will not be treated as tax exempt for any How to show reasonable action and good

must show that all of the following are true. period before they file Form 1023, unless they faith. An organization acted reasonably and

file the form within 15 months from the end of the showed good faith if at least one of the following 1) The organization is organized exclusively month in which they were organized. If the or- is true.

for, and will be operated exclusively for, ganization files the application within this one or more of the purposes (charitable, 1) The organization requests relief before its 15-month period, the organization’s exemption religious, etc.) specified in the introduction failure to file is discovered by the IRS. will be recognized retroactively to the date it was to this chapter. organized. Otherwise, exemption will be recog- 2) The organization failed to file because of

2) No part of the organization’s net earnings nized only for the period after the IRS receives intervening events beyond its control.

will inure to the benefit of private share- the application. The date of receipt is the date of 3) The organization exercised reasonable dil- holders or individuals. You must establish the U.S. postmark on the cover in which an igence (taking into account the complexity that your organization will not be organized exemption application is mailed or, if no post- of the return or issue and the or operated for the benefit of private inter- mark appears on the cover, the date the applica- organization’s experience in these mat- ests, such as the creator or the creator’s tion is stamped as received by the IRS. ters) but was not aware of the filing re- family, shareholders of the organization, Private delivery service. If a private deliv- quirement. other designated individuals, or persons ery service designated by the IRS, rather than controlled directly or indirectly by such pri- 4) The organization reasonably relied upon the U.S. Postal Service, is used to deliver the vate interests. the written advice of the IRS. application, the date of receipt is the date re3) The organization will not, as a substantial corded or marked by the private delivery serv- 5) The organization reasonably relied upon

part of its activities, attempt to influence ice. The following private delivery services have the advice of a qualified tax professional

legislation (unless it elects to come under been designated by the IRS. who failed to file or advise the organization

Chapter 3 Section 501(c)(3) Organizations Page 17
to file Form 1023. An organization cannot the request, and such facts are true, cor- These organizations are exempt automatirely on the advice of a tax professional if it rect, and complete.” cally if they meet the requirements of section

knows or should know that he or she is not 501(c)(3). • Detailed affidavits from individuals having competent to render advice on filing ex- knowledge or information about the events Filing Form 1023 to establish exemption. If emption applications or is not aware of all that led to the failure to make the applica- the organization wants to establish its exemp- the relevant facts. tion and to the discovery of that failure. tion with the IRS and receive a ruling or determiThis includes the organization’s return nation letter recognizing its exempt status, it Not acting reasonably and in good faith. preparer, and any accountant or attorney, should file Form 1023. By establishing its ex- An organization has not acted reasonably and in emption, potential contributors are assured by good faith under the following circumstances. knowledgeable in tax matters, who advised the taxpayer on the application. The the IRS that contributions will be deductible. A

subordinate organization (other than a private 1) It seeks to change a return position for affidavits must describe the engagement foundation) covered by a group exemption letter which an accuracy-related penalty has and responsibilities of the individual and does not have to submit a Form 1023 for itself. been or could be imposed at the time the the advice that he or she provided.

relief is requested. Private foundations. See Private Founda- • These affidavits must include the name, tions and Public Charities, later, in this chapter, 2) It was informed of the requirement to file current address, and taxpayer identifica- for more information about the additional notice and related tax consequences, but chose tion number of the individual, and be ac- required from an organization in order for it not not to file. companied by a dated declaration, signed to be presumed to be a private foundation and by the individual, which states: “Under 3) It uses hindsight in requesting relief. The for the additional information required from a penalties of perjury, I declare that I have IRS will not ordinarily grant an extension if private foundation claiming to be an operating examined this request, including accom- specific facts have changed since the due foundation.

panying documents, and, to the best of my date that makes filing an application ad- knowledge and belief, the request con- Gross receipts test. For purposes of the vantageous to an organization. gross receipts test, an organization normally tains all the relevant facts relating to the does not have more than $5,000 annually in Prejudicing the interest of the govern- request, and such facts are true, correct, gross receipts if: ment. Prejudice to the interest of the govern- and complete.”

ment results if granting an extension of time to • The organization must state whether the 1) During its first tax year the organization file to an organization results in a lower total tax returns for the tax year in which the appli- received gross receipts of $7,500 or less, liability for the years to which the filing applies cation should have been filed or any tax than would have been the case if the organiza- 2) During its first 2 years the organization had years that would have been affected by a total of $12,000 or less in gross receipts, tion had filed on time. Before granting an exten- the application had it been timely made is sion, the IRS may require the organization and

being examined by the IRS, an appeals requesting it to submit a statement from an inde- 3) In the case of an organization that has office, or a federal court. The organization pendent auditor certifying that no prejudice will must notify the IRS office considering the been in existence for at least 3 years, the result if the extension is granted. total gross receipts received by the organi- request for relief if the IRS starts an exam- The interests of the Government are ordinar- zation during the immediately preceding 2 ination of any such return while the ily prejudiced if the tax year in which the applica- years, plus the current year, are $15,000 organization’s request for relief is pending. tion should have been filed (or any tax year that or less.

would have been affected had the filing been • The organization, if requested, has to sub- An organization with gross receipts more timely) are closed by the statute of limitations mit copies of its tax returns, and copies of than the amounts in the gross receipts test, before relief is granted. The IRS may condition a the returns of other affected taxpayers. unless otherwise exempt from filing Form 1023, grant of relief on the organization providing the must file a Form 1023 within 90 days after the IRS with a statement from an independent audi- A request for this relief is a request that must end of the period in which the amounts are tor certifying that the interests of the Govern- be submitted as a request for a letter ruling and exceeded. For example, an organization’s gross ment are not prejudiced. be accompanied by the applicable user fee. receipts for its first tax year were less than

Procedure for requesting extension. To More information. For more information $7,500, but at the end of its second tax year its

request a discretionary extension, an organiza- about these procedures, see sections gross receipts for the 2–year period were more

tion must submit (to the IRS address shown on 301.9100–1, 301.9100–2, and 301.9100–3 of than $12,000. The organization must file Form

Form 8718) the following. the regulations. 1023 within 90 days after the end of its second

tax year. • A statement showing the date Form 1023 Notification from IRS. Organizations filing If the organization had existed for at least 3 was required to have been filed and the Form 1023 and satisfying all requirements of tax years and had met the gross receipts test for date it was actually filed. all prior tax years but fails to meet the require- section 501(c)(3) will be notified of their exempt

• Any documents relevant to the application. ment for the current tax year, its tax-exempt status in writing. status for the prior years will not be lost even if • An affidavit describing in detail the events Form 1023 is not filed within 90 days after the that led to the failure to apply and to the Organizations Not Required close of the current tax year. However, the or- discovery of that failure. If the organization To File Form 1023 ganization will not be treated as a section relied on a tax professional’s advice, the 501(c)(3) organization for the period beginning affidavit must describe the engagement Some organizations are not required to file Form with the current tax year and ending with the and responsibilities of the professional and 1023. filing of Form 1023. the extent to which the organization relied These include:

Example. An organization is organized and on him or her. • Churches, interchurch organizations of lo- operated exclusively for charitable purposes • This affidavit must be accompanied by a cal units of a church, conventions or as- and is not a private foundation. It was incorpo- dated declaration, signed by an individual sociations of churches, or integrated rated on January 1, 1999, and files returns on a who has personal knowledge of the facts auxiliaries of a church, such as a men’s or calendar-year basis. It did not file a Form 1023. and circumstances, who is authorized to women’s organization, religious school, The organization’s gross receipts during the act for the organization, which states, mission society, or youth group. years 1999 through 2002 were as follows: “Under penalties of perjury, I declare that I

have examined this request, including ac- • Any organization (other than a private 1999 ...................... $3,600

companying documents, and, to the best foundation) normally having annual gross 2000 ...................... 2,900

of my knowledge and belief, the request receipts of not more than $5,000 (see 2001 . . . . . . . . . . . . . . . . . . . . . . 400

contains all the relevant facts relating to Gross receipts test, later). 2002 ...................... 12,600

Page 18 Chapter 3 Section 501(c)(3) Organizations
The organization’s total gross receipts for cles appropriately limit the organization’s Dedication. To establish that your

1999, 2000, and 2001 were $6,900. Therefore, it purposes. The organization meets the organiza- organization’s assets will be permanently dedidid not have to file Form 1023 and is exempt for tional test. cated to an exempt purpose, the articles of orthose years. However, for 2000, 2001, and 2002 ganization should contain a provision insuring

the total gross receipts were $15,900. There- Example 2. An organization, by the terms of their distribution for an exempt purpose in the

fore, the organization must file Form 1023 within its articles, is formed to engage in research event of dissolution. Although reliance may be 90 days after the end of its 2002 tax year. If it without any further description or limitation. The placed upon state law to establish permanent does not file within this time period, it will not be organization will not be properly limited as to its dedication of assets for exempt purposes, your exempt under section 501(c)(3) for the period purposes since all research is not scientific. The organization’s application probably can be beginning with tax year 2002 ending when the organization does not meet the organizational processed much more rapidly if its articles of Form 1023 is received by the IRS. The organiza- test. organization include a provision insuring perma- tion, however, will not lose its exempt status for nent dedication of assets for exempt purposes. the tax years ending before January 1, 2002. Example 3. An organization’s articles state

The IRS will consider applying the that its purpose is to receive contributions and Distribution. Revenue Procedure 82–2,

Commissioner’s discretionary authority to ex- pay them over to organizations that are de- 1982–1 C.B. 367, identifies the states and cirtend the time for filing Form 1023. See the pro- scribed in section 501(c)(3) and exempt from cumstances in which the IRS will not require an

cedures for this extension discussed earlier. taxation under section 501(a). The organization express provision for the distribution of assets

meets the organizational test. upon dissolution in the articles of organization.

The procedure also provides a sample of an

Example 4. If a stated purpose in the arti- acceptable dissolution provision for organiza- cles is the conduct of a school of adult education Articles of tions required to have one. and its manner of operation is described in de- If a named beneficiary is to be the distribu- Organization tail, such a purpose will be satisfactorily limited. tee, it must be one that would qualify and would

be exempt within the meaning of section Your organization must include a conformed Example 5. If the articles state the organiza- 501(c)(3) at the time the dissolution takes place. copy of its articles of organization with the appli- tion is formed for charitable purposes, without Since the named beneficiary at the time of disso- cation for recognition of exemption. This may be any further description, such language ordinarily lution may not be qualified, may not be in exis- its trust instrument, corporate charter, articles of will be sufficient since the term charitable has a

tence, or may be unwilling or unable to accept association, or any other written instrument by generally accepted legal meaning. On the other the assets of the dissolving organization, a pro- which it is created. hand, if the purposes are stated to be charitable,

philanthropic, and benevolent, the organiza- vision should be made for distribution of the

tional requirement will not be met since the assets for one or more of the purposes specified Organizational Test in this chapter in the event of any such contin- terms philanthropic and benevolent have no

The articles of organization must generally accepted legal meaning and, there- gency. limit the

organization’s purposes to one or more of those fore, the stated purposes may, under the laws of

described at the beginning of this chapter and the state, permit activities that are broader than Sample Articles

must not expressly empower it to engage, other those intended by the exemption law. of Organization than as an insubstantial part of its activities, in

activities that do not further one or more of those Example 6. If the articles state an organiza- The following are examples of a charter (Draft A)

purposes. These conditions for exemption are tion is formed to promote American ideals, or to and a declaration of trust (Draft B) that contain

referred to as the organizational test. foster the best interests of the people, or to the required information as to purposes and

Section 501(c)(3) is the provision of law that further the common welfare and well-being of powers of an organization and disposition of its

grants exemption to the organizations described the community, without any limitation or provi- assets upon dissolution. You should bear in sion restricting such purposes to accomplish- in this chapter. Therefore, the organizational test mind that requirements for these instruments may be met if the purposes stated in the articles ment only in a charitable manner, the purposes may vary under applicable state law. of organization are limited in some way by refer- will not be sufficiently limited. Such purposes See Private Foundations and Public Chari- ence to section 501(c)(3). are vague and may be accomplished other than ties, later, for the special provisions required in a The requirement that your organization’s in an exempt manner. private foundation’s governing instrument in or- purposes and powers must be limited by the Example 7. A stated purpose to operate a der for it to qualify for exemption. articles of organization is not satisfied if the

hospital does not meet the organizational test limit is contained only in the bylaws or other since it is not necessarily charitable. A hospital rules or regulations. Moreover, the organiza- may or may not be exempt depending on the Draft A

tional test is not satisfied by statements of your

organization’s officers that you intend to operate manner in which it is operated. Articles of Incorporation of the underonly for exempt purposes. Also, the test is not signed, a majority of whom are citizens of the Example 8. An organization that is ex- satisfied by the fact that your actual operations United States, desiring to form a Non-Profit Cor- pressly empowered by its articles to carry on are for exempt purposes. poration under the Non-Profit Corporation Law social activities will not be sufficiently limited as In interpreting an organization’s articles, the of , do hereby certify: to its power, even if its articles state that it is law of the state where the organization was organized and will be operated exclusively for First: The name of the Corporation shall be created is controlling. If an organization con- charitable purposes. . tends that the terms of its articles have a different meaning under state law than their generally Second: The place in this state where the

accepted meaning, such meaning must be es- Dedication and principal office of the Corporation is to be lo- tablished by a clear and convincing reference to Distribution of Assets cated is the City of , relevant court decisions, opinions of the state County. attorney general, or other appropriate state au- Assets of an organization must be permanently Third: Said corporation is organized exclu- thorities. dedicated to an exempt purpose. This means

that should an organization dissolve, its assets sively for charitable, religious, educational, and The following are examples illustrating the

must be distributed scientific purposes, including, for such pur- organizational test. for an exempt purpose described in this chapter, or to the federal govern- poses, the making of distributions to organizaExample 1. Articles of organization state ment or to a state or local government for a tions that qualify as exempt organizations under

that an organization is formed exclusively for public purpose. If the assets could be distributed section 501(c)(3) of the Internal Revenue Code,

literary and scientific purposes within the mean- to members or private individuals or for any or the corresponding section of any future feding of section 501(c)(3) of the Code. These arti- other purpose, the organizational test is not met. eral tax code.

Chapter 3 Section 501(c)(3) Organizations Page 19
Fourth: The names and addresses of the Second: The trustees may receive and ac- under the laws of any state or under the laws of

persons who are the initial trustees of the corpo- cept property, whether real, personal, or mixed, the United States as may be determined by the

ration are as follows: by way of gift, bequest, or devise, from any trustees; such corporation when organized to

Name Address person, firm, trust, or corporation, to be held, have power to administer and control the affairs

administered, and disposed of in accordance and property and to carry out the uses, objects, Fifth: No part of the net earnings of the with and pursuant to the provisions of this Decla- and purposes of this trust. Upon the creation and corporation shall inure to the benefit of, or be ration of Trust; but no gift, bequest or devise of organization of such corporation, the trustees distributable to its members, trustees, officers, any such property shall be received and ac- are authorized and empowered to convey,

or other private persons, except that the corpo- cepted if it is conditioned or limited in such man- transfer, and deliver to such corporation all the

ration shall be authorized and empowered to ner as to require the disposition of the income or property and assets to which this trust may be or

pay reasonable compensation for services ren- its principal to any person or organization other become entitled. The charter, bylaws, and other

dered and to make payments and distributions than a “charitable organization” or for other than provisions for the organization and managein furtherance of the purposes set forth in Article “charitable purposes” within the meaning of ment of such corporation and its affairs and

Third hereof. No substantial part of the activities such terms as defined in Article Third of this property shall be such as the trustees shall deof the corporation shall be the carrying on of Declaration of Trust, or as shall in the opinion of termine, consistent with the provisions of this

propaganda, or otherwise attempting to influ- paragraph. the trustees, jeopardize the federal income tax

ence legislation, and the corporation shall not exemption of this trust pursuant to section C. In this Declaration of Trust and in any

participate in, or intervene in (including the pub- 501(c)(3) of the Internal Revenue Code, or the amendments to it, references to “charitable orlishing or distribution of statements) any political corresponding section of any future federal tax ganizations” or “charitable organization” mean

campaign on behalf of or in opposition to any code. corporations, trusts, funds, foundations, or comcandidate for public office. Notwithstanding any munity chests created or organized in the United Third: A. The principal and income of all other provision of these articles, the corporation States or in any of its possessions, whether property received and accepted by the trustees shall not carry on any other activities not permit- under the laws of the United States, any state or to be administered under this Declaration of ted to be carried on (a) by a corporation exempt territory, the District of Columbia, or any posses- Trust shall be held in trust by them, and the sion of the United States, organized and oper- from federal income tax under section 501(c)(3) trustees may make payments or distributions of the Internal Revenue Code, or the corre- ated exclusively for charitable purposes, no part from income or principal, or both, to or for the sponding section of any future federal tax code, of the net earnings of which inures or is payable use of such charitable organizations, within the or (b) by a corporation, contributions to which to or for the benefit of any private shareholder or meaning of that term as defined in paragraph C, individual, and no substantial part of the activi- are deductible under section 170(c)(2) of the in such amounts and for such charitable pur- ties of which is carrying on propaganda, or oth- Internal Revenue Code, or the corresponding poses of the trust as the trustees shall from time erwise attempting to influence legislation, and section of any future federal tax code. to time select and determine; and the trustees which do not participate in or intervene in (in- If reference to federal law in articles of incor- may make payments or distributions from in- cluding the publishing or distributing of state- poration imposes a limitation that is invalid in come or principal, or both, directly for such chari- ments) any political campaign on behalf of or in your state, you may wish to substitute the follow- table purposes, within the meaning of that term opposition to any candidate for public office. It is ing for the last sentence of the preceding para- as defined in paragraph D, in such amounts as intended that the organization described in this graph: “Notwithstanding any other provision of the trustees shall from time to time select and paragraph C shall be entitled to exemption from these articles, this corporation shall not, except determine without making use of any other char- federal income tax under section 501(c)(3) of to an insubstantial degree, engage in any activi- itable organization. The trustees may also make the Internal Revenue Code, or the correspond- ties or exercise any powers that are not in fur- payments or distributions of all or any part of the ing section of any future federal tax code. therance of the purposes of this corporation.” income or principal to states, territories, or pos- D. In this Declaration of Trust and in any

Sixth: Upon the dissolution of the corpora- sessions of the United States, any political sub- amendments to it, the term “charitable purtion, assets shall be distributed for one or more division of any of the foregoing, or to the United poses” shall be limited to and shall include only

exempt purposes within the meaning of section States or the District of Columbia but only for religious, charitable, scientific, literary, or educacharitable purposes within the meaning of that 501(c)(3) of the Internal Revenue Code, or the tional purposes within the meaning of those

corresponding section of any future federal tax term as defined in paragraph D. Income or prin- terms as used in section 501(c)(3) of the Internal

code, or shall be distributed to the federal gov- cipal derived from contributions by corporations Revenue Code, or the corresponding section of

ernment, or to a state or local government, for a shall be distributed by the trustees for use solely any future federal tax code, but only such purpublic purpose. Any such assets not so dis- within the United States or its possessions. No poses as also constitute public charitable purpart of the net earnings of this trust shall inure or poses under the law of trusts of the State posed of shall be disposed of by a Court of

Competent Jurisdiction of the county in which be payable to or for the benefit of any private of .

shareholder or individual, and no substantial the principal office of the corporation is then Fourth: This Declaration of Trust may be part of the activities of this trust shall be the located, exclusively for such purposes or to such amended at any time or times by written instru- carrying on of propaganda, or otherwise at- organization or organizations, as said Court ment or instruments signed and sealed by the tempting, to influence legislation. No part of the shall determine, which are organized and oper- trustees, and acknowledged by any of the trust- activities of this trust shall be the participation in, ated exclusively for such purposes. ees, provided that no amendment shall author- or intervention in (including the publishing or In witness whereof, we have hereunto sub- ize the trustees to conduct the affairs of this trust distributing of statements), any political cam- scribed our names this day of in any manner or for any purpose contrary to the paign on behalf of or in opposition to any candi- 20 . provisions of section 501(c)(3) of the Internal date for public office. Revenue Code, or the corresponding section of B. The trust shall continue forever unless the any future federal tax code. An amendment of trustees terminate it and distribute all of the Draft B the provisions of this Article Fourth (or any principal and income, which action may be taken amendment to it) shall be valid only if and to the by the trustees in their discretion at any time. On The Charitable Trust. Declaration extent that such amendment further restricts the such termination, assets shall be distributed for of Trust made as of the day of , trustees’ amending power. All instruments one or more exempt purposes within the mean- 20 , by , of , and amending this Declaration of Trust shall be ing of section 501(c)(3) of the Internal Revenue , of , who hereby de- noted upon or kept attached to the executed Code, or the corresponding section of any future clare and agree that they have received this day original of this Declaration of Trust held by the federal tax code, or shall be distributed to the from , as Donor, the sum of Ten trustees. federal government, or to a state or local govern- Dollars ($10) and that they will hold and manage ment, for a public purpose. The donor autho- Fifth: Any trustee under this Declaration of the same, and any additions to it, in trust, as rizes and empowers the trustees to form and Trust may, by written instrument, signed and follows: organize a nonprofit corporation limited to the acknowledged, resign his office. The number of

First: This trust shall be called “The uses and purposes provided for in this Declara- trustees shall be at all times not less than two,

Charitable Trust.” tion of Trust, such corporation to be organized and whenever for any reason the number is

Page 20 Chapter 3 Section 501(c)(3) Organizations
reduced to one, there shall be, and at any other such loans to mortgage or pledge any real or

time there may be, appointed one or more addi- personal property with or without power of sale; Educational

tional trustees. Appointments shall be made by to acquire or hold any real or personal property, the trustee or trustees for the time in office by subject to any mortgage or pledge on or of Organizations written instruments signed and acknowledged. property acquired or held by this trust. Any succeeding or additional trustee shall, upon and Private Schools

d) To execute and deliver deeds, assign- his or her acceptance of the office by written

ments, transfers, mortgages, pledges, leases, instrument signed and acknowledged, have the If your organization wants to obtain recognition

same powers, rights and duties, and the same covenants, contracts, promissory notes, re- of exemption as an educational organization,

title to the trust estate jointly with the surviving or leases, and other instruments, sealed or un- you must submit complete information as to how

remaining trustee or trustees as if originally ap- sealed, incident to any transaction in which they your organization carries on or plans to carry on

pointed. engage. its educational activities, such as by conducting

None of the trustees shall be required to a school, by panels, discussions, lectures, fo- e) To vote, to give proxies, to participate in furnish any bond or surety. None of them shall rums, radio and television programs, or through the reorganization, merger or consolidation of be responsible or liable for the acts or omissions various cultural media such as museums, sym- any concern, or in the sale, lease, disposition, or of any other of the trustees or of any predeces- phony orchestras, or art exhibits. In each insor or of a custodian, agent, depositary or coun- distribution of its assets; to join with other secur- stance, you must explain by whom and where

sel selected with reasonable care. ity holders in acting through a committee, de- these activities are or will be conducted and the

The one or more trustees, whether original or positary, voting trustees, or otherwise, and in amount of admission fees, if any. You must

successor, for the time being in office, shall have this connection to delegate authority to such submit a copy of the pertinent contracts, agreements, publications, programs, etc. full authority to act even though one or more committee, depositary, or trustees and to devacancies may exist. A trustee may, by appro- If you are organized to conduct a school, you posit securities with them or transfer securities

priate written instrument, delegate all or any part must submit full information regarding your tui- to them; to pay assessments levied on securities of his or her powers to another or others of the tion charges, number of faculty members, num- or to exercise subscription rights in respect of trustees for such periods and subject to such ber of full-time and part-time students enrolled, securities. conditions as such delegating trustee may de- courses of study and degrees conferred, totermine. f) To employ a bank or trust company as gether with a copy of your school catalog. See

The trustees serving under this Declaration custodian of any funds or securities and to dele- also Private Schools, discussed later.

of Trust are authorized to pay to themselves gate to it such powers as they deem appropriate;

amounts for reasonable expenses incurred and to hold trust property without indication of fiduci- Educational Organizations

reasonable compensation for services rendered ary capacity but only in the name of a registered

The term educational relates to: in the administration of this trust, but in no event nominee, provided the trust property is at all

shall any trustee who has made a contribution to times identified as such on the books of the trust; 1) The instruction or training of individuals for this trust ever receive any compensation there- to keep any or all of the trust property or funds in the purpose of improving or developing after. any place or places in the United States of their capabilities, or

Sixth: In extension and not in limitation of America; to employ clerks, accountants, invest- 2) The instruction of the public on subjects the common law and statutory powers of trust- ment counsel, investment agents, and any spe- useful to individuals and beneficial to the ees and other powers granted in this Declaration cial services, and to pay the reasonable community. of Trust, the trustees shall have the following compensation and expenses of all such services discretionary powers. in addition to the compensation of the trustees. a) To invest and reinvest the principal and Advocacy of a position. Advocacy of a parincome of the trust in such property, real, per- Seventh: The trustees’ powers are exercis- ticular position or viewpoint may be educational

sonal, or mixed, and in such manner as they able solely in the fiduciary capacity consistent if there is a sufficiently full and fair exposition of

shall deem proper, and from time to time to with and in furtherance of the charitable pur- pertinent facts to permit an individual or the

change investments as they shall deem advisa- poses of this trust as specified in Article Third public to form an independent opinion or concluble; to invest in or retain any stocks, shares, sion. The mere presentation of unsupported and not otherwise.

bonds, notes, obligations, or personal or real opinion is not educational. Eighth: In this Declaration of Trust and in property (including without limitation any inter- Method not educational. The method used ests in or obligations of any corporation, associ- any amendment to it, references to “trustees” by an organization to develop and present its ation, business trust, investment trust, common mean the one or more trustees, whether original views is a factor in determining if an organization trust fund, or investment company) although or successor, for the time being in office. qualifies as educational within the meaning of some or all of the property so acquired or re- Ninth: Any person may rely on a copy, certi- section 501(c)(3). The following factors may in- tained is of a kind or size which but for this dicate that the method is not educational. fied by a notary public, of the executed original express authority would not be considered of this Declaration of Trust held by the trustees, proper and although all of the trust funds are 1) The presentation of viewpoints unsup- and of any of the notations on it and writings invested in the securities of one company. No ported by facts is a significant part of the

principal or income, however, shall be loaned, attached to it, as fully as he might rely on the organization’s communications.

directly or indirectly, to any trustee or to anyone original documents themselves. Any such per- 2) The facts that purport to support the view- else, corporate or otherwise, who has at any son may rely fully on any statements of fact point are distorted. time made a contribution to this trust, nor to certified by anyone who appears from such origanyone except on the basis of an adequate inal documents or from such certified copy to be 3) The organization’s presentations make

interest charge and with adequate security. a trustee under this Declaration of Trust. No one substantial use of inflammatory and disb) To sell, lease, or exchange any personal, paraging terms and express conclusions dealing with the trustees need inquire concern- mixed, or real property, at public auction or by more on the basis of emotion than of ob- ing the validity of anything the trustees purport to private contract, for such consideration and on jective evaluations. do. No one dealing with the trustees need see to such terms as to credit or otherwise, and to the application of anything paid or transferred to 4) The approach used is not aimed at devel- make such contracts and enter into such underor upon the order of the trustees of the trust. oping an understanding on the part of the takings relating to the trust property, as they audience because it does not consider consider advisable, whether or not such leases Tenth: This Declaration of Trust is to be their background or training. or contracts may extend beyond the duration of governed in all respects by the laws of the State the trust. Exceptional circumstances, however, may of .

c) To borrow money for such periods, at such exist where an organization’s advocacy may be Trustee rates of interest, and upon such terms as the educational even if one or more of the factors

trustees consider advisable, and as security for listed above are present. Trustee 

Chapter 3 Section 501(c)(3) Organizations Page 21
Qualifying organizations. The following the racial composition of students who A policy of a school that favors racial minortypes of organizations may qualify as educa- have received the awards. ity groups with respect to admissions, facilities

tional: and programs, and financial assistance is not 3) A list of the school’s incorporators, foun- discrimination on the basis of race when the ders, board members, and donors of land 1) An organization, such as a primary or sec- purpose and effect of this policy is to promote ondary school, a college, or a professional or buildings, whether individuals or organi- establishing and maintaining the school’s nonor trade school, that has a regularly sched- zations. discriminatory policy. uled curriculum, a regular faculty, and a 4) A statement indicating whether any of the A school that selects students on the basis of

regularly enrolled student body in attend- organizations described in item (3) above membership in a religious denomination or

ance at a place where the educational ac- have an objective of maintaining segre- unit is not discriminating if membership in the

tivities are regularly carried on, gated public or private school education at denomination or unit is open to all on a racially

nondiscriminatory basis. 2) An organization whose activities consist of the time the application is filed and, if so,

conducting public discussion groups, fo- whether any of the individuals described in Policy statement. The school must include a

rums, panels, lectures, or other similar pro- item (3) are officers or active members of statement of its racially nondiscriminatory policy

grams, those organizations at the time the appli- in all its brochures and catalogs dealing with cation is filed. 3) An organization that presents a course of student admissions, programs, and scholarinstruction by correspondence or through 5) The public school district and county in ships. Also, the school must include a reference

which the school is located. to its racially nondiscriminatory policy in other the use of television or radio,

written advertising that it uses to inform prospec- 4) A museum, zoo, planetarium, symphony tive students of its programs. orchestra, or other similar organization, How to determine racial composition. The

and Publicity requirement. The school must racial composition of the student body, faculty, make its racially nondiscriminatory policy known and administrative staff may be an estimate 5) A nonprofit children’s day-care center. to all segments of the general community served based on the best information readily available by the school. Selective communication of a to the school, without requiring student appli- College book stores, cafeterias, restau- racially nondiscriminatory policy that a school cants, students, faculty, or administrative staff to rants, etc. These and other on-campus orga- provides solely to leaders of racial groups will submit to the school information that the school nizations should submit information to show that not be considered an effective means of com- otherwise does not require. Nevertheless, a they are controlled by and operated for the con- munication to make the policy known to all seg- statement of the method by which the racial venience of the faculty and student body or by ments of the community. To satisfy this whom they are controlled and whom they serve. composition was determined must be supplied. requirement, the school must use one of the The identity of individual students or members of Alumni association. An alumni association following two methods. the faculty and administrative staff should not be should establish that it is organized to promote included with this information. Method one. The school may publish a no- the welfare of the university with which it is A school that is a state or municipal instru- tice of its racially nondiscriminatory policy in a affiliated, is subject to the control of the univer- mentality (see Instrumentalities, near the begin- newspaper of general circulation that serves all sity as to its policies and destination of funds, ning of this chapter), whether or not it qualifies racial segments of the community. Such publi- and is operated as an integral part of the univer- for exemption under section 501(c)(3), is not cation must be repeated at least once annually sity or is otherwise organized to promote the considered to be a private school for purposes of during the period of the school’s solicitation for welfare of the college or university. If your asso- the following discussion. students or, in the absence of a solicitation pro- ciation does not have these characteristics, it gram, during the school’s registration period. may still be exempt as a social club if it meets When more than one community is served by a the requirements described in chapter 4, under Racially Nondiscriminatory Policy school, the school may publish the notice in 501(c)(7) — Social and Recreation Clubs. those newspapers that are reasonably likely to

Athletic organization. This type of organi- To qualify as an organization exempt from fed- be read by all racial segments in the communization must submit evidence that it is engaged in eral income tax, a private school must include a ties that the school serves.

statement in its charter, bylaws, or other govern- activities such as directing and controlling inter- If this method is used, the notice must meet

scholastic athletic competitions, conducting ing instrument, or in a resolution of its governing the following printing requirements.

body, that it has a racially nondiscriminatory tournaments, and prescribing eligibility rules for policy as to students and that it does not discrim- 1) It must appear in a section of the newspa- contestants. If it is not so engaged, your organi- inate against applicants and students on the per likely to be read by prospective stu- zation may be exempt as a social club described basis of race, color, or national or ethnic origin. dents and their families. in chapter 4. Raising funds to be used for travel

and other activities to interview and persuade Also, the school must circulate information that 2) It must occupy at least 3 column inches.

prospective students with outstanding athletic clearly states the school’s admission policies. A

racially nondiscriminatory policy toward stu- 3) It must have its title printed in at least 12 ability to attend a particular university does not

dents means that the school admits the students point bold face type. show an exempt purpose. If your organization is

not exempt as an educational organization, see of any race to all the rights, privileges, programs, 4) It must have the remaining text printed in

Amateur Athletic Organizations, and activities generally accorded or made avail- later in this at least 8 point type.

chapter. able to students at that school and that the

The following is an acceptable example of school does not discriminate on the basis of race

the notice: Private Schools in administering its educational policies, admission policies, scholarship and loan programs, NOTICE OF

Every private school filing an application for rec- and athletic and other school-administered pro- NONDISCRIMINATORY POLICY

ognition of tax-exempt status must supply the grams. AS TO STUDENTS

The M School admits students of any race, color, IRS (on Schedule B, Form 1023) with the follow- The IRS considers discrimination on the banational and ethnic origin to all the rights, ing information. sis of race to include discrimination on the basis privileges, programs, and activities generally of color or national or ethnic origin. accorded or made available to students at the 1) The racial composition of the student The existence of a racially discriminatory pol- school. It does not discriminate on the basis of

body, and of the faculty and administrative race, color, national and ethnic origin in icy with respect to the employment of faculty staff, as of the current academic year. administration of its educational policies, and administrative staff is indicative of a ra- (This information also must be projected, admissions policies, scholarship and loan cially discriminatory policy as to students. Con- programs, and athletic and other so far as may be feasible, for the next versely, the absence of racial discrimination in school-administered programs. academic year.) the employment of faculty and administrative

2) The amount of scholarship and loan funds, staff is indicative of a racially nondiscriminatory Method two. The school may use the

if any, awarded to students enrolled and policy as to students. broadcast media to publicize its racially nondisPage 22 Chapter 3 Section 501(c)(3) Organizations
criminatory policy if this use makes the policy not necessarily indicate the absence of a racially 1) Records indicating the racial composiknown to all segments of the general community nondiscriminatory policy when there are rela- tion of the student body, faculty, and adthe school serves. If the school uses this tively few or no such students in these communi- ministrative staff for each academic

method, it must provide documentation showing ties. Actual enrollment is, however, a meaningful year.

that the means by which this policy was commu- indication of a racially nondiscriminatory policy 2) Records sufficient to document that nicated to all segments of the general commu- in a community in which a public school or scholarship and other financial assis- nity was reasonably expected to be effective. In schools became subject to a desegregation or- tance is awarded on a racially nondis- this case, appropriate documentation would in- der of a federal court or are otherwise expressly criminatory basis. clude copies of the tapes or scripts used and obligated to implement a desegregation plan

records showing that there was an adequate under the terms of any written contract or other 3) Copies of all materials used by or on

number of announcements. The documentation commitment to which any federal agency was a behalf of the school to solicit contribualso would include proof that these announce- party. tions.

ments were made during hours when they were The IRS encourages schools to satisfy the 4) Copies of all brochures, catalogs, and likely to be communicated to all segments of the publicity requirement by using either of the advertising dealing with student admis- general community, that they were long enough methods described earlier, even though a sions, programs, and scholarships. to convey the message clearly, and that they school considers itself to be within one of the (Schools advertising nationally or in a were broadcast on radio or television stations Exceptions. The IRS believes that these public- large geographic segment or segments likely to be listened to by substantial numbers of ity requirements are the most effective methods of the United States need only maintain members of all racial segments of the general to make known a school’s racially nondiscrimi- a record sufficient to indicate when and community. Announcements must be made dur- natory policy. In this regard, it is each school’s in what publications their advertisements ing the period of the school’s solicitation for responsibility to determine whether either of the were placed.) students or, in the absence of a solicitation pro- exceptions apply. Such responsibility will pregram, during the school’s registration period. pare the school, if it is audited by the IRS, to The racial composition of the student body,

demonstrate that the failure to publish its racially faculty, and administrative staff may be deter- Exceptions. The publicity requirements will nondiscriminatory policy in accordance with ei- mined in the same manner as that described at not apply in the following situations. ther one of the publicity requirements was justi- the beginning of this section. However, a school

First fied by one of the exceptions. Also, a school may not discontinue maintaining a system of , if for the preceding 3 years the enrollment of a parochial or other church-related must be prepared to demonstrate that it has records that reflects the racial composition of its

school consists of students at least 75% of publicly disavowed or repudiated any state- students, faculty, and administrative staff used

whom are members of the sponsoring religious ments purported to have been made on its be- on November 6, 1975, unless it substitutes a

denomination or unit, the school may make half (after November 6, 1975) that are contrary different system that compiles substantially the to its publicity of a racially nondiscriminatory known its racially nondiscriminatory policy in same information, without advance approval of policy as to students, to the extent that the whatever newspapers or circulars the religious the IRS.

school or its principal official was aware of these denomination or unit uses in the communities The IRS does not require that a school re- statements. from which the students are drawn. These lease any personally identifiable records or pernewspapers and circulars may be distributed Facilities and programs. A school must be sonal information except in accordance with the

by a particular religious denomination or unit or able to show that all of its programs and facilities requirements of the Family Educational Rights

by an association that represents a number of and Privacy Act of 1974. Similarly, the IRS does are operated in a racially nondiscriminatory

religious organizations of the same denomina- manner. not require a school to keep records prohibited

tion. If, however, the school advertises in under state or federal law. Scholarship and loan programs. As a gen- newspapers of general circulation in the com- eral rule, all scholarship or other comparable munity or communities from which its students Exceptions. The school does not have to

benefits obtainable at the school must be of- are drawn and the second exception (dis- independently maintain these records for IRS fered on a racially nondiscriminatory basis. This cussed next) does not apply to the school, then use if both of the following are true. must be known throughout the general commu- it must comply with either of the publicity requirements explained earlier. nity being served by the school and should be 1) Substantially the same information has referred to in its publicity. Financial assistance been included in a report or reports filed Second, if a school customarily draws a programs, as well as scholarships and loans with an agency or agencies of federal, substantial percentage of its students nation- made under financial assistance programs, that state, or local governments, and this infor- wide, worldwide, from a large geographic sec- favor members of one or more racial minority mation is current within 1 year. tion or sections of the United States, or from groups and that do not significantly detract from

local communities, and if the school follows a or are designed to promote a school’s racially 2) The school maintains copies of these reracially nondiscriminatory policy as to its stu- nondiscriminatory policy will not adversely affect ports from which this information is readily

dents, the school may satisfy the publicity re- obtainable. the school’s exempt status.

quirement by complying with the instructions Certification. An individual authorized to take If these reports do not include all of the informa- explained, earlier, under Policy statement. official action on behalf of a school that claims to tion required, as discussed earlier, records probe racially nondiscriminatory as to students viding such remaining information must be The school may demonstrate that it follows a must certify annually, under penalties of per- maintained by the school for IRS use. racially nondiscriminatory policy either by show- jury, on Schedule A (Form 990) or Form 5578, ing that it currently enrolls students of racial Failure to maintain records. Failure to

minority groups in meaningful numbers or, ex- Annual Certification of Racial Nondiscrimination maintain or to produce the required records and for a Private School Exempt From Federal In- cept for local community schools, when minority information, upon proper request, will create a come Tax, whichever applies, that to the best of students are not enrolled in meaningful num- presumption that the organization has failed to his or her knowledge and belief the school has bers, that its promotional activities and recruiting comply with these guidelines. satisfied all requirements that apply, as previ- efforts in each geographic area were reasonably ously explained. designed to inform students of all racial segments in the general communities within the Failure to comply with the guidelines ordinarily will result in the proposed revocation of the area of the availability of the school. The ques- exempt status of a school. Organizations tion as to whether a school demonstrates such a

policy satisfactorily will be determined on the Recordkeeping requirements. With Providing Insurance basis of the facts and circumstances of each certain exceptions, given later, each

case. exempt private school must maintain An organization described in section 501(c)(3) RECORDS

The IRS recognizes that the failure by a the following records for a minimum period of 3 or 501(c)(4) may be exempt from tax only if no

school drawing its students from local communi- years, beginning with the year after the year of substantial part of its activities consist of providties to enroll racial minority group students may compilation or acquisition. ing commercial-type insurance.

Chapter 3 Section 501(c)(3) Organizations Page 23
However, this rule does not apply to • Erection or maintenance of public build- 2) The names of any doctors who continued

state-sponsored organizations described in sec- ings, monuments, or works, to lease office space in the hospital after

tions 501(c)(26) or 501(c)(27), which are dis- its transfer to nonprofit ownership and the • Lessening the burdens of government, cussed in chapter 4, or to charitable risk pools, amount of rent paid. Submit also an apdiscussed next. • Lessening of neighborhood tensions, praisal showing the fair rental value of the

rented space. • Elimination of prejudice and discriminaCharitable Risk Pools tion,

Clinic. If you are organized to operate a clinic,

A charitable risk pool is treated as organized and • Defense of human and civil rights secured attach a statement including: by law, and operated exclusively for charitable purposes if it:

• Combating community deterioration and 1) A description of the facilities and services,

1) Is organized and operated only to pool in- juvenile delinquency. 2) To whom the services are offered, such as surable risks of its members (not including The rest of this section contains a description of the public at large or a specific group, risks related to medical malpractice) and to the information to be provided by certain specific provide information to its members about 3) How charges are determined, such as on organizations. This information is in addition to loss control and risk management, a profit basis, to recover costs, or at less the required inclusions described in chapter 1, than cost, 2) Consists only of members that are section and other statements requested on Form 1023.

501(c)(3) organizations exempt from tax Each of the following organizations must submit 4) By whom administered and controlled,

under section 501(a), the information described. 5) Whether any of the professional staff (that

3) Is organized under state law authorizing is, those who perform or will perform the Charitable organization supporting educa- clinical services) also serve or will serve in this type of risk pooling, tion. Submit information showing how your or- an administrative capacity, and 4) Is exempt from state income tax (or will be ganization supports education — for example,

contributes to an existing educational institution, 6) How compensation paid the professional after qualifying as a section 501(c)(3) orendows a professorial chair, contributes toward staff is or will be determined. ganization),

paying teachers’ salaries, or contributes to an 5) Has obtained at least $1,000,000 in star- educational institution to enable it to carry on Home for the aged. If you are organized to tup capital from nonmember charitable or- research. operate a home for the aged, complete and ganizations, Scholarships. attach Schedule F of Form 1023. Explain on If the organization awards or 6) Is controlled by a board of directors Schedule F: plans to award scholarships, complete Schedelected by its members, and ule H of Form 1023. Submit the following also. 1) How charges are or will be determined, 7) Is organized under documents requiring 1) Criteria used for selecting recipients, in- such as on a profit basis, to recover costs, that: cluding the rules of eligibility. or at less than cost, and whether the

charges are based on providing service at a) Each member be a section 501(c)(3) 2) How and by whom the recipients are or will the lowest feasible cost to the residents, organization exempt from tax under be selected.

section 501(a), 2) Whether all residents are or will be re- 3) If awards are or will be made directly to quired to pay fees, b) Each member that receives a final de- individuals, whether information is required

termination that it no longer qualifies assuring that the student remains in 3) Whether any residents are or will be acunder section 501(c)(3) notify the pool school. cepted at lower rates or entirely without

immediately, and pay and, if so, how many, and 4) If awards are or will be made to recipients

c) Each insurance policy issued by the of a particular class, for example, children 4) Whether federal mortgage financing has

pool provide that it will not cover events of employees of a particular employer— been applied for and if so, the type.

occurring after a final determination de- a) Whether any preference is or will be scribed in (b). Community nursing bureau. If you provide a accorded an applicant by reason of the nursing register or community nursing bureau, parent’s position, length of employ- provide information showing that your organiza- ment, or salary, tion will be operated as a community project and

b) Whether as a condition of the award will receive its primary support from public conOther Section 501(c)(3) the recipient must upon graduation ac- tributions to maintain a nonprofit register of qualcept employment with the company, ified nursing personnel, including graduate

Organizations and nurses, unregistered nursing school graduates,

licensed attendants and practical nurses for the c) Whether the award will be continued benefit of hospitals, health agencies, doctors, In addition to the information required for all even if the parent’s employment ends. organizations, as described earlier, you should and individuals.

include any other information described in this 5) A copy of the scholarship application form Organization providing loans. If you make, section. and any brochures or literature describing or will make loans for charitable and educational the scholarship program. purposes, submit the following information. Charitable Organizations

Hospital. If you are organized to operate a 1) An explanation of the circumstances under If your organization is applying for recognition of charitable hospital, complete and attach Section which such loans are, or will be, made. exemption as a charitable organization, it must I of Schedule C, Form 1023.

show that it is organized and operated for pur- 2) Criteria for selection, including the rules of If your hospital was transferred to you from

poses that are beneficial to the public interest. eligibility. proprietary ownership, complete and attach

Some examples of this type of organization are Schedule I of Form 1023. You must attach a list 3) How and by whom the recipients are or will those organized for: showing: be selected.

• Relief of the poor, the distressed, or the 1) The names of the active and courtesy staff 4) Manner of repayment of the loan.

underprivileged, members of the proprietary hospital, as 5) Security required, if any. well as the names of your medical staff • Advancement of religion, members after the transfer to nonprofit 6) Interest charged, if any, and when pay-

• Advancement of education or science, ownership, and able.

Page 24 Chapter 3 Section 501(c)(3) Organizations
7) Copies in duplicate of the loan application Religious Organizations Special rule. Men’s and women’s organizaand any brochures or literature describing tions, seminaries, mission societies, and youth

To determine whether an organization meets groups that satisfy (1) and (2) above are inte- the loan program.

the religious purposes test of section 501(c)(3), grated auxiliaries of a church even if they are not

internally supported. the IRS maintains two basic guidelines.

Public-interest law firms. If your organiza1) That the particular religious beliefs of the Note. In order for an organization (including tion was formed to litigate in the public interest

organization are truly and sincerely held. a church and religious organization) to qualify (as opposed to providing legal services to the for tax exemption, no part of its net earnings may poor), such as in the area of protection of the 2) That the practices and rituals associated inure to any individual. environment, you should submit the following with the organization’s religious belief or Although an individual is entitled to a charita- information. creed are not illegal or contrary to clearly ble deduction for contributions to a church, the

defined public policy. assignment or similar transfer of compensation 1) How the litigation can reasonably be said Therefore, your group (or organization) may not for personal services to a church generally does to be representative of a broad public in- not relieve a taxpayer of federal income tax qualify for treatment as an exempt religious or- terest rather than a private one. liability on the compensation, regardless of the ganization for tax purposes if its actions, as motivation behind the transfer. 2) Whether the organization will accept fees contrasted with its beliefs, are contrary to well

for its services. established and clearly defined public policy. If

there is a clear showing that the beliefs (or Scientific Organizations 3) A description of the cases litigated or to be doctrines) are sincerely held by those professing litigated and how they benefit the public You must show that your organization’s re- them, the IRS will not question the religious generally. search will be carried on in the public interest. nature of those beliefs. Scientific research will be considered to be in the 4) Whether the policies and program of the public interest if the results of the research (in- organization are the responsibility of a Churches. Although a church, its integrated cluding any patents, copyrights, processes, or board or committee representative of the auxiliaries, or a convention or association of formulas) are made available to the public on a public interest, which is neither controlled churches is not required to file Form 1023 to be nondiscriminatory basis; if the research is per- by employees or persons who litigate on exempt from federal income tax or to receive tax formed for the United States or a state, county, behalf of the organization nor by any or- deductible contributions, the organization may or municipal government; or if the research is

ganization that is not itself an organization find it advantageous to obtain recognition of carried on for one of the following purposes. 

described in this chapter. exemption. In this event, you should submit information showing that your organization is a 1) Aiding in the scientific education of college 5) Whether the organization is operated, church, synagogue, association or convention or university students. through sharing of office space or other- of churches, religious order, or religious organi- wise, in a way to create identification or 2) Obtaining scientific information that is pub- zation that is an integral part of a church, and lished in a treatise, thesis, trade publica- confusion with a particular private law firm. that it is engaged in carrying out the function of a tion, or in any other form that is available

6) Whether there is an arrangement to pro- church. to the interested public.

vide, directly or indirectly, a deduction for In determining whether an admittedly relig- 3) Discovering a cure for a disease. the cost of litigation that is for the private ious organization is also a church, the IRS does

benefit of the donor. not accept any and every assertion that the 4) Aiding a community or geographical area

organization is a church. Because beliefs and by attracting new industry to the commuAcceptance of attorneys’ fees. A nonprofit practices vary so widely, there is no single defi- nity or area, or by encouraging the develpublic-interest law firm can accept attorneys’ opment or retention of an industry in the nition of the word church for tax purposes. The community or area. fees in public interest cases if the fees are paid IRS considers the facts and circumstances of

directly by its clients and the fees are not more each organization applying for church status. Scientific research, for exemption purposes,

than the actual costs incurred in the case. Once does not include activities of a type ordinarily Integrated auxiliaries. An organization is undertaking a representation, the organization incidental to commercial or industrial operations an integrated auxiliary of a church if all the fol- cannot withdraw from the case because the liti- such as the ordinary inspection or testing of lowing are true. gant is unable to pay the fee. materials or products, or the designing or constructing of equipment, buildings, etc. Firms can accept fees awarded or ap- 1) The organization is described both in sec- If you engage or plan to engage in research, proved by a court or an administrative tions 501(c)(3) and 509(a)(1), 509(a)(2), or submit all of the following. agency and paid by an opposing party if the 509(a)(3).

firms do not use the likelihood or probability of 2) It is affiliated with a church or a convention 1) An explanation of the nature of the refee awards as a consideration in the selection of or association of churches. search.

cases. All fee awards must be paid to the organi- 3) It is internally supported. An organization 2) A brief description of research projects zation and not to its individual staff attorneys. completed or presently being engaged in. is internally supported unless both of the Instead, a public-interest law firm can reasona- following are true. bly compensate its staff attorneys, but only on a 3) How and by whom research projects are

straight salary basis. Private attorneys, whose determined and selected. a) It offers admissions, goods, services or services are retained by the firm to assist it in facilities for sale, other than on an inci- 4) Whether you have, or contemplate, con- particular cases, can be compensated by the dental basis, to the general public (ex- tracted or sponsored research and, if so,

firm, but only on a fixed fee or salary basis. cept goods, services, or facilities sold at names of past sponsors or grantors, terms

The total amount of all attorneys’ fees (court a nominal charge or for a small part of of grants or contracts, together with copies

of any executed contracts or grants. awarded and those received from clients) must the cost).

not be more than 50% of the total cost of opera- b) It normally gets more than 50% of its 5) Disposition made or to be made of the

tions of the organization’s legal functions, calcu- results of your research, including whether support from a combination of govern- lated over a 5-year period. mental sources, public solicitation of preference has been or will be given to

If, in order to carry out its program, an organi- any organization or individual either as to contributions, and receipts from the results or time of release. zation violates applicable canons of ethics, dis- sale of admissions, goods, performrupts the judicial system, or engages in any ance of services, or furnishing of facili- 6) Who will retain ownership or control of any

illegal action, the organization will jeopardize its ties in activities that are not unrelated patents, copyrights, processes or formulas

exemption. trades or businesses. resulting from your research.

Chapter 3 Section 501(c)(3) Organizations Page 25
7) A copy of publications or other media Later nonsubstantive amendments to the enashowing reports of your research activities. Private Foundations bling instrument will not change the date of orOnly reports of your research activities or ganization, for purposes of the notice

and Public Charities requirement. those conducted in your behalf, as distinguished from those of your creators or Notice filed late. An organization that

members conducted in their individual ca- It is important that you determine if your organi- states it is a private foundation when it files its

zation is a private foundation. Most organiza- pacities, should be submitted. application for recognition of exemption after the tions exempt from income tax (as organizations 15-month period will be treated as a section described in section 501(c)(3)) are presumed to 501(c)(3) organization and as a private founda- Literary Organizations be private foundations unless they notify the tion only from the date it files its application. Internal Revenue Service within a specified pe- An organization that states it is a publicly If your organization is established to operate a riod of time that they are not. This notice require- supported charity when it files its application book store or engage in publishing activities of ment applies to most section 501(c)(3) for recognition of exemption after the 15-month any nature (printing, publication, or distribution organizations regardless of when they were period cannot be treated as a section 501(c)(3) formed. of your own material or that printed or published organization before the date it files the applicaby others and distributed by you), explain fully tion. Financial support received before that date

the nature of the operations, including whether Private Foundations may not be used for purposes of determining

sales are or will be made to the general public, whether the organization is publicly supported. Every organization that qualifies for tax exemp- the type of literature involved, and how these However, an organization that can reasonably tion as an organization described in section activities are related to your stated purposes. be expected to meet the support requirements 501(c)(3) is a private foundation unless it falls (discussed later under Public Charities) can ob- into one of the categories specifically excluded

Amateur Athletic tain an advance ruling from the IRS that it is a from the definition of that term (referred to in publicly supported organization. Organizations section 509(a)(1), 509(a)(2), 509(a)(3), or

509(a)(4)). In effect, the definition divides these Excise taxes on private foundations. There There are two types of amateur athletic organi- organizations into two classes, namely private is an excise tax on the net investment income of foundations and public charities. Public chari- zations that can qualify for tax-exempt status. most domestic private foundations. This tax ties are discussed later. The first type is an organization that fosters must be reported on Form 990–PF and must be Organizations that fall into the excluded cat- national or international amateur sports compe- paid annually at the time for filing that return or in egories are generally those that either have tition but only if none of its activities involve quarterly estimated tax payments if the total tax broad public support or actively function in a providing athletic facilities or equipment. The for the year is $500 or more. In addition, there supporting relationship to those organizations. second type is a Qualified amateur sports or- are several other rules that apply. These in- Organizations that test for public safety also are ganization (discussed below). The difference is clude: excluded.

that a qualified amateur sports organization may 1) Restrictions on self-dealing between pri- provide athletic facilities and equipment. Notice to IRS. Even if an organization falls vate foundations and their substantial con- within one of the categories excluded from the Donations to either amateur athletic organi- tributors and other disqualified persons, definition of private foundation, it will be pre- zation are deductible as charitable contributions sumed to be a private foundation, with some 2) Requirements that the foundation annually on the donor’s federal income tax return. How- exceptions, unless it gives timely notice to the distribute income for charitable purposes, ever, no deduction is allowed if there is a direct IRS that it is not a private foundation. This notice 3) Limits on their holdings in private busi- personal benefit to the donor or any other per- requirement applies to an organization regardnesses, son other than the organization. less of when it was organized. The only exceptions to this requirement are those organizations 4) Provisions that investments must not jeopthat are excepted from the requirement of filing ardize the carrying out of exempt pur- Qualified amateur sports organization. An Form 1023 as discussed, earlier, under Organi- poses, and organization will be a qualified amateur sports zations Not Required To File Form 1023. 5) Provisions to assure that expenditures fur- organization if it is organized and operated: When to file notice. If an organization has ther the organization’s exempt purposes.

to file the notice, it must do so within 15 months 1) Exclusively to foster national or interna- Violations of these provisions give rise to from the end of the month in which it was organ- tional amateur sports competition, and taxes and penalties against the private founda- ized.

tion and, in some cases, its managers, its sub- 2) Primarily to conduct national or interna- If your organization is newly applying for rec- stantial contributors, and certain related ognition of exemption as an organization de- tional competition in sports or to support persons. scribed in this chapter (a section 501(c)(3) and develop amateur athletes for that organization) and you wish to establish that your Payments made as a result of September competition. organization is a public charity rather than a 11, 2001 Terrorist Attacks. Payments made

The organization’s membership may be local or private foundation, you must complete the appli- by a private foundation to individuals and their

regional in nature. cable lines of Part III of your exemption applica- families because of death, injury, wounding, or

tion (Form 1023). An extension of time for filing illness of an individual paid as a result of the

Prevention of Cruelty this application may be granted by the IRS if terrorist attacks against the United States on

your request is timely and you demonstrate that September 11, 2001, or for an attack involving to Children or Animals additional time is needed. See Application for anthrax, occurring on or after September 11,

Recognition of Exemption, earlier in this chap- 2001, and before January 1, 2002, will not be Examples of activities that may qualify this type ter, for more information. treated as paid to a disqualified person for pur- of organization for exempt status are: In determining the date on which a corpora- poses of the excise tax on self-dealing. This rule

applies to payments made on or after Septem- tion is organized for purposes of applying for 1) Preventing children from working in haz- ber 11, 2001. recognition of section 501(c)(3) status, the IRS ardous trades or occupations, looks to the date the corporation came into existence under the law of the state in which it is Governing instrument. A private foundation 2) Promoting high standards of care for laboincorporated. For example, where state law pro- cannot be tax exempt nor will contributions to it ratory animals, and vides that existence of a corporation begins on be deductible as charitable contributions unless

3) Providing funds to pet owners to have their the date its articles are filed by a certain state its governing instrument contains special provipets spayed or neutered to prevent over- official in the appropriate state office, the corpo- sions in addition to those that apply to all organibreeding. ration is considered organized on that date. zations described in section 501(c)(3).

Page 26 Chapter 3 Section 501(c)(3) Organizations
Sample governing instruments. The fol- taxes and certain organization managers are 1) Require it to act or refrain from acting so lowing samples of governing instrument provi- liable for the third tax.

as not to subject the foundation to the sions illustrate the special charter requirements Taxes imposed on excess benefit transac- taxes imposed on prohibited transactions, that apply to private foundations. Draft A is a tions apply to transactions occurring on or after or sample of provisions in articles of incorporation, September 14, 1995. However, these taxes do

Draft B, a trust indenture. 2) Treat the required provisions as contained not apply to a transaction pursuant to a written

contract that was binding on September 13, in the foundation’s governing instrument. 1995, and at all times thereafter before the The IRS has published a list of states with Draft A transaction occurred.

this type of law. The list is in Revenue Ruling

75–38, 1975-1 CB 161(or later update). Tax on disqualified persons. An excise

General tax equal to 25% of the excess benefit is imposed on each excess benefit transaction be- 1) The corporation will distribute its income Public Charities tween an applicable tax-exempt organization for each tax year at a time and in a man- and a disqualified person. The disqualified per- A private foundation is any organization de- ner as not to become subject to the tax on son who benefitted from the transaction is liable scribed in section 501(c)(3), unless it falls into undistributed income imposed by section for the tax. If the 25% tax is imposed and the one of the categories specifically excluded from 4942 of the Internal Revenue Code, or the excess benefit transaction is not corrected the definition of that term in section 509(a), corresponding section of any future federal which lists four basic categories of exclusions. within the taxable period, an additional excise

tax code. tax equal to 200% of the excess benefit is im- These categories are discussed under the Secposed. 2) The corporation will not engage in any act tion 509(a) heading that follow this introduction. If a disqualified person makes a payment of of self-dealing as defined in section If your organization falls into one of these less than the full correction amount, the 200% 4941(d) of the Internal Revenue Code, or categories, it is not a private foundation and you tax is imposed only on the unpaid portion of the the corresponding section of any future should state this in Part III of your application for correction amount. If more than one disqualified federal tax code. recognition of exemption (Form 1023). person received an excess benefit from an ex- If your organization does not fall into one of 3) The corporation will not retain any excess cess benefit transaction, all such disqualified these categories, it is a private foundation and is business holdings as defined in section persons are jointly and severally liable for the subject to the applicable rules and restrictions 4943(c) of the Internal Revenue Code, or taxes. until it terminates its private foundation status. the corresponding section of any future To avoid the 200% tax, a disqualified person Some private foundations also qualify as private federal tax code. must correct the excess benefit transaction dur- operating foundations; these are discussed near ing the taxable period. The taxable period be- 4) The corporation will not make any invest- the end of this chapter. gins on the date the transaction occurs and ends ments in a manner as to subject it to tax Generally speaking, a large class of organi- on the earlier of the date the statutory notice of under section 4944 of the Internal Reve- zations excluded under section 509(a)(1) and all deficiency is issued or the section 4958 taxes nue Code, or the corresponding section of organizations excluded under section 509(a)(2) are assessed. The 200% tax is abated (re- any future federal tax code. depend upon a support test. This test is used to funded if collected) if the excess benefit transac5) The corporation will not make any taxable assure a minimum percentage of broad-based tion is corrected within a 90-day correction

expenditures as defined in section 4945(d) public support in the organization’s total support period beginning on the date a statutory notice

of the Internal Revenue Code, or the cor- pattern. Thus, in the following discussions, when of deficiency is issued.

the one-third support test (see Qualifying As responding section of any future federal Tax on organization managers. An excise Publicly Supported, later) is referred to, it means tax code. tax equal to 10% of the excess benefit is im- the following fraction normally must equal at posed on an organization manager who know- least one-third:

ingly participated in an excess benefit

Draft B Qualifying support transaction, unless such participation was not

Total support willful and was due to reasonable cause. This

Any other provisions of this instrument not- tax may not exceed $10,000 with respect to any

withstanding, the trustees shall distribute its in- Including items of support in qualifying support single excess benefit transaction. There is also

come for each tax year at a time and in a manner (the numerator of the fraction) or excluding joint and several liability for this tax. A person

as not to become subject to the tax on undistrib- items of support from total support (the denomi- may be liable for both the tax paid by the disuted income imposed by section 4942 of the nator of the fraction) may decide whether an qualified person and the organization manager

organization is excluded from the definition of a tax. Internal Revenue Code, or the corresponding

section of any future federal tax code. private foundation, and thus from the liability for An organization manager is any officer, dicertain excise taxes. So it is very important to rector, or trustee of an applicable tax-exempt Any other provisions of this instrument not- classify items of support correctly. organization, or any individual having powers or withstanding, the trustees will not engage in any responsibilities similar to officers, directors, or act of self-dealing as defined in section 4941(d) Excise tax on excess benefit transactions. trustees of the organization, regardless of title. of the Internal Revenue Code, or the corre- A person who benefits from an excess benefit An organization manager is not considered to sponding section of any future federal tax code; transaction such as compensation, fringe bene- have participated in an excess benefit transac- nor retain any excess business holdings as de- fits, or contract payments from a section tion where the manager has opposed the trans- fined in section 4943(c) of the Internal Revenue 501(c)(3) or 501(c)(4) organization may have to action in a manner consistent with the fulfillment Code, or the corresponding section of any future pay an excise tax under section 4958. A man- of the manager’s responsibilities to the organi- federal tax code; nor make any investments in a ager of the organization may also have to pay an zation. For example, a director who votes manner as to incur tax liability under section excise tax under section 4958 of the Code. against giving an excess benefit would ordinarily 4944 of the Internal Revenue Code, or the corre- These taxes are reported on Form 4720, Return not be subject to the 10% tax. sponding section of any future federal tax code; of Certain Excise Taxes on Charities and Other A person participates in a transaction know- nor make any taxable expenditures as defined in Persons Under Chapters 41 and 42 of the Inter- ingly if the person has actual knowledge of suffi- section 4945 (d) of the Internal Revenue Code, nal Revenue Code. cient facts so that, based solely upon such facts, or the corresponding section of any future fed- The excise taxes are imposed if an applica- the transaction would be an excess benefit

eral tax code. ble tax-exempt organization provides an excess transaction. Knowing does not mean having reabenefit to a disqualified person and that bene- son to know. The organization manager ordinarEffect of state law. A private foundation’s fit exceeds the value of the benefit an organiza- ily will not be considered knowing if, after full

governing instrument will be considered to meet tion received in the exchange. disclosure of the factual situation to an approprithese charter requirements if valid provisions of There are three taxes under section 4958. ate professional, the organization manager restate law have been enacted that: Disqualified persons are liable for the first two lied on the professional’s reasoned written

Chapter 3 Section 501(c)(3) Organizations Page 27
opinion on matters within the professional’s ex- scribed above, the organization may make a 3) A trust or estate in which such persons

pertise or if the manager relied on the fact that cash payment to the disqualified person equal to own more than 35% of the beneficial interthe requirements for the rebuttable presumption the difference. est.

of reasonableness have been satisfied. Partici- Applicable tax-exempt organization. An In determining the holdings of a business pation by an organization manager is willful if it is applicable tax-exempt organization is a section enterprise, any stock or other interest owned voluntary, conscious, and intentional. An organi- 501(c)(3) or 501(c)(4) organization that is directly or indirectly shall apply. zation manager’s participation is due to reason- tax-exempt under section 501(a), or was such able cause if the manager has exercised Persons not considered to have substanan organization at any time during a five-year responsibility on behalf of the organization with tial influence. Persons who are not considperiod ending on the day of the excess benefit ordinary business care and prudence. ered to be in a position to exercise substantial transaction. influence over the affairs of an organization in- Excess benefit transaction. An excess An applicable tax-exempt organization does clude: benefit transaction is a transaction in which an not include: economic benefit is provided by an applicable • An employee who receives benefits that

tax-exempt organization, directly or indirectly, to 1) A private foundation as defined in section total less than the highly compensated

or for the use of any disqualified person, and the 509(a), amount in section 414(q)(1)(B)(i) and who

value of the economic benefit provided by the does not hold the executive or voting poworganization exceeds the value of the consider- 2) A governmental entity that is: ers mentioned earlier in the discussion on

ation (including the performance of services) Disqualified person, is not a family mem- a) Exempt from (or not subject to) taxation received for providing such benefit. ber of a disqualified person, and is not a without regard to section 501(a), or To determine whether an excess benefit substantial contributor,

transaction has occurred, all consideration and b) Not required to file an annual return • Tax-exempt organizations described in benefits exchanged between a disqualified per- section 501(c)(3), and son and the applicable tax-exempt organization, 3) A foreign organization, recognized by the

and all entities it controls, are taken into account. IRS or by treaty, that receives substantially • Section 501(c)(4) organizations with reFor purposes of determining the value of eco- all of its support (other than gross invest- spect to transactions engaged in with

nomic benefits, the value of property, including ment income) from sources outside the other section 501(c)(4) organizations.

the right to use property, is the fair market value. United States.

Fair market value is the price at which property, Facts and circumstances. The determina- An organization is not treated as a section or the right to use property, would change hands tion of whether a person has substantial influ- 501(c)(3) or 501(c)(4) organization for any pe- between a willing buyer and a willing seller, ence over the affairs of an organization is based

neither being under any compulsion to buy, sell riod covered by a final determination that the on all the facts and circumstances. Facts and

or transfer property or the right to use property, organization was not tax-exempt under section circumstances that show a person has substan- and both having reasonable knowledge of rele- 501(a), but only if the determination was not tial influence over the affairs of an organization vant facts. based on private inurement or one or more ex- include, but are not limited to, the following. cess benefit transactions. Correcting the excess benefit. An excess • The person founded the organization. benefit transaction is corrected by undoing the Disqualified person. A disqualified person

excess benefit to the extent possible, and by is any person, with respect to any transaction, in • The person is a substantial contributor to

taking any additional measures necessary to a position to exercise substantial influence over the organization under the section

place the organization in a financial position not the affairs of the applicable tax-exempt organi- 507(d)(2)(A) definition, only taking into acworse than what it would have been if the dis- zation at any time during a five-year period end- count contributions to the organization for

qualified person were dealing under the highest the past 5 years. ing on the date of the transaction. Persons who

fiduciary standards. hold certain powers, responsibilities, or interests • The person’s compensation is primarily A disqualified person corrects an excess are among those who are in a position to exer- based on revenues derived from activities benefit by making a payment in cash or cash cise substantial influence over the affairs of the of the organization that the person con- equivalents, excluding payment by a promissory organization. This includes, for example, voting trols. note, equal to the correction amount to the appli- members of the governing body, and persons

cable tax-exempt organization. The correction • The person has or shares authority to con- holding the power of:

amount equals the excess benefit plus the inter- trol or determine a substantial portion of

est on the excess benefit. The interest rate may • Presidents, chief executives, or chief oper- the organization’s capital expenditures,

be no lower than the applicable federal rate, ating officers. operating budget, or compensation for emcompounded annually, for the month the trans- ployees. • Treasurers and chief financial officers.

action occurred. • The person manages a discrete segment A disqualified person may, with the agree- A disqualified person also includes certain or activity of the organization that repre- ment of the applicable tax-exempt organization, family members of a disqualified person, and sents a substantial portion of the activities, make a payment by returning the specific prop- 35% controlled entities of a disqualified person. assets, income, or expenses of the organi- erty previously transferred in the excess trans- zation, as compared to the organization as action. In this case, the disqualified person is Family members. Family members of a a whole. treated as making a payment equal to the lesser disqualified person include a disqualified

of: person’s spouse, brothers or sisters (whether by • The person owns a controlling interest

whole or half-blood), spouses of brothers or sis- (measured by either vote or value) in a • The fair market value of the property on ters (whether by whole or half-blood), ancestors, corporation, partnership, or trust that is a the date the property is returned to the children (including a legally adopted child), disqualified person. organization, or grandchildren, great grandchildren, and • The person is a non-stock organization • The fair market value of the property on spouses of children, grandchildren, and great controlled directly or indirectly by one or the date the excess benefit transaction oc- grandchildren (whether by whole or half-blood). more disqualified persons. curred. 35% controlled entity. The term 35% conFacts and circumstances tending to show that trolled entity means: If the payment resulting from the return of a person does not have substantial influence property is less than the correction amount, the 1) A corporation in which a disqualified per- over the affairs of an organization include, but disqualified person must make an additional son owns more than 35% of the total com- are not limited to, the following. cash payment to the organization equal to the bined voting power, difference. • The person has taken a bona fide vow of

If the payment resulting from the return of the 2) A partnership in which such persons own poverty as an employee, agent, or on beproperty exceeds the correction amount de- more than 35% of the profits interest, or half of a religious organization.

Page 28 Chapter 3 Section 501(c)(3) Organizations
• The person is an independent contractor change for performance of services are taken 2) Before making its determination, the auwhose sole relationship to the organization into account in determining the value of com- thorized body obtained and relied upon apis providing professional advice (without pensation (except for economic benefits that are propriate data as to comparability. (There

having decision-making authority) with re- disregarded under the discussion, Disregarded is a special safe harbor for small organizaspect to transactions from which the inde- benefits, later). Items of compensation include: tions. If the organization has gross receipts

pendent contractor will not economically of less than $1 million, appropriate compa- • All forms of cash and noncash compensa- benefit either directly or indirectly aside rability data includes data on compensa- tion, including salary, fees, bonuses, sev- from customary fees received for the pro- tion paid by three comparable erance payments, and deferred noncash fessional advice rendered. organizations in the same or similar com- compensation. munities for similar services.) • Any preferential treatment the person re- • The payment of liability insurance premi- ceives based on the size of the person’s 3) The authorized body adequately docu- ums for, or the payment or reimbursement donation is also offered to others making ments the basis for its determination con- by the organization of penalties, taxes or comparable widely solicited donations. currently with making that determination. certain expenses under section 4958, un- The documentation should include: • The direct supervisor of the person is not less excludable from income as a de

a disqualified person. minimis fringe benefit under section a) The terms of the approved transaction 132(a)(4), • The person does not participate in any and the date approved,

management decisions affecting the or- • All other compensatory benefits, whether b) The members of the authorized body ganization as a whole or a discrete seg- or not included in gross income for income who were present during debate on the ment of the organization that represents a tax purposes, transaction that was approved and substantial portion of the activities, assets, • Taxable and nontaxable fringe benefits, those who voted on it, income, or expenses of the organization, except fringe benefits described in section as compared to the organization as a c) The comparability data obtained and 132 of the Code, and whole. relied upon by the authorized body and

• Foregone interest on loans. how the data was obtained,

In the case of multiple organizations affiliated d) Any actions by a member of the author- by common control or governing documents, the An economic benefit is not treated as consid- ized body having conflict of interest, determination of whether a person does or does eration for the performance of services unless and

not have substantial influence is made sepa- the organization providing the benefit clearly indicates its intent to treat the benefit as compen- e) Documentation of the basis of the de- rately for each applicable tax-exempt organizasation when the benefit is paid. termination before the later of the next tion. A person may be a disqualified person with

respect to transactions with more than one or- An applicable tax-exempt organization (or meeting of the authorized body or 60

ganization. entity that it controls) is treated as clearly indicat- days after the final actions of the authorized body are taken, and approval ing its intent to provide an economic benefit as Date excess benefit transaction occurs. compensation for services only if the organiza- of records as reasonable, accurate and An excess benefit transaction occurs on the tion provides written substantiation that is con- complete within a reasonable time date the disqualified person receives the eco- temporaneous with the transfer of the economic thereafter.

nomic benefit from the organization for federal benefits under consideration. Ways to provide income tax purposes. However, when a single contemporaneous written substantiation of its contractual arrangement provides for a series of Disregarded benefits. The following eco- intent to provide an economic benefit as com- compensation payments or other payments to a nomic benefits are disregarded for section 4958 pensation include: disqualified person during the disqualified purposes.

person’s tax year (or part of a tax year), any • The organization produces a signed writ- • Nontaxable fringe benefits that are ex- excess benefit transaction with respect to these ten employment contract, cluded from income under section 132. payments occurs on the last day of the tax year • The organization reports the benefit as (or if the payments continue for part of the year, • Benefits provided to a volunteer for the compensation on an original Form W-2, the date of the last payment in the series). organization if the benefit is provided to Form 1099 or Form 990, or on an the general public in exchange for a mem- In the case of benefits provided to a qualified amended form filed before starting an IRS pension, profit-sharing, or stock bonus plan, the bership fee or contribution of $75 or less. examination, or transaction occurs on the date the benefit is • Benefits provided to a member of an or- vested. In the case of the transfer of property • The disqualified person reports the benefit ganization due to the payment of a mem- subject to a substantial risk of forfeiture, or in the as income on the person’s original Form bership fee or to a donor as a result of a case of rights to future compensation or prop- 1040, or on an amended form filed before deductible contribution, if a significant erty, the transaction occurs on the date the prop- starting an IRS examination. number of disqualified persons make simi- erty, or the rights to future compensation or lar payments or contributions and are of- property, is not subject to a substantial risk of Exception. If the economic benefit is excluded fered a similar economic benefit. forfeiture. Where the disqualified person elects from the disqualified person’s gross income for to include an amount in gross income in the tax • Benefits provided to a person solely as a income tax purposes, the applicable tax-exempt year of transfer under section 83(b), the excess member of a charitable class that the ap- organization is not required to indicate its intent benefit transaction occurs on the date the dis- plicable tax-exempt organization intends to provide an economic benefit as compensation qualified person receives the economic benefit to benefit as part of the accomplishment of for services.

for federal income tax purposes. its exempt purpose.

Rebuttable presumption that a transaction Reasonable compensation. Reasonable • A transfer of an economic benefit to or for is not an excess benefit transaction. Pay- compensation is the value that would ordinarily ments under a compensation arrangement are the use of a governmental unit, as defined

be paid for like services by like enterprises under in section 170(c)(1), if exclusively for pub- presumed to be reasonable and the transfer of like circumstances. The section 162 standard lic purposes. property (or right to use property) is presumed to will apply in determining the reasonableness of be at fair market value, if the following three compensation. The fact that a bonus or Special exception for initial contracts. conditions are met.

revenue-sharing arrangement is subject to a cap Section 4958 does not apply to any fixed payis a relevant factor in determining reasonable- 1) The transaction is approved by an author- ment made to a person under an initial contract.

ness of compensation. ized body of the organization (or an entity A fixed payment is an amount of cash or

To determine the reasonableness of com- it controls) which is composed of individu- other property specified in the contract, or deterpensation, all items of compensation provided mined by a fixed formula that is specified in the als who do not have a conflict of interest

by an applicable tax-exempt organization in ex- concerning the transaction. contract, which is to be part of or transferred in

Chapter 3 Section 501(c)(3) Organizations Page 29
exchange for the provision of specified services sarily qualify the museum as an educational 1) Receive, hold, invest, and administer prop- or property. organization. erty for a college or university, and A fixed formula may, generally, incorporate An exempt organization that operates a

an amount that depends upon future specified tutoring service for students on a one-to-one 2) Make expenditures to or for the benefit of

events or contingencies, as long as no one has basis in their homes, maintains a small center to a college or university.

discretion when calculating the amount of a pay- test students to determine their need for tutor- The college or university must be: ment or deciding whether to make a payment ing, and employs tutors on a part-time basis is

(such as a bonus). not an educational organization for these pur- 1) An agency or instrumentality of a state or An initial contract is a binding written contract poses. Nor is an exempt organization that con- political subdivision, or between an applicable tax-exempt organization ducts an internship program by placing college

and a person who was not a disqualified person 2) Owned or operated by: and university students with cooperating govimmediately before entering into the contract. ernment agencies an educational organization. a) A state or political subdivision, or A binding written contract providing it may be

terminated or cancelled by the applicable Hospitals and medical research b) An agency or instrumentality of one or

tax-exempt organization without the other organizations. A hospital is an organization more states or political subdivisions.

party’s consent (except as a result of substantial whose principal purpose or function is to provide nonperformance) and without substantial pen- The phrase expenditures to or for the ben- hospital or medical care or either medical edu- alty, is treated as a new contract, as of the efit of a college or university includes expen- cation or medical research. A rehabilitation instiearliest date any termination or cancellation ditures made for any one or more of the normal tution, outpatient clinic, or community mental would be effective. Also, if the parties make a functions of a college or university. These ex- health or drug treatment center may qualify as a material change to a contract, which includes an penditures include those for: hospital if its principal purpose or function is extension or renewal of the contract (except for providing hospital or medical care. If the accom- 1) Acquiring and maintaining real property an extension or renewal resulting from the exer- modations of an organization qualify as being comprising part of the campus area, cise of an option by the disqualified person), or a part of a skilled nursing facility, that organiza- more than incidental change to the amount pay- 2) Erecting (or participating in erecting) col- tion may qualify as a hospital if its principal able under the contract, it is treated as a new lege or university buildings, purpose or function is providing hospital or med- contract as of the effective date of the material ical care. A cooperative hospital service or- 3) Acquiring and maintaining equipment and change. ganization that meets the requirements of furnishings used for, or in conjunction with,

More information. For more information, section 501(e) will qualify as a hospital. normal functions of colleges and universisee the instructions to Forms 990 and 4720. The term hospital does not include conva- ties,

lescent homes, homes for children or the aged, 4) Libraries, or institutions whose principal purpose or func- Section 509(a)(1) Organizations tion is to train handicapped individuals to pursue 5) Scholarships, and

a vocation. An organization that mainly provides Section 509(a)(1) organizations include: 6) Student loans. medical education or medical research will not

be considered a hospital, unless it is also ac- The organization must normally receive a 1) A church or a convention or association of tively engaged in providing medical or hospital substantial part of its support from the United churches,

care to patients on its premises or in its facilities, States or any state or political subdivision, or

2) An educational organization such as a on an in-patient or out-patient basis, as an inte- from direct or indirect contributions from the

school or college, gral part of its medical education or medical general public, or from a combination of these

sources. 3) A hospital or medical research organiza- research functions.

tion operated in conjunction with a hospi- Hospitals participating in provider-spon- Support. Support does not include income

tal, sored organizations. An organization can be received in the exercise or performance by the

organization of its charitable, educational, or 4) Endowment funds operated for the benefit treated as organized and operated exclusively other purpose or function constituting the basis of certain state and municipal colleges and for a charitable purpose even if it owns and for exemption. universities, operates a hospital that participates in a In determining the amount of support re- provider-sponsored organization, whether or not 5) A governmental unit, and ceived by an organization for a contribution of the provider-sponsored organization is tax ex- property when the value of the contribution by 6) A publicly supported organization. empt. For section 501(c)(3) purposes, any per- the donor is subject to reduction for certain ordi- son with a material financial interest in the

nary income and capital gain property, the fair provider-sponsored organization is treated as a Church. The characteristics of a church are market value of the property is taken into ac- private shareholder or individual with respect to discussed earlier in this chapter under Religious count. the hospital. Organizations. Indirect contribution. An example of an in- Medical research organization. A medical

Educational organizations. An educational direct contribution from the public is the receipt research organization must be directly engaged organization is one whose primary function is to by the organization of its share of the proceeds in the continuous active conduct of medical represent formal instruction, that normally main- of an annual collection campaign of a commu- search in conjunction with a hospital, and that nity chest, community fund, or united fund. tains a regular faculty and curriculum, and that activity must be the organization’s principal pur- normally has a regularly enrolled body of pupils pose or function. Governmental units. A governmental unit in- or students in attendance at the place where it Publicly supported. A hospital or medical cludes a state, a possession of the United regularly carries on its educational activities. research organization that wants the additional States, or a political subdivision of either of the The term includes institutions such as primary, classification of a publicly-supported organiza- foregoing, or the United States or the District of secondary, preparatory, or high schools, and tion (described later in this chapter under Quali- Columbia. colleges and universities. It includes federal,

state, and other publicly supported schools that fying As Publicly Supported) may specifically Publicly-supported organizations. An or- otherwise come within the definition. It does not request that classification. The organization

must establish that it meets the public support ganization is a publicly-supported organization if include organizations engaged in both educa- it is one that normally receives a substantial part requirements of section 170(b)(1)(A)(vi). tional and noneducational activities, unless the of its support from a governmental unit or from latter are merely incidental to the educational the general public. activities. A recognized university that inciden- Endowment funds. Organizations operated Types of organizations that generally qualify tally operates a museum or sponsors concerts is for the benefit of certain state and municipal are: an educational organization. However, the oper- colleges and universities are endowment funds.

ation of a school by a museum does not neces- They are organized and operated exclusively to: • Museums of history, art, or science,

Page 30 Chapter 3 Section 501(c)(3) Organizations
• Libraries, public or governmental support on a continuous tion is publicly supported. However, an organibasis. An organization will meet this requirement zation generally does not have to satisfy all of • Community centers to promote the arts, if it maintains a continuous and bona fide pro- the factors. The factors relevant to each case

• Organizations providing facilities for the gram for solicitation of funds from the general and the weight accorded to any one of them may

support of an opera, symphony orchestra, public, community, or membership group in- differ depending upon the nature and purpose of

ballet, or repertory drama, or for some volved, or if it carries on activities designed to the organization and the length of time it has

other direct service to the general public, attract support from governmental units or other existed. The combination of factors that an orand charitable organizations described in section ganization normally must meet does not have to 509(a)(1). In determining whether an organiza- • Organizations such as the American Red be the same for each 4-year period as long as a tion maintains a continuous and bona fide pro- Cross or the United Way. sufficient combination of factors exists to show

gram for solicitation of funds from the general that the organization is publicly supported. public or community, consideration will be given 1. Percentage of financial support factor. Qualifying As Publicly Supported to whether the scope of its fund-raising activities

When an organization normally receives at least is reasonable in light of its charitable activities. An organization will qualify as publicly supported Consideration also will be given to the fact that 10% but less than one-third of its total support

if it passes the one-third support test. If it fails an organization may, in its early years of exis- from public or governmental sources, the perthat test, it may qualify under the facts and tence, limit the scope of its solicitation to per- centage of support received from those sources

circumstances test. sons who would be most likely to provide seed will be considered in determining whether the

money sufficient to enable it to begin its charita- organization is publicly supported. As the perOne-third support test. An organization will ble activities and expand its solicitation program. centage of support from public or governmental qualify as publicly supported if it normally re- sources increases, the burden of establishing Definition of normally for facts and circum- ceives at least one-third of its total support from the publicly supported nature of the organization stances test. An organization will normally governmental units, from contributions made di- through other factors decreases, while the lower meet the requirements of the facts and circum- rectly or indirectly by the general public, or from the percentage, the greater the burden. stances test for its current tax year and the next a combination of these sources. For a definition If the percentage of the organization’s sup- tax year if, for the 4 tax years immediately before of support, see Support, later. port from the general public or governmental the current tax year, the organization meets the Definition of normally for one-third sup- ten-percent-of-support and the attraction of pub- sources is low because it receives a high perport test. An organization will be considered lic support requirements on an aggregate basis centage of its total support from investment in- as normally meeting the one-third support test and satisfies a sufficient combination of the fac- come on its endowment funds, the organization

for its current tax year and the next tax year if, for tors discussed later. The combination of factors will be treated as complying with this factor if the the 4 tax years immediately before the current that an organization normally must meet does endowment fund was originally contributed by a tax year, the organization meets the one-third not have to be the same for each 4-year period governmental unit or by the general public. How- support test on an aggregate basis. See also as long as a sufficient combination of factors ever, if the endowment funds were originally Special computation period for new organiza- exists to show compliance. See also Special contributed by a few individuals or members of tions, later, in this discussion. computation period for new organizations, later, their families, this fact will increase the burden

in this discussion. on the organization of establishing compliance Facts and circumstances test. The facts and with other factors. Facts pertinent to years circumstances test is for organizations failing to Special rule. The fact that an organization before the 4 tax years immediately before the meet the one-third support test. If your organiza- has normally met the one-third support test requirements for a current tax year, but is unable current tax year also may be considered. tion fails to meet the one-third support test, it

may still be treated as a publicly-supported or- normally to meet the requirements for a later tax 2. Sources of support factor. If an organiganization if it normally receives a substantial year, will not in itself prevent the organization zation normally receives at least 10% but less

part of its support from governmental units, from from meeting the requirements of the facts and than one-third of its total support from public or

direct or indirect contributions from the general circumstances test for the later tax year. governmental sources, the fact that it receives

public, or from a combination of these sources. the support from governmental units or directly Example. X organization meets the To qualify, an organization must meet the or indirectly from a representative number of one-third support test in its 2002 tax year on the ten-percent-of-support requirement and the persons, rather than receiving almost all of its basis of support received during 1998, 1999, attraction of public support requirement. support from the members of a single family, will 2000, and 2001. It therefore normally meets the These requirements establish, under all the be considered in determining whether the or- requirements for both 2002 and 2003. For the facts and circumstances, that an organization ganization is publicly supported. In determining 2003 tax year, X is unable to meet the one-third normally receives a substantial part of its sup- what is a representative number of persons, support test on the basis of support received port from governmental units or from direct or consideration will be given to the type of organi- during 1999, 2000, 2001, and 2002. If X can indirect contributions from the general public. meet the facts and circumstances test on the zation involved, the length of time it has existed, The organization also must be in the nature of a and whether it limits its activities to a particular basis of those years, X will normally meet the publicly-supported organization, taking into ac- requirements for 2004 (the tax year immediately community or region or to a special field that can count five different factors. See Additional reafter 2003). However, if on the basis of both be expected to appeal to a limited number of quirements (the five public support factors), 4-year periods (1999 through 2002 and 2000 persons. Facts pertinent to years before the 4 later.

through 2003), X fails to meet both the one-third tax years immediately before the current tax

Ten-percent-of-support requirement. and the facts and circumstances tests, X will not year also may be considered.

The percentage of support normally received by be a publicly-supported organization for 2004. 3. Representative governing body factor. an organization from governmental units, from The fact that an organization has a governing contributions made directly or indirectly by the However, X will not be disqualified as a body that represents the broad interests of the general public, or from a combination of these publicly-supported organization for the 2003 tax public rather than the personal or private interest sources must be substantial. An organization year because it normally met the one-third supwill not be treated as normally receiving a sub- port test requirements on the basis of the tax of a limited number of donors will be considered

in determining whether the organization is pub- stantial amount of governmental or public sup- years 1998 through 2001 unless the provisions

port unless the total amount of governmental governing the Exception for material changes in licly supported.

and public support normally received is at least sources of support (discussed later) become An organization will meet this requirement if

10% of the total support normally received by applicable. it has a governing body composed of:

that organization. For a definition of support, see Additional requirements (the five public Support, later. 1) Public officials acting in their public capaci- support factors). In addition to the two re- ties, Attraction of public support requirement. quirements of the facts and circumstances test,

An organization must be organized and oper- the following five public support factors will be 2) Individuals selected by public officials actated in a manner to attract new and additional considered in determining whether an organiza- ing in their public capacities,

Chapter 3 Section 501(c)(3) Organizations Page 31
3) Persons having special knowledge or ex- to restrict membership to a limited number one of the organization’s founders, creators, or

pertise in the particular field or discipline in of persons. foundation managers, the grantee organization

which the organization is operating, and may request a ruling from the EO area manager 3) Whether the activities of the organization before accepting the grant or contribution for the 4) Community leaders, such as elected or ap- will be likely to appeal to persons having protection of the grantor or contributor. pointed officials, members of the clergy, some broad common interest or purpose, If there is no written statement, a grantor or educators, civic leaders, or other such per- such as educational activities in the case contributor will not be considered responsible for sons representing a broad cross-section of of alumni associations, musical activities in a substantial and material change if the total the views and interests of the community. the case of symphony societies, or civic gifts, grants, or contributions received from that affairs in the case of parent-teacher as- In a membership organization, the governing grantor or contributor for a tax year are 25% or sociations. body also should include individuals elected by less of the total support received by the organia broadly based membership according to the zation from all sources for the 4 tax years immeorganization’s governing instrument or bylaws. Exception for material changes in sources of diately before the tax year. (If the organization

support. If for the current tax year substantial has not qualified as publicly supported for those 4. Availability of public facilities or serv- and material changes occur in an organization’s 5 years, see Special computation period for new ices factor. The fact that an organization gen- sources of support other than changes arising organizations, next.) For this purpose, total sup- erally provides facilities or services directly for from unusual grants (discussed later, under Un- port does not include support received from that the benefit of the general public on a continuing usual grants), then in applying either the particular grantor or contributor. The grantor or basis, is evidence that the organization is pub- one-third or the facts and circumstances test, contributor cannot be a person who is in a posi- licly supported. Examples are: the 4-year computation period applicable to that tion of authority, such as a foundation manager,

• A museum or library that is open to the year, either as an immediately following tax year or who obtains a position of authority or the

public, or as a current tax year, will not apply. Instead of ability to exercise control over the organization

using these computation periods, a computation because of the grant or contribution. • A symphony orchestra that gives public period of 5 years will apply. The 5-year period performances, consists of the current tax year and the 4 tax Special computation period for new

• A conservation organization that provides years immediately before that year. organizations. Organizations that have been

educational services to the public through For example, if substantial and material in existence for at least 1 tax year consisting of

the distribution of educational materials, or changes occur in an organization’s sources of at least 8 months, but for fewer than 5 tax years,

support for the 2000 tax year, then, even though can substitute the number of tax years they have • An old-age home that provides domiciliary the organization meets the one-third or the facts been in existence before their current tax year to or nursing services for members of the and circumstances test using a computation pe- determine whether they meet the one-third sup- general public. riod of tax years 1995–1998 or 1996–1999, the port test or the facts and circumstances test,

The fact that an educational or research institu- organization will not meet either test unless it discussed earlier.

tion regularly publishes scholarly studies widely meets the test using a computation period of tax First tax year at least 8 months. The initial used by colleges and universities or by mem- years 1996–2000 (substituted period). status determination of a newly created organi- bers of the general public is also evidence that Substantial and material change. An ex- zation whose first tax year is at least 8 months is the organization is publicly supported. ample of a substantial and material change is based on a computation period of either the first

Similarly, the following factors are also evi- the receipt of an unusually large contribution or tax year or the first and second tax years.

dence that an organization is publicly supported. bequest that does not qualify as an unusual First tax year shorter than 8 months. The grant. initial status determination of a newly created 1) Participating in, or sponsoring of, the pro- Effect on grantor or contributor. If as a organization whose first tax year is less than 8 grams of the organization by members of result of this substituted period, an organization months is based on a computation period of the public having special knowledge or ex- is not able to meet either the one-third support or either the first and second tax years or the first, pertise, public officials, or civic or commu- the facts and circumstances test for its current second, and third tax years. nity leaders. tax year, its status with respect to a grantor or 5-year advance ruling period. If an organi- 2) Maintaining a definitive program by the or- contributor will not be affected until notice of zation has received an advance ruling, the com- ganization to accomplish its charitable change of status is made to the public (such as putation is based on all the years in the 5-year work in the community, such as slum by publication in the Internal Revenue Bulletin). advance ruling period. Advance rulings are de- clearance or developing employment op- This does not apply, however, if the grantor or scribed later, under Advance rulings to newly portunities. contributor was responsible for or was aware of created organizations—Initial determination of the substantial and material change or acquired 3) Receiving a significant part of its funds status. knowledge that the IRS had given notice to the from a public charity or governmental However, if the advance ruling period is ter- organization that it would be deleted from classi- agency to which it is in some way held minated by the IRS, the computation period will fication as a publicly-supported organization. accountable as a condition of the grant, be based on the period described above under A grantor or contributor (other than one of the contract, or contribution. First tax year at least 8 months and First tax year organization’s founders, creators, or foundation shorter than 8 months, or if the period is greater, managers) will not be considered responsible 5. Additional factors pertinent to member- the number of years to which the advance ruling for, or aware of, the substantial and material ship organizations. The following are addi- applies. change, if the grantor or contributor made the tional factors in determining whether a grant or contribution relying upon a written state- membership organization is publicly supported. ment by the grantee organization that the grant Support. For purposes of publicly-supported

organizations, the term support includes (but is or contribution would not result in the loss of the 1) Whether the solicitation for dues-paying not limited to): organization’s classification as a publicly-sup- members is designed to enroll a substan- ported organization. The statement must be tial number of persons in the community or 1) Gifts, grants, contributions, or membership signed by a responsible officer of the grantee area, or in a particular profession or field of fees, organization and must give enough information, special interest (taking into account the including a summary of the pertinent financial 2) Net income from unrelated business activi- size of the area and the nature of the data for the 4 preceding years, to assure a ties, whether or not those activities are organization’s activities). reasonably prudent person that the grant or con- carried on regularly as a trade or business,

2) Whether membership dues for individual tribution would not result in the loss of the 3) Gross investment income, (rather than institutional) members have grantee organization’s classification as a

been fixed at rates designed to make publicly-supported organization. If a reasonable 4) Tax revenues levied for the benefit of an

membership available to a broad cross doubt exists as to the effect of the grant or organization and either paid to or spent on

section of the interested public, rather than contribution, or, if the grantor or contributor is behalf of the organization, and

Page 32 Chapter 3 Section 501(c)(3) Organizations
5) The value of services or facilities furnished support from a governmental unit includes Thus, a contribution by any one individual

by a governmental unit to an organization will be included in full in the denominator of the any amounts received from a governmental unit,

without charge (except services or facilities fraction used in the one-third support test or the including donations or contributions and

generally furnished to the public without ten-percent-of-support requirement. However, amounts received on a contract entered into

charge). with a governmental unit for the performance of the contribution will be included in the numerator

services, or from a government research grant. only to the extent that it is not more than 2% of

Amounts that are not support. The term However, these amounts are not support from a the denominator. In applying the 2% limit, all

support does not include: governmental unit for these purposes if they contributions made by a donor and by any perconstitute amounts received from the exercise son in a special relationship to the donor (certain 1) Any amount received from the exercise or or performance of the organization’s exempt Disqualified persons discussed under Absence

performance by an organization of the pur- functions. of control by disqualified persons) are consid- pose or function constituting the basis for ered made by one person. The 2% limit does not Any amount paid by a governmental unit to its exemption (in general, these amounts apply to support received from governmental an organization will not be treated as received include amounts received from any activity units or to contributions from other publicly sup- from the exercise or performance of its exempt the conduct of which is substantially re- ported charities, except as provided under function if the purpose of the payment is prima- lated to the furtherance of the exempt pur- Grants from public charities, later. rily to enable the organization to provide a serv- pose or function, other than through the ice to, or maintain a facility for, the direct benefit production of income), or Indirect contributions. The term indirect

of the public (regardless of whether part of the contributions from the general public in2) Contributions of services for which a de- expense of providing the service or facility is cludes contributions received by the organiza- duction is not allowed. paid for by the public), rather than to serve the tion from organizations (such as

These amounts are excluded from both the nu- direct and immediate needs of the payor. This publicly-supported organizations) that normally

merator and the denominator of the fractions in includes: receive a substantial part of their support from

determining compliance with the one-third sup- direct contributions from the general public, export test and ten-percent-of-support require- 1) Amounts paid to maintain library facilities cept as provided under Grants from public charithat are open to the public, ment. The following discusses an exception to ties, next.

this general rule. 2) Amounts paid under government programs Grants from public charities. ContribuOrganizations dependent primarily on to nursing homes or homes for the aged to tions received from a governmental unit or from

gross receipts from related activities. Orga- provide health care or domiciliary services a publicly-supported organization (including a

nizations will not satisfy the one-third support to residents of these facilities, and church that meets the requirements for being

test or the ten-percent-of-support requirement if 3) Amounts paid to child placement or child publicly supported) are not subject to the 2%

they receive: limit unless the contributions represent amounts guidance organizations under government either expressly or impliedly earmarked by a programs for services rendered to children 1) Almost all support from gross receipts from donor to the governmental unit or publicly-sup- in the community. related activities, and ported organization as being for, or for the beneThese payments are mainly to enable the recipi- fit of, the particular organization claiming a 2) An insignificant amount of support from ent organization to provide a service or maintain publicly-supported status. governmental units (without regard to a facility for the direct benefit of the public, rather amounts referred to in (3) in the list of than to serve the direct and immediate needs of Example 1. M, a national foundation for the items included in support) and contribu- the payor. Furthermore, any amount received encouragement of the musical arts, is a tions made directly or indirectly by the gen- from a governmental unit under circumstances publicly-supported organization. George Spruce eral public. in which the amount would be treated as a grant gives M a donation of $5,000 without imposing

will generally constitute support from a govern- any restrictions or conditions upon the gift. M

Example. X, an organization described in mental unit. See the discussion of Grants , later, later makes a $5,000 grant to X, an organization

section 501(c)(3), is controlled by Thomas Blue, under Section 509(a)(2) Organizations. devoted to giving public performances of chamits president. X received $500,000 during the 4 ber music. Since the grant to X is treated as Medicare and Medicaid payments. Medi- tax years immediately before its current tax year being received from M, it is fully includible in the care and Medicaid payments are received from under a contract with the Department of Trans- numerator of X’s support fraction for the tax year contracts entered into with state and federal portation, under which X engaged in research to of receipt. governmental units. However, payments are improve a particular vehicle used primarily by made for services already provided to eligible the federal government. During the same pe- Example 2. Assume M is the same organi- individuals, rather than to encourage or enable riod, the only other support received by X was zation described in Example 1. Tom Grove gives an organization to provide services to the public. $5,000 in small contributions primarily from X’s M a donation of $10,000, but requires that M The individual patient, not a governmental unit, employees and business associates. The spend the money to support organizations de- actually controls the ultimate recipient of these $500,000 is support under (1) above. Under voted to the advancement of contemporary payments by selecting the health care organiza- these circumstances, X meets the conditions of American music. M has complete discretion as tion. As a result, these payments are not consid- (1) and (2) above and so does not meet the to the organizations of the type described to ered support from a governmental unit. one-third support test or the ten-percent-of-sup- which it will make a grant. M decides to make Medicare and Medicaid payments are gross re- port requirement. grants of $5,000 each to Y and Z, both being

For the rules that apply to organizations that ceipts derived from the exercise or performance organizations described in section 501(c)(3) and of exempt activities and, therefore, are not in- fail to qualify as section 509(a)(1) publicly-sup- devoted to furthering contemporary American

ported organizations because of these provi- cluded in the term support. music. Since the grants to Y and Z are treated as

sions, see Section 509(a)(2) Organizations, having been received from M, Y, and Z, each

later. See also Gross receipts from a related Support from the general public. In deter- may include one of the $5,000 grants in the

activity in the discussion on section 509(a)(2) mining whether the one-third support test or the numerator of its support fraction. Although the

organizations. ten-percent-of-support requirement is met, in- donation to M was conditioned upon the use of

clude in your computation support from direct or the funds for a particular purpose, M was free to Membership fees. Membership fees are in- indirect contributions from the general public. select the ultimate recipient. cluded in the term support if they are paid to This includes contributions from an individual, provide support for the organization rather than trust, or corporation but only to the extent that Example 3. N is a national foundation for to buy admissions, merchandise, services, or the total contributions from the individual, trust, the encouragement of art and is a publicly-sup- the use of facilities. or corporation, during the 4-year period immedi- ported organization. Grants to N are permitted to

Support from a governmental unit. For pur- be earmarked for particular purposes. O, which ately before the current tax year (or substituted

poses of the one-third support test and the is an art workshop devoted to training young computation period) are not more than 2% of the

ten-percent-of-support requirement, the term organization’s total support for the same period. artists and which is claiming status as a

Chapter 3 Section 501(c)(3) Organizations Page 33
publicly-supported organization, persuades C, a otherwise exercise control over the organi- Continued reliance on unusual grants to

private foundation, to make a grant of $25,000 to fund an organization’s current operating zation.

N. C is a disqualified person with respect to O. C expenses (as opposed to providing new 3) The grant or contribution is in the form of makes the grant to N with the understanding that endowment funds) may be evidence that cash, readily marketable securities, or as- N would be bound to make a grant to O in the the organization cannot reasonably be ex- sets that directly further the organization’s sum of $25,000, in addition to a matching grant pected to attract future support from the exempt purposes, such as a gift of a paint- of N’s funds to O in the sum of $25,000. Only the general public. ing to a museum. $25,000 received directly from N is considered a 5) Whether the organization has a represen- grant from N. The other $25,000 is an indirect 4) The donee-organization has received ei- tative governing body. contribution from C to O and is to be excluded ther an advance or final ruling or determifrom the numerator of O’s support fraction to the nation letter classifying it as a

extent it exceeds the 2% limit. Advance rulings to newly created organiza- publicly-supported organization and, ex- tions — Initial determination of status. cept for an organization operating under

Unusual grants. In applying the 2% limit to Many newly created organizations cannot meet an advance ruling or determination letter,

determine whether the one-third support test or either the 4-year normally publicly supported the organization is actively engaged in a the ten-percent-of-support requirement is met, provisions or the provisions for newly created program of activities in furtherance of its exclude contributions that are considered unu- organizations to qualify as normally publicly sup- exempt purpose. sual grants from both the numerator and denom- ported because they have not been in existence

inator of the appropriate percent-of-support 5) No material restrictions or conditions have long enough. However, a newly created organifraction. Generally, unusual grants are substan- been imposed by the grantor or contributor zation may qualify for an advance ruling that it

tial contributions or bequests from disinterested upon the organization in connection with will be treated as an organization described in

parties if the contributions: the grant or contribution. section 170(b)(1)(A)(vi) during an advance ruling period long enough to enable it to develop an 6) If the grant or contribution is intended for 1) Are attracted by the publicly-supported na- adequate support history on which to base an operating expenses, rather than capital ture of the organization, initial determination as to foundation status. items, the terms and amount of the grant Generally, the type of newly created organi- 2) Are unusual or unexpected in amount, and or contribution are expressly limited to one zation that would qualify for an advance ruling is year’s operating expenses. 3) Would adversely affect, because of the one that can show that its organizational strucsize, the status of the organization as nor- ture, proposed programs and activities, and in- Ruling request. Before any grant or contri- mally being publicly supported. (The or- tended method of operation are likely to attract bution is made, a potential grantee organization ganization must otherwise meet the may request a ruling as to whether the grant or the type of broadly based support from the gensupport test in that year without benefit of eral public, public charities, and governmental contribution may be excluded. This request may the grant or contribution.) units that is necessary to meet the public sup- be filed by the grantee organization with the EO port requirements discussed earlier, under For a grant (see Grants, later) that meets the area manager for its area. The organization Qualifying As Publicly Supported. requirements for exclusion, if the terms of the must submit all information necessary to make a An advance ruling or determination will pro- granting instrument require that the funds be determination, including information relating to vide that an organization will be treated as an paid to the recipient organization over a period the factors and characteristics listed in the pre- organization described in section of years, the amount received by the organiza- ceding paragraphs. If a favorable ruling is is- 170(b)(1)(A)(vi) for an advance ruling period of 5 tion each year under the terms of the grant may sued, the ruling may be relied upon by the

years. be excluded for that year. However, no item of grantor or contributor of the particular contribugross investment income (defined under Sec- tion in question. The issuance of the ruling will 5-year advance ruling period. A newly tion 509(a)(2) Organizations, later) may be ex- be at the sole discretion of the IRS. The potential created organization may request a ruling or cluded under this rule. These provisions allow grantee organization should follow the proce- determination letter that it will be treated as a

exclusion of unusual grants made during any of dures set out in Revenue Procedure 2003–4 (or section 170(b)(1)(A)(vi) organization for its first 5 the applicable periods previously discussed later update) to request a ruling. tax years. The request must be accompanied by under Special computation period for new orga- Grants and contributions that result in sub- a consent to extend the statute (on Form nizations and to periods described in Advance stantial and material changes in the organization 872–C) that, in effect, states the organization rulings to newly created organizations—Initial and that fail to qualify for exclusion will affect the will be subject to the taxes imposed under sec- determination of status, later. way the support tests are applied. See Excep- tion 4940 if it fails to qualify as an organization

Characteristics of an unusual grant. A tion for material changes in sources of support, excluded as a private foundation during the

earlier. 5-year advance ruling period. The grant or contribution will be considered an unu- organization’s first tax year, regardless of sual grant if the above three factors apply and if If a ruling is requested, in addition to the

characteristics listed earlier under Characteris- length, will count as the first year in the 5-year it has all of the following characteristics. If these

tics of an unusual grant, the following factors period. The advance ruling period will end on the factors and characteristics apply, then even

without the benefit of an advance ruling, grant- may be considered by the IRS in determining if last day of the organization’s 5th tax year.

ors or contributors have assurance that they will the grant or contribution is an unusual grant. Between 30 and 45 days before the end of

not be considered responsible for substantial the advance ruling period, the EO area manager

and material changes in the organization’s 1) Whether the contribution was a bequest or will contact the organization and request the

sources of support. a transfer while living. A bequest will be financial support information necessary to make

given more favorable consideration than a a final determination of foundation status. In

1) The grant or contribution is not made by a general, this is the information requested in Part transfer while living.

person (or related person) who created the IV, A of Form 1023. 2) Whether, before the receipt of the contri- organization or was a substantial contribu- bution, the organization has carried on an Failure to obtain advance ruling. If a tor to the organization before the grant or active program of public solicitation and newly created organization has not obtained an contribution. exempt activities and has been able to at- advance ruling or determination letter, it cannot

2) The grant or contribution is not made by a rely upon the possibility that it will meet the tract a significant amount of public support.

person (or related person) who is in a posi- public support requirements discussed earlier. 3) Whether, before the year of contribution, tion of authority, such as a foundation Thus, in order to avoid the risk of being classified the organization met the one-third support manager, or who otherwise has the ability as a private foundation, the organization may test without benefit of any exclusions of to exercise control over the organization. comply with the rules governing private founda- unusual grants. Similarly, the grant or contribution is not tions by paying any applicable private foundamade by a person (or related person) who, tion taxes. If the organization later meets the 4) Whether the organization may reasonably

because of the grant or contribution, ob- public support requirements for the applicable be expected to attract a significant amount

tains a position of authority or the ability to of public support after the contribution. period, it will be treated as a section

Page 34 Chapter 3 Section 501(c)(3) Organizations
170(b)(1)(A)(vi) organization from its inception family have annually been less than 20% of the Total support ................ $600,000

and any private foundation tax that was imposed Board of Trustees. The remaining board memmay be refunded. For 2002, the basis of the above support, M is bers are citizens of Y City from a variety of

considered to have normally received more than professions and occupations who represent the Reliance period. The newly created organi- one-third of its support from a governmental unit interests and views of the people of Y City in the zation will be treated as a publicly-supported and from direct and indirect contributions from activities carried on by the organization rather organization for all purposes other than sections the general public computed as follows. than the personal or private interests of the 507(d) (relating to total tax benefit resulting from founding family. exempt status) and 4940 (relating to tax on net One-third of total support ........ $200,000 O solicits contributions from the general pub- investment income) for the period beginning Support from a governmental unit . . $40,000 lic and for each of its 4 most recent tax years has with its inception and ending 90 days after its received total contributions (in small sums of Indirect contributions from the advance ruling period expires. The period will be general public (United Way) ...... 40,000 less than $100, none of which is more than 2% extended until a final determination is made of Contributions by various donors (no of O’s total support for the period) of more than an organization’s status only if the organization one having made contributions that $10,000. These contributions from the general submits, within the 90-day period, information total more than $12,000—2% of total public are 25% of the organization’s total sup- needed to determine whether it meets either of support) ................... 50,000 port for the 4-year period. For this same period, the support tests for its advance ruling period Six contributions (each in excess of investment income from several large endow- (even if the organization fails to meet either test). $12,000 —2% of total support) 6 × ment funds has been 75% of its total support. O However, this reliance period does not apply to $12,000 ................... 72,000 spends substantially all of its annual income for the excise tax imposed on net investment in- $202,000 its exempt purposes and thus depends upon the come. If it is later determined that the organiza- funds it annually solicits from the public as well tion was a private foundation from its inception, Since M’s support from governmental units and as its investment income to carry out its activities that excise tax will be due without regard to the from direct and indirect contributions from the on a normal and continuing basis and to acquire advance ruling or determination letter. Conse- general public normally is more than one-third of new works of art. For the entire period of its quently, if any amount of the tax is not paid on or M’s total support for the applicable period existence, O has been open to the public and before the last date prescribed for payment, the (1998–2001), M meets the one-third support more than 300,000 people (from Y City and organization is liable for interest on the tax due test and satisfies the requirements for classifica- elsewhere) have visited the museum in each of for years in the advance ruling period. However, tion as a publicly-supported organization for its 4 most recent tax years. since any failure to pay the tax during the period 2002 and 2003. (This remains in effect if no Under these circumstances, O does not

is due to reasonable cause, the penalty imposed substantial and material changes took place in meet the one-third support test for its current

for failure to pay the tax will not apply. the organization’s character, purposes, meth- year since it has received only 25% of its total ods of operation, or sources of support in these If an advance ruling or determination letter support for the applicable 4-year period from the years.) general public. However, O has met the is terminated by the IRS before the expiration ten-percent-of-support requirement as well as of the reliance period, the status of grants or Example 2. N organization was created to the attraction of public support requirement and contributions with respect to grantors or contrib- maintain public gardens containing plant speci- the factors to be considered, under the facts and utors to the organization will not be affected until mens and displaying works of art. The facilities, circumstances test, in determining whether an notice of change of status of the organization is art, and a large endowment were all contributed made to the public (such as by publication in the organization is publicly supported. Therefore, O by a single contributor. The members of the is classified as a publicly-supported organiza- Internal Revenue Bulletin). However, this will not governing body of the organization are unre- tion for its current tax year and the next tax year. apply if the grantor or contributor was responsi- lated to its creator. The gardens are open to the ble for, or aware of, the act or failure to act that public without charge and attract many visitors Example 4. In 1990, the P Philharmonic resulted in the organization’s loss of classifica- each year. For the 4 tax years immediately Orchestra was organized in Z City by a local tion as a publicly-supported organization. before the current tax year, 95% of the music society and a local women’s club to pres- Also, it will not apply if the grantor or contrib- organization’s total support was received from ent to the public a wide variety of musical pro- utor knew that the IRS had given notice to the investment income from its original endowment. grams intended to foster music appreciation in organization that it would be deleted from this N also maintains a membership society that is the community. The orchestra is composed of classification. Before any grant or contribution is supported by members of the general public professional musicians who are paid by the as- made, a potential grantee organization may who wish to contribute to the upkeep of the sociation. Twelve performances, open to the request a ruling on whether the grant or contri- gardens by paying a small annual membership public, are scheduled each year. A small admis- bution may be made without loss of classifica- fee. Over the 4-year period in question, these sion charge is made for each of these perform- tion as a publicly-supported organization. fees from the general public constituted the re- ances. In addition, several performances are The ruling request may be filed by the maining 5% of the organization’s total support. staged annually without charge. grantee organization with the EO area manager. Under these circumstances, N does not meet During its 4 most recent tax years, P re- The issuance of the ruling will be at the sole the one-third support test for its current tax year. ceived separate contributions of $200,000 each discretion of the IRS. The organization must Furthermore, since only 5% was received from from Amanda Green and Jackie White (not submit all information necessary to make a de- the general public, N does not satisfy the members of a single family) and support of termination on the support factors previously ten-percent-of-support requirement of the facts $120,000 from the Z Community Chest, a public discussed. If a favorable ruling is issued, the and circumstances test. For its current tax year, federated fund-raising organization operating in ruling may be relied upon by the grantor or N therefore is not a publicly-supported organiza- Z City. P depends on these funds to carry out its contributor of the particular contribution in ques- tion. Since N failed to satisfy the activities and will continue to depend on contri- tion. The grantee organization also may rely on ten-percent-of-support requirement, none of the butions of this type to be made in the future. P the ruling for excluding unusual grants. other requirements or factors can be considered has also begun a fund-raising campaign in an in determining whether N qualifies as a attempt to expand its activities for the coming publicly-supported organization. years. Comprehensive Examples P is governed by a Board of Directors com- Example 3. In 1980, O organization was posed of five individuals. A faculty member of a

Example 1. For the years 1998 through founded in Y City by the members of a single local college, the president of a local music soci2001, M organization received support of family to collect, preserve, interpret, and display ety, the head of a local bank, a prominent doctor,

$600,000 from the following sources. to the public important works of art. O is gov- and a member of the governing body of the local erned by a Board of Trustees that originally Chamber of Commerce currently serve on the

Investment Income ............ $300,000 consisted almost entirely of members of the Board and represent the interests and views of City Y .................... 40,000 founding family. the community in the activities carried on by P. United Way ................. 40,000 However, since 1990, members of the foundContributions ............... 220,000 ing family or persons related to members of the

Chapter 3 Section 501(c)(3) Organizations Page 35
For P’s current tax year, its sources of sup- ment, its method of solicitation makes it ques- document(s) containing common lanport are computed on the basis of the 4 immedi- tionable whether Q satisfies the attraction of guage.

ately preceding years, as follows. public support requirement. Because of its 3) The organization must have a common method of operating, Q also has a greater bur- governing body (or distribution committee) Contributions ............... $520,000 den of establishing its publicly supported nature that either directs or, in the case of a fund Receipts from performances ..... 100,000 under the percentage of financial support factor. designated for specified beneficiaries, $620,000 Based on these facts and on Q’s failure to reLess: monitors the distribution of all funds exclu- ceive favorable consideration under the remainReceipts from performances sively for charitable purposes. The govern- ing factors, Q does not qualify as a (excluded, see Support) ........ 100,000 ing body must have the power in the publicly-supported organization. Total support .............. $520,000 governing instrument, the instrument of

transfer, the resolutions or bylaws of the Z Community Chest (indirect support governing body, a written agreement, or from the general public) ........ $120,000 Community Trusts

Two contributions (each over otherwise—

$10,400—2% of total support) 2 × Community trusts are often established to at- a) To modify any restriction or condition $10,400 ................... 20,800 tract large contributions of a capital or endow- on the distribution of funds for any Total support from general public . . $140,800 ment nature for the benefit of a particular specified charitable purposes or to community or area. Often these contributions specified organizations if in the sole P’s support from the general public, directly and come initially from a small number of donors. judgment of the governing body (with- indirectly, does not meet the one-third support While the community trust generally has a gov- out the necessity of the approval of any test ($140,800/$520,000 = 27% of total sup- erning body composed of representatives of the participating trustee, custodian, or port). However, it meets the ten-percent-of-sup- particular community or area, its contributions agent), the restriction or condition be- port requirement. P also meets the requirement are often received and maintained in the form of comes, in effect, unnecessary, incapa- of the attraction of public support. As a result of separate trusts or funds that are subject to vary- ble of fulfillment, or inconsistent with satisfying these requirements and the public ing degrees of control by the governing body. the charitable needs of the community support factors, P is considered to be a To qualify as a publicly-supported organiza- or area served, publicly-supported organization. tion, a community trust must meet the one-third If P were a newly created organization, it support test, explained earlier under Qualifying b) To replace any participating trustee,

could obtain a ruling that it is a publicly-sup- As Publicly Supported. If it cannot meet that test, custodian, or agent for breach of fiduciported organization by reason of its purposes, it must be organized and operated so as to ary duty under state law, and

organizational structure, and proposed method attract new and additional public or governmen- c) To replace any participating trustee, of operation. Even if P had initially been founded tal support on a continuous basis sufficient to etc., for failure to produce a reasonable by the contributions of a few individuals, this meet the facts and circumstances test, also exwould not, in and of itself, disqualify P from return of net income over a reasonable plained earlier. Community trusts are generally period of time. (The governing body will receiving the ruling. able to satisfy the attraction of public support determine what is reasonable.) requirement (as contained in the facts and cir- Example 5. Q is a philanthropic organiza- cumstances test) if they seek gifts and bequests 4) The organization must prepare periodic fi- tion founded in 1985 by Anne Elm for the pur- from a wide range of potential donors in the pose of making annual contributions to worthy nancial reports treating all of the funds that community or area served, through banks or charities. Anne created Q as a charitable trust by are held by the community trust, either di- trust companies, through attorneys or other pro- rectly or in component parts, as funds of transferring $500,000 worth of appreciated se- fessional persons, or in other appropriate ways curities to Q. the organization. that call attention to the community trust as a Under the trust agreement, Anne and two potential recipient of gifts and bequests made A community trust can meet the requirement other family members are the sole trustees and for the benefit of the community or area served. in (3) above even if its exercise of the powers in are vested with the right to appoint successor A community trust, however, does not have to (3)(a), (b), or (c) is reviewable by an appropriate trustees. In each of its 4 most recent tax years, engage in periodic, community-wide, fund-rais- state authority. Q received $15,000 in investment income from ing campaigns directed toward attracting a large Component part. To be treated as a com- its original endowment. Each year Q solicits number of small contributions in a manner simifunds by operating a charity ball at Anne’s home. ponent part of a community trust (rather than as lar to campaigns conducted by a community Guests are invited and asked to make contribu- a separate trust or a not-for-profit corporation), a chest or a united fund.

tions of $100 per couple. During the 4-year pe- trust or fund: 

riod involved, $15,000 was received from the Separate trusts or funds. Any community proceeds of these events. Anne and the family 1) Must be created by gift, bequest, legacy, trust may be treated as a single entity, rather have also made contributions to Q of $25,000 devise, or other transfer to a community than as an aggregation of separate funds, in over the course of the organization’s 4 most trust that is treated as a single entity (de- which case all qualifying funds associated with recent tax years. Q makes disbursements each scribed above), and that organization (whether a trust, not-for-profit year of substantially all of its net income to the corporation, unincorporated association, or a 2) May not be directly subjected by the trans- public charities chosen by the trustees. combination thereof) will be treated as compo- feror to any material restriction or condition For Q’s current tax year, Q’s sources of sup- nent parts of the organization. with respect to the transferred assets. port are computed on the basis of the 4 immedi- Single entity. To be treated as a single en- ately preceding years as follows. tity, a community trust must meet all of the fol- Grantors and contributors. Grantors, conlowing requirements. Investment income ............. $60,000 tributors, or distributors to a community trust

Contributions ................ 40,000 may rely on the public charity status, which the 1) The organization must be commonly Total support ............... $100,000 organization has claimed in a timely filed notice, known as a community trust, fund, founda- Contributions from the general public $15,000 on or before the date the IRS informs the public tion, or other similar name conveying the (through such means as publication in the InterOne contribution (over $2,000—2% concept of a capital or endowment fund to nal Revenue Bulletin) that such reliance has of total support) 1 × $2,000 ....... 2,000 support charitable activities in the commu- expired. However, if the grantor, contributor, or Total support from general public . . . $17,000 nity or area it serves. distributor acquires knowledge that the IRS has

Q’s support from the general public does not 2) All funds of the organization must be sub- notified the community trust that it has failed to

meet the one-third support test ($17,000/ ject to a common governing instrument (or establish that it is a public charity, then reliance

$100,000 = 17% of total support). Even though it a master trust or agency agreement) that on the claimed status expires at the time such

does meet the ten-percent-of-support require- may be embodied in a single (or several) knowledge is acquired.

Page 36 Chapter 3 Section 501(c)(3) Organizations
Section 509(a)(2) Organizations ceives no more than one-third of its support in the grantee organization that the grant or contrieach tax year from the total of: bution would not result in the loss of the

Section 509(a)(2) excludes certain types of organization’s classification as an organization

broadly, publicly-supported organizations from 1) Gross investment income, and that is not a private foundation. The statement

private foundation status. Generally, an organi- 2) The excess (if any) of unrelated business must be signed by a responsible officer of the

zation described in section 509(a)(2) may also fit grantee organization and must give enough in- taxable income from unrelated trades or the description of a publicly-supported organiza- businesses acquired after June 30, 1975 formation, including a summary of the pertinent

tion under section 509(a)(1). There are, how- over the tax imposed on that income. financial data for the 4 preceding years, to asever, two basic differences. sure a reasonably prudent person that the grant

Gross investment income. Gross invest- or contribution would not result in the loss of the 1) For section 509(a)(2) organizations, the ment income means the gross amount of in- grantee organization’s classification as not a term support includes items of support dis- private foundation. If a reasonable doubt exists come from interest, dividends, payments with cussed earlier (under Support, in the dis- as to the effect of the grant or contribution, or if respect to securities loans, rents, and royalties, cussion of Section 509(a)(1) but it does not include any income that would be the grantor or contributor is one of the Organizations) and income from activities

included in computing tax on unrelated business organization’s founders, creators, or foundation directly related to their exempt function. managers, the grantee organization may re- income from trades or businesses. This income is not included in meeting the quest a ruling from its EO area manager for the support test for a publicly-supported or- Definition of normally. Both support tests protection of the grantor or contributor. ganization under section 509(a)(1). are computed on the basis of the nature of the If there is no written statement, a grantor or organization’s normal sources of support. An 2) Section 509(a)(2) places a limit on the total contributor will not be considered responsible for organization will be considered to have normally gross investment income and unrelated a substantial and material change if the total met both tests for its current tax year and the tax business taxable income (in excess of the gifts, grants, or contributions received from that year immediately following, if it meets those unrelated business tax) an organization grantor or contributor for a tax year are 25% or tests on the basis of the total support received may have, while section 509(a)(1) does less of the total support received by the organi- for the 4 tax years immediately before the cur- not. zation from all sources for the 4 tax years imme- rent tax year. diately before the tax year. (If the organization To be excluded from private foundation treat- has not qualified as publicly supported for ment under section 509(a)(2), an organization Exception for material changes in sources of those 5 years, see Special computation period must meet two support tests. support. If during the current tax year there for new organizations, next.) For this purpose, are substantial and material changes in an total support does not include support received 1) The one-third support test. organization’s sources of support other than from that particular grantor or contributor. The changes arising from unusual grants (dis- 2) The not-more-than-one-third support test. grantor or contributor cannot be a person who is cussed, later, under Unusual grants), neither the

Both these tests are designed to insure that in a position of authority, such as a foundation 4-year computation period for the current year manager, or who obtains a position of authority an organization excluded from private founda- as an immediately following tax year, nor the or the ability to exercise control over the organi- tion treatment is responsive to the general pub- 4-year computation period for that year as a zation because of the grant or contribution. lic, rather than to the private interests of a limited current tax year applies. Instead, the normal

number of donors or other persons. sources of support will be determined on the Special computation period for new basis of a 5-year period consisting of the current organizations. A newly created organization One-third support test. The one-third sup- tax year and the 4 preceding tax years. may need several years to establish its normal port test will be met if an organization normally For example, if material changes occur in sources of support. Organizations generally are receives more than one-third of its support in support for the year 2002, then even though the allowed a 5-year period to establish that they each tax year from any combination of: organization meets the requirements of the sup- meet the section 509(a)(2) support test. This is port tests based on the years 1997–2000 or 1) Gifts, grants, contributions, or membership called the advance ruling period. If an organiza- 1998–2000, it does not meet these tests unless fees, and tion can reasonably be expected to meet the it meets the requirements based on the 5-year support test by the end of its advance ruling 2) Gross receipts from admissions, sales of computation period of 1998–2002. An example period, the IRS may issue it an advance ruling or merchandise, performance of services, or of a substantial and material change is the re- determination letter. See Advance rulings for furnishing facilities in an activity that is not ceipt of an unusually large contribution that does newly created organizations, later. This will per- an unrelated trade or business, subject to not qualify as an unusual grant. mit the organization to be treated as a section certain limits, discussed below under Limit Effect on grantor or contributor. 509(a)(2) organization for its advance ruling pe- If an or- on gross receipts. ganization is not able to meet either of the sup- riod.

For this purpose, the support must be from port tests because of a substantial or material An advance ruling or determination is not a

permitted sources, which include: change in the sources of support, its status with ruling that the organization will meet the requirerespect to a grantor or contributor will not be ments of section 509(a)(2) during the advance • Section 509(a)(1) organizations, described affected until notice of a change in status is ruling period. An organization that receives an earlier, made to the public (such as by publication in the advance ruling or determination letter must, at

• Governmental units, described under Sec- the expiration of the advance ruling period, es- Internal Revenue Bulletin).

tion 509(a)(1) Organizations, and However, this rule does not apply to any tablish that it satisfies the section 509(a)(2) supgrantor or contributor who: port requirements for the years covered by the • Persons other than Disqualified persons advance ruling, or the organization will be pre- (defined under Section 509(a)(3) Organi- 1) Was responsible for the substantial or ma- sumed to be a private foundation under section zations). terial change, 508(b).

Limit on gross receipts. 2) Was aware of it, or In computing the Unusual grants. An unusual grant may be

amount of support received from gross receipts 3) Has acquired knowledge that the IRS gave excluded from the support test computation if it: 

under (2) above, gross receipts from related notice to the organization that it would no activities received from any person or from any 1) Was attracted by the publicly supported longer be classified as a section 509(a)(2) bureau or similar agency of a governmental unit nature of the organization, organization. are includible in any tax year only to the extent 2) Was unusual or unexpected in amount, the gross receipts are not more than the greater A grantor or contributor (other than one of the and

of $5,000 or 1% of the organization’s total sup- organization’s founders, creators, or foundation

port in that year. managers) is not considered responsible for, or 3) Would, because of its size, adversely afaware of, the substantial and material change if fect the status of the organization as norNot-more-than-one-third support test. This the grantor or contributor made the grant or mally meeting the one-third support test.

test will be met if an organization normally re- contribution relying upon a written statement by (The organization must otherwise meet the

Chapter 3 Section 501(c)(3) Organizations Page 37
test in that year without benefit of the grant United States. Its principal activities will consist 1) Whether the contribution was a bequest or or contribution.) of erecting a theater for the performance of bal- a transfer while living. A bequest will ordi- let and the organization and operation of a ballet

Characteristics of an unusual grant. A company. The governing body of M consists of narily be given more favorable consideragrant or contribution will be considered an unu- tion than a transfer while living. nine prominent unrelated citizens living in the

sual grant if the above 3 factors apply and it has region who have either an expertise in ballet or a 2) Whether, before the contribution, the or- all of the following characteristics. If these fac- strong interest in encouraging appreciation of ganization carried on an actual program of tors and characteristics apply, then even without ballet. To provide sufficient capital for M to begin public solicitation and exempt activities the benefit of an advance ruling, grantors or its activities, X, a private foundation, makes a and was able to attract a significant contributors have assurance that they will not be grant of $500,000 in cash to M. Although Albert amount of public support. considered responsible for substantial and ma- Cedar, the creator of X, is one of the nine memterial changes in the organization’s sources of 3) Whether the organization may reasonably bers of M’s governing body, was one of M’s

support. be expected to attract a significant amount original founders, and continues to lend his

of public support after the contribution. prestige to M’s activities and fund-raising efforts,

1) The grant or contribution is not made by a Continued reliance on unusual grants to Albert does not, directly or indirectly, exercise

person (or related person) who created the any control over M. By the close of its first tax fund an organization’s current operating

organization or was a substantial contribu- expenses may be evidence that the organ- year, M also has received a significant amount

tor to the organization before the grant or ization cannot attract future support from of support from a number of smaller contributhe general public. contribution. tions and pledges from members of the general

public. Upon the opening of its first season of 2) The grant or contribution is not made by a 4) Whether the organization met the one-third ballet performances, M expects to charge ad- person (or related person) who is in a posi- support test in the past without the benefit mission to the general public. Under these cir- of any exclusions of unusual grants. tion of authority, such as a foundation cumstances, the grant by X to M may be manager, or who otherwise has the ability 5) Whether the organization has a represen- excluded as an unusual grant. to exercise control over the organization. tative governing body. Similarly, the grant or contribution is not Advance rulings for newly created made by a person (or related person) who, organizations. Newly created organizations Example 1. In 1998, Y, an organization de- because of the grant or contribution, ob- generally are allowed an advance ruling period scribed in section 501(c)(3), was created by tains a position of authority or the ability to of 5 years. Marshall Pine, the holder of all the common otherwise exercise control over the organi- An organization that is claiming on its Form stock in M corporation, Lisa, Marshall’s wife, and zation. 1023 (or other section 508(b) notice) to be de- Edward Forest, Marshall’s business associate.

3) The grant or contribution is in the form of scribed under section 509(a)(2) must have oper- Each of the three creators made small cash

cash, readily marketable securities, or as- ated for at least 1 tax year consisting of at least 8 contributions to Y to enable it to begin opera- sets that directly further the organization’s months before the IRS will make a final determi- tions. The purpose of Y was to sponsor and exempt purposes, such as a gift of a paint- nation of its status. However, if an organization equip athletic teams composed of underprivi- ing to a museum. can show that it can reasonably be expected to leged children of the community. Between 1998 qualify under section 509(a)(2), the IRS will is- 4) The donee organization has received ei- and 2001, Y was able to raise small amounts of sue an advance ruling or determination letter on ther an advance or final ruling or determi- contributions through fund-raising drives and the organization’s private foundation status. nation letter classifying it as a selling admission to some of the sponsored Generally, an advance ruling or determination publicly-supported organization and, ex- sporting events. provides that an organization will be treated as cept for an organization operating under For its first year of operations, it was deter- an organization described in section 509(a)(2) an advance ruling or determination letter, mined that Y was excluded from the definition of for an advance ruling period of 5 years. the organization is actively engaged in a private foundation under the provisions of sec- A newly created organization may request a program of activities in furtherance of its tion 509(a)(2). Marshall made small contribu- ruling or determination that it will be treated as a exempt purpose. tions to Y from time to time. At all times, the section 509(a)(2) organization for its first 5 tax operations of Y were carried out on a small years. This request must be filed with a consent 5) No material restrictions or conditions have scale, usually being restricted to the sponsor- to extend the statute (Form 872–C) that in effect been imposed by the grantor or contributor ship of two to four baseball teams of underprivi- states the organization will be subject to private upon the organization in connection with leged children. foundation taxes (under section 4940) if it fails to the grant or contribution. In 2002, M recapitalized and created a first qualify as not a private foundation during the 6) If the grant or contribution is intended for and second class of 6% nonvoting preferred 5-year advance ruling period. operating expenses, rather than capital stock, most of which was held by Marshall and In determining whether an organization can items, the terms and amount of the grant Lisa. Marshall then contributed 49% of his com- meet the support tests, the basic consideration

or contribution are expressly limited to one mon stock in M to Y. Marshall, Lisa, and Edward is whether its organizational structure, proposed

year’s operating expenses. continued to be active participants in the affairs programs or activities, and intended method of

of Y from its creation through 2002. Marshall’s operation will attract the type of broadly based Ruling request. If there is any doubt that a contribution of M’s common stock was 90% of support from the general public, public charities,

grant or contribution may be excluded as an Y’s total support for 2002. Although Y could and governmental units that is necessary to

unusual grant, the grantee organization may re- satisfy the one-third support test on the basis of meet the tests. The facts that are relevant to this

quest a ruling, submitting all of the necessary the 4 tax years before 2002, a combination of determination and the weight accorded each

information for making a determination to its EO the facts and circumstances preclude Marshall’s fact may differ from case to case. A favorable

area manager. The IRS has the sole discretion contribution of M’s common stock in 2002 from determination will not be made when the facts

of issuing a ruling, but if a favorable ruling is being excluded as an unusual grant. Marshall’s indicate that an organization is likely to receive

issued, it may be relied on by the grantor or contribution in 2002 was a substantial and mate- less than one-third of its support from permitted

contributor for purposes of a charitable contribu- rial change in Y’s sources of support and on the sources or to receive more than one-third of its

tions deduction and by the organization for pur- basis of the 5-year period (1998 to 2002), Y support from gross investment income and unposes of the exclusion for unusual grants. The would not be considered as normally meeting related business taxable income.

organization should follow the procedures set the one-third support test for the tax years 2002 All pertinent facts and circumstances are

out in Revenue Procedure 2003–4 (or later up- (the current tax year) and 2003 (the immediately taken into account in determining whether the

date). following tax year). organizational structure, programs or activities,

In addition to the characteristics listed above, and method of operation of an organization will

the following factors may be considered by the enable it to meet the tests for its advance ruling Example 2. M, an organization described in

IRS in determining if the grant or contribution is section 501(c)(3), was organized to promote the period (discussed earlier). Some pertinent facan unusual grant. appreciation of ballet in a particular region of the tors considered are: 

Page 38 Chapter 3 Section 501(c)(3) Organizations
Grantors or contributors. If a ruling or de- and grantee, and the possibility of benefit to the 1) Whether the organization has or will have termination letter is terminated before the expi- grantor, amounts received as grants for carrying a governing body that is composed of per- ration of the reliance period, the status of a on exempt activities are sometimes difficult to

sons having special knowledge in the par- charitable contribution deduction of a grantor or distinguish from amounts received as gross reticular field in which the organization is contributor will not be affected until notice of ceipts from carrying on exempt activities.

operating or of community leaders, such change of status is made public (such as by In distinguishing the term gross receipts

as elected officials, members of the clergy, publication in the Internal Revenue Bulletin). from the term grants, the term gross receipts

and educators, or, in the case of a mem- However, this rule will not apply if the grantor means amounts received from an activity that is

bership organization, of individuals elected or contributor is responsible for, or aware of, the not an unrelated trade or business, if a specific

under the organization’s governing instru- act or failure to act that resulted in the service, facility, or product is provided to serve

ment or bylaws by a broadly based mem- organization’s loss of section 509(a)(2) status, the direct and immediate needs of the payor

bership, or if a grantor or contributor acquires knowledge rather than primarily to confer a direct benefit on

that the IRS had given notice of the loss of status the general public. In general, payments made 2) Whether a substantial part of the to the organization. primarily to enable the payor to realize or receive organization’s initial funding is to be pro- some economic or physical benefit as a result of vided by the general public, by public char- Failure to obtain advance ruling. See the the service, facility, or product obtained will be ities, or by government grants rather than corresponding discussion under Failure to ob- treated as gross receipts by the payee. by a limited number of grantors or contrib- tain advance ruling under Qualifying As Publicly For example, a profit-making organization, utors who are disqualified persons with re- Supported. primarily for its own betterment, contracts with a spect to the organization, Gifts, contributions, and grants distin- nonprofit organization for a service from that

3) Whether a substantial proportion of the guished from gross receipts. In determining organization. Any payments received by the

organization’s initial funds are placed, or whether an organization normally receives more nonprofit organization (whether from the

will remain, in an endowment and whether than one-third of its support from permitted profit-making organization or from another nonthe investment of those funds is unlikely to sources, include all gifts, contributions, and profit) for similar services are primarily for the

result in more than one-third of its total grants received from permitted sources in the benefit of the payor and are therefore gross

support being received from gross invest- numerator of the support fraction in each tax receipts, rather than grants.

ment income and from unrelated business year. However, gross receipts from admissions, Research leading to the development of tansales of merchandise, performance of services, gible products for the use or benefit of a payor taxable income in excess of the tax imposed on that income, or furnishing facilities, in an activity that is not an generally will be treated as a service provided to

unrelated trade or business, are includible in the serve the direct and immediate needs of the

4) Whether an organization that carries on numerator of the support fraction in any tax year payor, while basic research or studies carried on fund-raising activities has developed a only to the extent that the amounts received in the physical or social sciences generally will concrete plan for solicitation of funds on a from any person or from any bureau or similar be treated as primarily to confer a direct benefit

community or area-wide basis, agency of a governmental unit are not more than upon the general public.

the greater of $5,000 or 1% of support. Medicare and Medicaid payments are gross 5) Whether an organization that carries on receipts from the exercise or performance of an community service activities has a con- Gifts and contributions. Any payment of exempt function. The individual patient, not a crete program to carry out its work in the money or transfer of property without adequate governmental unit, actually controls the ultimate community, consideration is considered a gift or contribution. recipient of these payments. Therefore, Medi6) Whether membership dues for individual When payment is made or property is trans- care and Medicaid receipts for services provided ferred as consideration for admissions, sales of (rather than institutional) members of an each patient are included as gross receipts to merchandise, performance of services, or fur- organization that carries on education or the extent they are not more than the greater of nishing facilities to the donor, the status of the other exempt activities for or on behalf of $5,000 or 1% of the organization’s total support

members have been fixed at rates de- payment or transfer under section 170(c) deter- for the tax year. mines whether and to what extent the payment signed to make membership available to a or transfer is a gift or contribution as distin- Membership fees distinguished from gross broad cross section of the public rather guished from gross receipts from related activi- receipts. The fact that a membership organi- than to restrict membership to a limited ties. zation provides services, admissions, facilities, number of persons, and The amount includible in computing support or merchandise to its members as part of its

7) Whether an organization that provides overall activities will not, in itself, result in the from gifts, grants, or contributions of property or

goods, services, or facilities is or will be use of property is the fair market or rental value classification of fees received from members as

required to make its services, facilities, of the property at the date of the gift or contribu- gross receipts subject to the $5,000 or 1% limit

performances, or products available (re- tion. rather than membership fees. However, if an

gardless of whether a fee is charged) to organization uses membership fees as a means

the general public, public charities, or gov- Example. P is a local agricultural club and is of selling admissions, merchandise, services, or

ernmental units rather than to a limited an organization described in section 501(c)(3). It the use of facilities to members of the general

number of persons or organizations. makes awards at its annual fair for outstanding public who have no common goal or interest

specimens of produce and livestock to en- (other than the desire to buy the admissions,

Reliance period. The reliance period for a courage interest and proficiency by young peo- merchandise, services, or use of facilities), the

ruling or determination letter begins with the ple in farming and raising livestock. Most of fees are not membership fees but are gross

these awards are cash or other property receipts. inception of the organization and ends 90 days

after the advance ruling period. The reliance donated by local businessmen. When the On the other hand, to the extent the basic

period will be extended until a final determina- awards are made, the donors are given recogni- purpose of the payment is to provide support for

tion for their donations by being identified as the the organization rather than to buy admissions, tion is made of the organization’s status only if

donor of the award. The recognition given to merchandise, services, or the use of facilities, the organization submits, within the 90-day pe- donors is merely incidental to the making of the the payment is a membership fee. riod, the necessary information to determine

whether it meets the requirements for a section award to worthy youngsters. For these reasons, Bureau defined. The term any bureau or the donations are contributions. The amount in- 509(a)(2) organization. similar agency of a governmental unit for cludible in computing support is equal to the However, this reliance period does not apply determining amounts subject to the $5,000 or cash contributed or the fair market value of other to the section 4940 excise tax on net investment 1% limit means a specialized operating unit of property on the dates contributed. income. Therefore, if it is later determined that the executive, judicial, or legislative branch of

the organization was a private foundation from Grants. Grants often contain certain terms government in which business is conducted

its inception, the tax on net investment income and conditions imposed by the grantor. Because under certain rules and regulations. Since the

will be due without regard to the ruling or deter- of the imposition of terms and conditions, the term bureau refers to a unit functioning at the

mination letter. frequent similarity of public purposes of grantor operating, as distinct from the policy-making,

Chapter 3 Section 501(c)(3) Organizations Page 39
level of government, it normally means a subdi- kind of funding ordinarily would indicate private Gross receipts from a related activity.

vision of a department of government. The term foundation status, but a section 509(a)(3) organ- When the charitable purpose of an organization

would not usually include those levels of govern- ization has limited purposes and activities and described in section 501(c)(3) is accomplished

ment that are basically policy-making or admin- gives up a significant degree of independence. through furnishing facilities for a rental fee or

istrative, such as the office of the Secretary or loans to a particular class of persons, such as The requirement in (2) above provides that a

Assistant Secretary of a department, but would aged, sick, or needy persons, the support re- supporting (section 509(a)(3)) organization

consist of the highest operational level under the ceived from those persons will be considered have one of three types of relationships with one

policy-making or administrative levels. gross receipts from a related exempt activity or more publicly- supported (section 509(a)(1) or

Amounts received from a unit functioning at rather than gross investment income or unre- 509(a)(2)) organizations. It must be: 

lated business taxable income. the policy-making or administrative level of government are treated as received from one bu- However, if the organization also furnishes 1) Operated, supervised, or controlled by a

reau or similar agency of the unit. Units of a facilities or loans to persons who are not mem- publicly-supported organization,

governmental agency above the operating level bers of a particular class and furnishing the 2) Supervised or controlled in connection with are combined and considered a separate bu- facilities or funds does not contribute importantly a publicly-supported organization, or reau for this purpose. Thus, an organization that to accomplishing the organization’s exempt purhas gross receipts from both a policy-making or poses, the support received from furnishing the 3) Operated in connection with one or more

administrative unit and an operational unit of a facilities or funds will be considered rents or publicly-supported organizations.

department will be treated as having gross re- interest and will be treated as gross investment More than one type of relationship may exist ceipts from two bureaus. For this purpose, the income or unrelated business taxable income. between a supporting organization and a Departments of Air Force, Army, and Navy are publicly-supported organization. Any relation- separate departments and each has its own Example. X, an organization described in ship, however, must insure that the supporting policy-making, administrative, and operating section 501(c)(3), is organized and operated to organization will be responsive to the needs or units. provide living facilities for needy widows of de- demands of, and will be an integral part of or ceased servicemen. X charges the widows a maintain a significant involvement in, the opera- Example 1. The Bureau for Africa and the small rental fee for the use of the facilities. Since tions of one or more publicly-supported organi- Bureau for Latin America are considered sepa- X is accomplishing its exempt purpose through zations. rate bureaus. Each is an operating unit under the rental of the facilities, the support received The first two relationships, operated, super- the Administrator of the Agency for International from the widows is considered gross receipts vised, or controlled by and supervised or Development, a policy-making official. If an or- from a related exempt activity. However, if X controlled in connection with, are based on ganization had gross receipts from both of these rents part of its facilities to persons having no an existence of majority control of the governing bureaus, the amount of gross receipts from each relationship to X’s exempt purpose, the support body of the supporting organization by the would be subject to the greater of $5,000 or the received from these rentals will be considered publicly-supported organization. They have the 1% limit. gross investment income or unrelated business same rules for meeting the tests under require- taxable income. ment (1) and are discussed as Category one in Example 2. A bureau is an operating unit the following discussion. The operated in con- under the administrative office of the Executive nection with relationship requires that the sup- Director. The subdivisions of the bureau are Section 509(a)(3) Organizations porting organization be responsive to and have Geographic Areas and Project Development Section 509(a)(3) excludes from the definition of operational relationships with publicly-sup- Staff. If an organization had gross receipts from private foundation those organizations that meet ported organizations. This third relationship has these subdivisions, the total gross receipts from all of the three following requirements. different rules for meeting the requirement (1) these subdivisions would be considered gross tests and is discussed separately as Category receipts from the same bureau and would be 1) The organization must be organized and at two, later. subject to the greater of $5,000 or the 1% limit. all times thereafter operated exclusively for

the benefit of, to perform the functions of, Category one. This category includes organi- Grants from public charities. For purposes or to carry out the purposes of one or more zations either operated, supervised, or con- of the one-third support test, grants received specified organizations (which can be ei- trolled by or supervised or controlled in from a section 509(a)(1) organization (public ther domestic or foreign) as described in connection with organizations described in charity) are generally includible in full in comput- section 509(a)(1) or 509(a)(2). These sec- section 509(a)(1) or 509(a)(2). ing the numerator of the support fraction for that tion 509(a)(1) and 509(a)(2) organizations These kinds of organizations have a govern- tax year. are commonly called publicly-supported ing body that either includes a majority of mem- However, if the amount received is consid- organizations. bers elected or appointed by one or more ered an indirect contribution from one of the publicly-supported organizations or that con- public charity’s donors, it will retain its character 2) The organization must be operated, super- sists of the same persons that control or manage as a contribution from the donor, and if, for vised, or controlled by or in connection the publicly-supported organizations. If an or- example, the donor is a substantial contributor with one or more of the organizations de- ganization is to qualify under this category, it to the ultimate recipient, the amount is excluded scribed in section 509(a)(1) or 509(a)(2). also must meet an organizational test, an opera- from the numerator of the support fraction. If a 3) The organization must not be controlled tional test, and not be controlled by disqualified public charity makes both an indirect contribu- directly or indirectly by disqualified persons persons. These requirements are covered later tion from its donor and an additional grant to the (defined later) other than foundation man- in this discussion. ultimate recipient, the indirect contribution is agers and other than one or more organi- treated as made first. Operated, supervised, or controlled by. zations described in section 509(a)(1) or An indirect contribution is one that is ex- Each of these terms, as used for supporting 509(a)(2). pressly or impliedly earmarked by the donor as organizations, presupposes a substantial debeing for, or for the benefit of, a particular recipi- Section 509(a)(3) differs from the other pro- gree of direction over the policies, programs,

ent rather than for a particular purpose. visions of section 509 that describe a and activities of a supporting organization by

publicly-supported organization. Instead of one or more publicly-supported organizations.

Method of accounting. An organization’s describing an organization that conducts a par- The relationship required under any one of

support is determined solely on the cash re- ticular kind of activity or that receives financial these terms is comparable to that of a parent

ceipts and disbursements method of account- support from the general public, section and subsidiary, in which the subsidiary is under

ing. For example, if a grantor makes a grant to 509(a)(3) describes organizations that have es- the direction of and is accountable or responsian organization payable over a term of years, tablished certain relationships in support of sec- ble to the parent organization. This relationship

the grant will be includible in the support fraction tion 509(a)(1) or 509(a)(2) organizations. Thus, is established when a majority of the officers,

of the grantee organization only when and to the an organization may qualify as other than a directors, or trustees of the supporting organizaextent amounts payable under the grant are private foundation even though it may be funded tion are appointed or elected by the governing

received by the grantee. by a single donor, family, or corporation. This body, members of the governing body, officers

Page 40 Chapter 3 Section 501(c)(3) Organizations
acting in their official capacity, or the member- ginning of the discussion of Section 509(a)(3) and because of this relationship, a subship of one or more publicly-supported organiza- Organizations. Therefore, an organization that stantial identity of interests has developed

tions. by the terms of its articles is formed for the between the organizations.

A supporting organization may be operated, benefit of one or more specified publicly-sup- If a supporting organization is operated, su- supervised, or controlled by one or more ported organizations will, if it otherwise meets pervised, or controlled by, or is supervised or publicly-supported organizations even though the other requirements, be considered to have controlled in connection with, one or more met the organizational test. its governing body is not made up of representa- publicly-supported organizations, it will not fail tives of the specified publicly-supported organi- For example, articles stating that an organi- the test of being organized for the benefit of zations for whose benefit it is operated. This zation is formed to perform the publishing func- specified organizations solely because its arti- occurs only if it can be demonstrated that the tions of a specified university are enough to cles: purposes of the publicly-supported organiza- comply with the organizational test. An organitions are carried out by benefiting the specified zation operated, supervised, or controlled by, or 1) Permit the substitution of one publicly-sup- publicly-supported organizations (discussed, supervised or controlled in connection with, one ported organization within a designated later, under Specified organizations). or more publicly-supported organizations to class for another publicly-supported organ- carry out the purposes of those organizations, Supervised or controlled in connection ization either in the same or a different will be considered to have met these require- with. The control or management of the sup- class designated in the articles, ments if the purposes set forth in its articles are porting organization must be vested in the same similar to but no broader than the purposes set 2) Permit the supporting organization to oper- persons that control or manage the publicly-sup- forth in the articles of its controlling organiza- ate for the benefit of new or additional

ported organization. In order for an organization tions. If, however, the organization by which it is publicly-supported organizations of the to be supervised or controlled in connection with operated, supervised, or controlled is a same or a different class designated in the a publicly-supported organization, common su- publicly-supported section 501(c)(4), 501(c)(5), articles, or pervision or control by the persons supervising or 501(c)(6) organization, the supporting organi- or controlling both organizations must exist to 3) Permit the supporting organization to vary zation will be considered to have met these insure that the supporting organization will be the amount of its support among different requirements if its articles require it to carry on responsive to the needs and requirements of the publicly-supported organizations within the charitable, etc., activities within the meaning of publicly-supported organization. class or classes of organizations desig- section 170(c)(2). An organization will not be considered super- nated by the articles.

Limits. An organization is not organized ex- vised or controlled in connection with one or See also the rules considered under the Organi- more publicly-supported organizations if it clusively for the purposes specified in require- zational test, in the later discussion for organiza- merely makes payments (mandatory or discre- ment (1) if its articles expressly permit it to tions in Category two. operate, to support, or to benefit any organiza- tionary) to the publicly-supported organizations. tion other than the specified publicly-supported Operational test — permissible beneficia- This is true even if the obligation to make payments is legally enforceable and the organizations. It will not meet the organizational ries. A supporting organization will be retest even though the actual operations of the garded as operated exclusively to support one organization’s governing instrument contains organization have been exclusively for the bene- or more specified publicly-supported organiza- provisions requiring the distribution. These ar- fit of the specified publicly-supported organiza- tions only if it engages solely in activities that rangements do not provide a sufficient connec- tions. support or benefit the specified organizations. tion between the payor organization and the These activities may include making payments needs and requirements of the publicly-sup- Specified organizations. In order to meet to or for the use of, or providing services or ported organizations to constitute supervision or requirement (1), an organization must be organ- facilities for, individual members of the charita- control in connection with the organizations. ized and operated exclusively to support or ben- ble class benefited by the specified publicly-sup- efit one or more specified publicly-supported Organizational and operational tests. To ported organization. organizations. The manner in which the qualify as a section 509(a)(3) organization (sup- For example, a supporting organization may publicly-supported organizations must be speci- porting organization), the organization must be make a payment indirectly through another un- fied in the articles will depend on whether the both organized and operated exclusively for related organization to a member of a charitable supporting organization is operated, super- the purposes set out in requirement (1) at the class benefited by a specified publicly-sup- vised, or controlled by or supervised or con- beginning of this section. If an organization fails ported organization, but only if the payment is a trolled in connection with the organizations or to meet either the organizational or the opera- grant to an individual rather than a grant to an whether it is operated in connection with the

tional test, it cannot qualify as a supporting or- organization. Similarly, an organization will be organizations. ganization. regarded as operated exclusively to support or Generally, the articles of the supporting or- benefit one or more specified publicly-supported Organizational test. An organization is or- ganization must designate each of the specified organizations if it supports or benefits a section ganized exclusively for one or more of the pur- organizations by name, unless: 501(c)(3) organization, other than a private poses specified in requirement (1) only if its 1) The supporting organization is operated, foundation, that is operated, supervised, or con- articles of organization: supervised, or controlled by or super- trolled directly by or in connection with a

vised or controlled in connection with publicly-supported organization, or an organiza- 1) Limit the purposes of the organization to one or more publicly-supported organiza- tion that is a publicly-owned college or univer- one or more of those purposes, tions and the articles of organization of the sity. However, an organization will not be

2) Do not expressly empower the organiza- supporting organization require that it be regarded as one that is operated exclusively to

tion to engage in activities that are not in operated to support or benefit one or more support or benefit a publicly-supported organifurtherance of those purposes, beneficiary organizations that are desig- zation if any part of its activities is in furtherance

nated by class or purpose and include: of a purpose other than supporting or benefiting 3) Specify (as explained, later, under Speci- one or more specified publicly-supported orga- fied organizations ) the publicly-supported a) The publicly-supported organizations nizations. organizations on whose behalf the organi- referred to above (without designating zation is operated, and Operational test — permissible activities. the organizations by name), or A supporting organization does not have to pay 4) Do not expressly empower the organiza- b) Publicly-supported organizations that its income to the publicly-supported organiza- tion to operate to support or benefit any are closely related in purpose or func- tions to meet the operational test. It may satisfy organization other than the ones specified tion to those publicly-supported organi- the test by using its income to carry on an inde- in item (3). zations, or pendent activity or program that supports or

In meeting the organizational test, the benefits the specified publicly-supported organiorganization’s purposes as stated in its articles 2) A historic and continuing relationship ex- zations. All such support, however, must be limmay be as broad as, or more specific than, the ists between the supporting organization ited to permissible beneficiaries described

purposes set forth in requirement (1) at the be- and the publicly-supported organizations, earlier. The supporting organization also may

Chapter 3 Section 501(c)(3) Organizations Page 41
engage in fund-raising activities, such as solici- under Proof of independent control, next, a sup- publicly-supported organizations and it is opertations, fund-raising dinners, and unrelated porting organization will be considered to be ated in connection with that type of organizatrade or business, to raise funds for the controlled directly or indirectly by one or more tion or organizations, then, its articles of

publicly-supported organizations or for the per- disqualified persons if the voting power of those organization must designate the specified orgamissible beneficiaries. persons is 50% or more of the total voting power nizations by name to satisfy the test. But a supof the organization’s governing body, or if one or porting organization that has one or more

Absence of control by disqualified persons. more of those persons have the right to exercise specified organizations designated by name in

The third requirement an organization must veto power over the actions of the organization. its articles will not fail the organizational test meet to qualify as a supporting organization Thus, if the governing body of a foundation is solely because its articles: requires that the organization not be controlled composed of five trustees, none of whom has a

directly or indirectly by one or more disqualified veto power over the actions of the foundation, 1) Permit a publicly-supported organization,

persons (other than foundation managers or one and no more than two trustees are at any time that is designated by class or purpose

or more publicly-supported organizations). disqualified persons, the foundation is not con- rather than by name, to be substituted for

sidered controlled directly or indirectly by one or the publicly-supported organization or or- Disqualified persons. For the purposes of more disqualified persons by reason of this fact ganizations designated by name in the ar- the rules discussed in this publication, the fol- alone. However, all pertinent facts and circum- ticles, but only if the substitution is lowing persons are considered disqualified per- stances (including the nature, diversity, and in- conditioned upon the occurrence of an sons: come yield of an organization’s holdings, the event that is beyond the control of the sup1) All substantial contributors to the founda- length of time particular stocks, securities, or porting organization, such as loss of exother assets are retained, and its manner of emption, substantial failure or tion.

exercising its voting rights with respect to stocks abandonment of operations, or dissolution 2) All foundation managers of the foundation. in which members of its governing body also of the organization or organizations desig3) An owner of more than 20% of: have some interest) are considered in determin- nated in the articles,

ing whether a disqualified person does in fact 2) Permit the supporting organization to oper- a) The total combined voting power of a indirectly control an organization. ate for the benefit of an organization that is corporation that is (during such owner- Proof of independent control. An organi- not a publicly-supported organization, but ship) a substantial contributor to the zation is permitted to establish to the satisfaction only if the supporting organization is cur- foundation, of the IRS that disqualified persons do not di- rently operating for the benefit of a

b) The profits interest of a partnership that rectly or indirectly control it. For example, in the publicly-supported organization and the is (during such ownership) a substantial case of a religious organization operated in con- possibility of its operating for the benefit of contributor to the foundation, or nection with a church, the fact that the majority other than a publicly-supported organizaof the organization’s governing body is com- tion is remote, or c) The beneficial interest of a trust or unin- posed of lay persons who are substantial con- corporated enterprise that is (during 3) Permit the supporting organization to vary tributors to the organization will not disqualify such ownership) a substantial contribu- the amount of its support between different the organization under section 509(a)(3) if a tor to the foundation. designated organizations, as long as it representative of the church, such as a bishop or meets the requirements of the integral-part other official, has control over the policies and 4) A member of the family of any of the indi- test (discussed later) with respect to at decisions of the organization. viduals just listed. least one beneficiary organization.

5) A corporation of which more than 35% of Category two. This category includes organi- If the beneficiary organization referred to in the total combined voting power is owned zations operated in connection with one or (2) is not a publicly-supported organization, the by persons just listed. more organizations described in section supporting organization will not meet the opera- 509(a)(1) or 509(a)(2). 6) A partnership of which more than 35% of tional test. Therefore, if a supporting organiza- This kind of section 509(a)(3) organization is the profits interest is owned by persons tion substituted a beneficiary other than a one that has certain types of operational rela- described in (1), (2), (3), or (4). publicly-supported organization and operated in tionships. If an organization is to qualify as a support of that beneficiary, the supporting or- 7) A trust, or estate, of which more than 35% section 509(a)(3) organization because it is op- ganization would not be one described in sec- of the beneficial interest is owned by per- erated in connection with one or more tion 509(a)(3). sons described in (1), (2), (3), or (4). publicly-supported organizations, it must not be

controlled by disqualified persons (as described Method two. If a historic and continuing re- Remember, however, that foundation manag- earlier) and it must meet an organizational test, lationship exists between the supporting organi- ers and publicly-supported organizations are a responsiveness test, an integral-part test, and zation and the publicly-supported organizations, not disqualified persons for purposes of the an operational test. and because of this relationship, a substantial third requirement under section 509(a)(3). identity of interests has developed between the If a person who is a disqualified person with Organizational test. This test requires that organizations, then the articles of organization respect to a supporting organization, such as a the organization, in its governing instrument: will not have to designate the specified organi- substantial contributor, is appointed or desig- zation by name. nated as a foundation manager of the support- 1) Limit its purposes to supporting one or

ing organization by a publicly-supported more publicly-supported organizations, Responsiveness test. An organization will beneficiary organization to serve as the repre- meet this test if it is responsive to the needs or 2) Designate the organizations operated, su- sentative of the publicly-supported organization, demands of the publicly-supported organiza- pervised, or controlled by, and that person is still a disqualified person, rather tions. To meet this test, either of the following than a representative of the publicly-supported 3) Not have express powers inconsistent with must be satisfied. 

organization. these purposes.

An organization is considered controlled for 1) The publicly-supported organizations must These tests apply to all supporting organiza- this purpose if the disqualified persons, by com- elect, appoint, or maintain a close and tions. bining their votes or positions of authority, may continuous working relationship with the In the case of an organization that is oper- require the organization to perform any act that officers, directors, or trustees of the sup- ated in connection with one or more significantly affects its operations or may pre- porting organization. (Consequently, the publicly-supported organizations, however, the vent the organization from performing the act. officers, directors, or trustees of the designation requirement under the organiza- This includes, but is not limited to, the right of publicly-supported organizations have a tional test can be satisfied using either of the any substantial contributor or spouse to desig- significant voice in the investment policies following two methods. nate annually the recipients from among the of the supporting organization, the timing

publicly-supported organizations of the income Method one. If an organization is organized of grants and the manner of making them,

from his or her contribution. Except as explained and operated to support one or more the selection of recipients, and generally

Page 42 Chapter 3 Section 501(c)(3) Organizations
the use of the income or assets of the All factors, including the number of beneficia- conducted by an organization with which the

supporting organization.), or ries, the length and nature of the relationship supporting organization has established an hisbetween the beneficiary and supporting organi- toric and continuing relationship. 2) The supporting organization is a charitable zation, and the purpose to which the funds are An organization operated in conjunction with trust under state law, each specified put, will be considered in determining whether a social welfare organization, labor or agricul- publicly-supported organization is a named the amount of support received by a tural organization, business league, chamber of beneficiary under the trust’s governing in- publicly-supported beneficiary organization is commerce, or other organization described in strument, and the beneficiary organization large enough to insure the attentiveness of the section 501(c)(4), 501(c)(5), or 501(c)(6), may has the power to enforce the trust and organization to the operations of the supporting qualify as a supporting organization under sec- compel an accounting under state law. organization. tion 509(a)(3) and therefore not be classified as

Normally, the attentiveness of a beneficiary a private foundation if both the following condiorganization is motivated by the amounts re- tions are met. Integral-part test. The organization will meet

ceived from the supporting organization. Thus, this test if it maintains a significant involvement 1) The supporting organization must meet all the more substantial the amount involved, in in the operations of one or more publicly-sup- the requirements previously specified (the terms of a percentage of the publicly-supported ported organizations and these organizations organizational tests, the operational test, organization’s total support, the greater the like- are in turn dependent upon the supporting or- and the requirement that it be operated, lihood that the required degree of attentiveness ganization for the type of support that it provides. supervised, or controlled by or in connec- will be present. However, in determining To meet this test, either of the following must be tion with one or more specified organiza- whether the amount received from the support- satisfied. tions, and not be controlled by disqualified ing organization is large enough to insure the persons). attentiveness of the beneficiary organization to 1) The activities engaged in for, or on behalf

of, the publicly-supported organizations the operations of the supporting organization 2) The section 501(c)(4), 501(c)(5), or

are activities to perform the functions of or (including attentiveness to the nature and yield 501(c)(6) organization would be described

of the supporting organization’s investments), to carry out the purposes of the organiza- in section 509(a)(2) if it was a charitable

tions, and, but for the involvement of the evidence of actual attentiveness by the benefi- organization described in section

supporting organization, would normally be ciary organization is of almost equal importance. 501(c)(3). This provision allows separate

engaged in by the publicly-supported orga- Imposing this requirement is merely one of charitable funds of certain noncharitable

nizations themselves, or the factors in determining whether a supporting organizations to be described in section

organization is complying with the attentiveness 509(a)(3) if the noncharitable organiza- 2) The supporting organization makes pay- test. The absence of this requirement will not tions receive their support and otherwise ments of substantially all of its income to, preclude an organization from classification as a operate in the manner specified by section or for the use of, publicly-supported orga- supporting organization if it complies with the 509(a)(2). nizations, and the amount of support re- other factors.

ceived by one or more of these However, when none of the beneficiary orga- Special rules of attribution. To determine publicly-supported organizations is enough nizations are dependent upon the supporting whether an organization meets the to insure the attentiveness of these organi- organization for a large enough amount of their not-more-than-one-third support test in section zations to the operations of the supporting support, the requirements of item (2) of the 509(a)(2), amounts received by the organization organization. integral-part test will not be satisfied, even from an organization that seeks to be a section though the beneficiary organizations have en- If item (2) is being relied on, a substantial 509(a)(3) organization because of its support of forceable rights against the supporting organi- amount of the total support of the supporting the organization are gross investment income zation under state law. organization also must go to those publicly-sup- (rather than gifts or contributions) to the extent If an organization cannot meet the require- ported organizations that meet the attentiveness they are gross investment income of the distrib- ments of item (2) of the integral-part test for its requirement with respect to the supporting or- uting organization. (This rule also applies to current tax year solely because the amount re- ganization. Except as explained in the next par- amounts received from a charitable trust, corpoagraph, the amount of support received by a ceived by one or more of the beneficiaries from ration, fund, association, or similar organization the supporting organization is no longer large publicly-supported organization must represent that is required by its governing instrument or enough, it can still qualify under the integral-part a large enough part of the organization’s total otherwise to distribute, or that normally does test if it can establish that it has met the require- support to insure such attentiveness. In applying distribute, at least 25% of its adjusted net in- ments of item (2) of the integral-part test for any this, if the supporting organization makes pay- come to the organization, and whose distribution 5-year period and that there has been an historic ments to, or for the use of, a particular depart- normally comprises at least 5% of its adjusted and continuing relationship of support between ment or school of a university, hospital, or net income.) All income that is gross investment the organizations between the end of the 5-year church, the total support of the department or income of the distributing organization will be period and the tax year in question. considered distributed first by that organization. school must be substituted for the total support If the supporting organization makes distribu- of the beneficiary organization. Operational test. The requirements for meet- tions to more than one organization, the amount Even when the amount of support received ing the operational test for organizations oper- of gross investment income considered distrib- by a publicly-supported beneficiary organization ated, supervised, or controlled by uted will be prorated among the distributees. does not represent a large enough part of the publicly-supported organizations (discussed Also, treat amounts paid by an organization beneficiary organization’s total support, the earlier, under Qualifying As Publicly Supported) to provide goods, services, or facilities for the amount of support received from a supporting have limited applicability to organizations oper- direct benefit of an organization seeking section organization may be large enough to meet the ated in connection with one or more 509(a)(2) status (rather than for the direct bene- requirements of item (2) of the integral-part test publicly-supported organizations. This is be- fit of the general public) in the same manner as if it can be demonstrated that, in order to avoid cause the operational requirements of the amounts received by the latter organization. the interruption of a particular function or activ- integral-part test, just discussed, generally are These amounts will be treated as gross invest- ity, the beneficiary organization will be suffi- more specific than the general rules found for ment income to the extent they are gross invest- ciently attentive to the operations of the the operational test in the preceding category. ment income of the organization spending the supporting organization. This may occur when However, a supporting organization can fail both amounts. An organization seeking section either the supporting organization or the benefi- the integral-part test and the operational test if it 509(a)(2) status must file a separate statement ciary organization earmarks the support re- conducts activities of its own that do not consti- with its annual information return, Form 990 or ceived from the supporting organization for a tute activities or programs that would, but for the 990–EZ, listing all amounts received from sup- particular program or activity, even if the pro- supporting organization, have been conducted porting organizations. gram or activity is not the beneficiary by any publicly-supported organization named

organization’s primary program or activity, as in the supporting organization’s governing in- Relationships created for avoidance purlong as the program or activity is a substantial strument. A similar result occurs for such activi- poses. If a relationship between an organizaone. ties or programs that would not have been tion seeking section 509(a)(3) status and an

Chapter 3 Section 501(c)(3) Organizations Page 43
organization seeking section 509(a)(2) status is supporting organization will not be considered to from merely making grants to other organizaestablished or used to avoid classification as a tions for these purposes. be operated exclusively to support or benefit

private foundation with respect to either organi- one or more section 509(a)(1) or 509(a)(2) orga- Most of the restrictions and requirements

zation, then the character and amount of sup- nizations and therefore would not qualify for that apply to private foundations also apply to

port received by the section 509(a)(3) section 509(a)(3) status. private operating foundations. However, there

organization will be attributed to the section are advantages to being classified as a private

509(a)(2) organization for purposes of determin- Classification under section 509(a). If an or- operating foundation. For example, a private

ing whether the latter meets the support tests ganization is described in section 509(a)(1), and operating foundation (as compared to a private

under section 509(a)(2). If this type of relation- is also described in either section 509(a)(2) or foundation) can be the recipient of grants from a

ship is established or used between an organi- 509(a)(3), it will be treated as a section 509(a)(1) private foundation without having to distribute

zation seeking 509(a)(3) status and two or more organization. the funds received currently within 1 year, and

organizations seeking 509(a)(2) status, the the funds nevertheless may be treated as qualiamount and character of support received by the Reliance by grantors and contributors. fying distributions by the donating private founformer organization will be prorated among the Once an organization has received a final ruling dation; charitable contributions to a private

latter organizations. or determination letter classifying it as an organi- operating foundation qualify for a higher charitaIn determining whether a relationship exists zation described in section 509(a)(1), 509(a)(2), ble deduction limit on the donor’s tax return; and

between an organization seeking 509(a)(3) sta- or 509(a)(3), the treatment of grants and contri- the excise tax on net investment income does

tus (supporting organization) and one or more butions and the status of grantors and contribu- not apply to an exempt operating foundation.

organizations seeking 509(a)(2) status (benefi- tors to the organization will generally not be ciary organizations) for the purpose of avoiding Private operating foundation means any pri- affected by reason of a later revocation by the private foundation status, all pertinent facts and vate foundation that meets the assets test, the IRS of the organization’s classification until the circumstances will be taken into account. The support test, or the endowment test, and makes date on which notice of change of status is made following facts may be used as evidence that qualifying distributions directly, for the active to the public (generally by publication in the such a relationship was not established or conduct of its activities for which it was organ- Internal Revenue Bulletin) or another applicable availed of to avoid classification as a private ized, of substantially all (85% or more) of the date, if any, specified in the public notice. In foundation. lesser of its: appropriate cases, however, the treatment of

grants and contributions and the status of grant- 1) The supporting organization is operated to 1) Adjusted net income, or ors and contributors to an organization de- support or benefit several specified benefi- scribed in section 509(a)(1), 509(a)(2), or 2) Minimum investment return. ciary organizations. 509(a)(3) may be affected pending verification 2) The beneficiary organization has a sub- of the continued classification of the organiza- Assets test. A private foundation will meet

stantial number of dues-paying members the assets test if substantially more than half tion. Notice to this effect will be made in a public who have an effective voice in the man- announcement by the IRS. In these cases, the (65% or more) of its assets are: 

agement of both the supporting and the effect of grants and contributions made after the beneficiary organizations. 1) Devoted directly to the active conduct of its date of the announcement will depend on the exempt activity, to a functionally related 3) The beneficiary organization is composed statutory qualification of the organization as an business, or to a combination of the two, of several membership organizations, organization described in section 509(a)(1),

each of which has a substantial number of 2) Stock of a corporation that is controlled by 509(a)(2), or 509(a)(3).

members, and the membership organiza- the foundation (by ownership of at least The preceding paragraph shall not ap- tions have an effective voice in the man- 80% of the total voting power of all classes ply if the grantor or contributor: agement of the supporting and beneficiary of stock entitled to vote and at least 80% CAUTION

!

organizations. of the total shares of all other classes of

1) Had knowledge of the revocation of the stock) and substantially all (at least 85%) 4) The beneficiary organization receives a ruling or determination letter classifying the assets of which are devoted as pro- substantial amount of support from the the organization as an organization de- vided above, or general public, public charities, or govern- scribed in section 509(a)(1), 509(a)(2), mental grants. 3) Any combination of (1) and (2). or 509(a)(3), or

5) The supporting organization uses its funds This test is intended to apply to organizations 2) Was in part responsible for, or was to carry on a meaningful program of activi- such as museums and libraries. aware of, the act, the failure to act, or ties to support or benefit the beneficiary Support test. A private foundation will meet the substantial and material change on organization and, if the supporting organi- the support test if: the part of the organization that gave zation were a private foundation, this use rise to the revocation. would be sufficient to avoid the imposition 1) Substantially all (at least 85%) of its sup- of the tax on failure to distribute income. port (other than gross investment income)

6) The operations of the beneficiary and sup- is normally received from the general pubporting organizations are managed by dif- Section 509(a)(4) Organizations lic and five or more unrelated exempt organizations, ferent persons, and each organization Section 509(a)(4) excludes from classification performs a different function. as private foundations those organizations that 2) Not more than 25% of its support (other

7) The supporting organization is not able to qualify under section 501(c)(3) as organized and than gross investment income) is normally

exercise substantial control or influence operated for the purpose of testing products received from any one exempt organizaover the beneficiary organization because for public safety. Generally, these organiza- tion, and

the beneficiary organization receives sup- tions test consumer products to determine their 3) Not more than 50% of its support is nor- port or holds assets that are disproportion- acceptability for use by the general public. mally received from gross investment in- ately large in comparison with the support come. received or assets held by the supporting Private Operating organization. This test is intended to apply to special-purpose Foundations foundations, such as learned societies and associations of libraries. Effect on 509(a)(3) organizations. If a bene- Some private foundations qualify as private opficiary organization fails to meet either of the erating foundations. These are types of private Endowment test. A foundation will meet

support tests of section 509(a)(2) due to these the endowment test if it normally makes qualify- foundations that, although lacking general pubprovisions, and the beneficiary organization is ing distributions directly for the active conduct of lic support, make qualifying distributions dione for whose support the organization seeking its exempt function of at least two-thirds of its rectly for the active conduct of their educational,

section 509(a)(3) status is operated, then the minimum investment return. charitable, and religious purposes, as distinct

Page 44 Chapter 3 Section 501(c)(3) Organizations
The minimum investment return for any Expenditures To Influence Legislation, to make • Lobbying expenditures that are more private foundation for any tax year is 5% of the the election. The form must be signed and post- than 150% of the lobbying nontaxable excess of the total fair market value of all assets marked within the first tax year to which it ap- amount for the organization for each tax of the foundation (other than those used directly plies. If the form is used to revoke the election, it year, or in the active conduct of its exempt purpose) over must be signed and postmarked before the first

the amount of indebtedness incurred to acquire day of the tax year to which it applies. • Normally makes grass roots expendithose assets. Eligible section 501(c)(3) organizations that tures that are more than 150% of the

In determining whether the amount of quali- have made the election to be subject to the limits grass roots nontaxable amount for the

fying distributions is at least two-thirds of the on lobbying expenditures must use Part VI – A organization for each tax year.

organization’s minimum investment return, the of Schedule A (Form 990) to figure these limits. See Tax on excess expenditures to influence organization is not required to trace the source legislation, later, in this section. of the expenditures to determine whether they Attempting to influence legislation. Atwere derived from investment income or from tempting to influence legislation, for this pur- Lobbying expenditures. These are any

contributions. pose, means: expenditures that are made for the purpose of This test is intended to apply to organizations attempting to influence legislation, as discussed such as research organizations that actively 1) Any attempt to influence any legislation earlier under Attempting to influence legislation. conduct charitable activities but whose personal through an effort to affect the opinions of

Grass roots expenditures. This term re- services are so great in relationship to charitable the general public or any segment thereof

assets that the cost of those services cannot be (grass roots lobbying), and fers only to those lobbying expenditures that are

met out of small endowments. made to influence legislation by attempting to 2) Any attempt to influence any legislation affect the opinions of the general public or any Exempt operating foundations. The ex- through communication with any member segment thereof. cise tax on net investment income does not or employee of a legislative body or with

apply to an exempt operating foundation. An any government official or employee who Lobbying nontaxable amount. The lobbyexempt operating foundation for the tax year is may participate in the formulation of legis- ing nontaxable amount for any organization for

any private foundation that: any tax year is the lesser of $1,000,000 or: lation (direct lobbying).

1) Is an operating foundation, as described However, the term attempting to influence 1) 20% of the exempt purpose expendipreviously, legislation does not include the following activi- tures if the exempt purpose expenditures ties. are not over $500,000, 2) Has been publicly supported for at least 10

tax years or was an operating foundation 1) Making available the results of nonpartisan 2) $100,000 plus 15% of the excess of the

on January 1, 1983, or for its last taxable analysis, study, or research. exempt purpose expenditures over

year ending before January 1, 1983, $500,000 if the exempt purpose expendi- 2) Examining and discussing broad social, tures are over $500,000 but not over 3) Has a governing body that, at all times economic, and similar problems. $1,000,000, during the tax year, is broadly representa- 3) Providing technical advice or assistance tive of the general public and consists of 3) $175,000 plus 10% of the excess of the (where the advice would otherwise consti- individuals no more than 25% of whom are exempt purpose expenditures over tute the influencing of legislation) to a gov- disqualified individuals, and $1,000,000 if the exempt purpose expendi- ernmental body or to a committee or other

4) Does not have any officer, at any time dur- tures are over $1,000,000 but not over subdivision thereof in response to a written $1,500,000, or ing the tax year, who is a disqualified indi- request by that body or subdivision.

vidual. 4) $225,000 plus 5% of the excess of the 4) Appearing before, or communicating with,

The foundation must obtain a ruling letter from exempt purpose expenditures over any legislative body about a possible deci- $1,500,000 if the exempt purpose expendi- the IRS recognizing this special status. sion of that body that might affect the exis- tures are over $1,500,000. tence of the organization, its powers and New organization. If you are applying for rec- duties, its tax-exempt status, or the deduc- The term exempt purpose expenditures ognition of exemption as an organization de- tion of contributions to the organization. means the total of the amounts paid or incurred scribed in section 501(c)(3) and you wish to (including depreciation and amortization, but not establish that your organization is a private op- 5) Communicating with a government official capital expenditures) by an organization for the erating foundation, you should complete Sched- or employee, other than: tax year to accomplish its exempt purposes. In ule E of your exemption application (Form a) A communication with a member or addition, it includes: 1023). employee of a legislative body (when

the communication would otherwise 1) Administrative expenses paid or incurred

constitute the influencing of legislation), for the organization’s exempt purposes,

or and Lobbying Expenditures b) A communication with the principal pur- 2) Amounts paid or incurred for the purpose

In general, if a substantial part of the activities of pose of influencing legislation. of influencing legislation, whether or not

your organization consists of carrying on propa- the legislation promotes the organization’s

ganda or otherwise attempting to influence Also excluded are communications between an exempt purposes.

legislation, your organization’s exemption from organization and its bona fide members about Exempt purpose expenditures do not include federal income tax will be denied. However, a legislation or proposed legislation of direct in- amounts paid or incurred to or for: public charity (other than a church, an integrated terest to the organization and the members,

auxiliary of a church or of a convention or asso- unless these communications directly en- 1) A separate fund-raising unit of the organi- ciation of churches, or a member of an affiliated courage the members to attempt to influence zation, or

group of organizations that includes a church, legislation or directly encourage the members

to urge nonmembers to attempt to influence 2) One or more other organizations, if the etc.) may avoid this result. Such a charity can amounts are paid or incurred primarily for elect to replace the substantial part of activities legislation, as explained earlier.

fund-raising. test with a limit defined in terms of expenditures

for influencing legislation. Private foundations Lobbying expenditures limits. If a public

cannot make this election. charitable organization makes the election to be Grass roots nontaxable amount. The

subject to the lobbying expenditures limits rules grass roots nontaxable amount for any organiMaking the election. Use Form 5768, Elec- (instead of the substantial part of activities test), zation for any tax year is 25% of the lobbying

tion/Revocation of Election By an Eligible Sec- it will not lose its tax-exempt status under sec- nontaxable amount for the organization for that

tion 501(c)(3) Organization To Make tion 501(c)(3), unless it normally makes: tax year.

Chapter 3 Section 501(c)(3) Organizations Page 45
Years for which election is effective. Once 2) The amount by which the grass roots ex- due to reasonable cause. A second tax of 50%

an organization elects to come under these pro- penditures made by the organization dur- of the expenditures (up to $10,000 for each

visions, the election will be in effect for all tax ing the tax year are more than the grass expenditure) is imposed on a manager if he or

years that end after the date of the election and roots nontaxable amount for the organiza- she refuses to agree to a correction of the exbegin before the organization revokes this elec- tion for that tax year. penditures that resulted in the imposition of the

tion. initial (first-tier) tax. For purposes of these taxes, Eligible organizations that have made the elec- an organization manager is generally an officer, tion to be subject to the limits on lobbying expen- Note. These elective provisions for lobbying director, trustee, or any employee having au- ditures and that owe the tax on excess lobbying activities by public charities do not apply to a thority or responsibility concerning the expenditures (as computed in Part VI – A of church, an integrated auxiliary of a church or of a organization’s political expenditures. These Schedule A (Form 990)) must file Form 4720, convention or association of churches, or a taxes must be paid by the manager of the organ- member of an affiliated group of organizations Return of Certain Excise Taxes on Charities and

ization. Other Persons Under Chapters 41 and 42 of the that includes a church, etc., or a private foundation. Moreover, these provisions will not apply to Internal Revenue Code, to report and pay the Political expenditures. Generally, political

any organization for which an election is not in tax. expenditures that will trigger these taxes are

effect. amounts paid or incurred by a section 501(c)(3) Organization that no longer qualifies. An

organization in any participation or intervention organization that no longer qualifies for exemp- Expenditures of affiliated organizations. If in any political campaign for or against any can- tion under section 501(c)(3) because of sub- two or more section 501(c)(3) organizations are didate for public office. Political expenditures stantial lobbying activities will not at any time members of an affiliated group of organizations include publication or distribution of statements thereafter be treated as an organization de- and at least one of these organizations has for these purposes. Political expenditures also scribed in section 501(c)(4). This provision, made the election regarding the treatment of include certain expenditures by organizations however, does not apply to certain organizations certain lobbying expenditures, then the determi- that are formed primarily to promote the candi- (churches, etc.) that cannot make the election nation as to whether excess lobbying expendi- dacy (or prospective candidacy) of an individual discussed earlier. tures have been made and the determination as for public office and by organizations that are to whether the expenditure limits, described ear- Tax on disqualifying lobbying expenditures. effectively controlled by a candidate and are lier, have been exceeded by more than 150% The law imposes a tax on certain organizations if used primarily to promote that candidate. will be made as though the affiliated group is one

organization. they no longer qualify under section 501(c)(3) by Correction of expenditure. A correction of

reason of having made disqualifying lobbying If the group has excess lobbying expendi- a political expenditure is the recovery, if possi- expenditures. An additional tax may be imposed tures, each organization for which the election is ble, of all or part of the expenditure and the on the managers of those organizations. effective for the year will be treated as an organi- establishment of safeguards to prevent future

zation that has excess lobbying expenditures in Tax on organization. Organizations that political expenditures.

an amount that equals the organization’s pro- lose their exemption under section 501(c)(3)

portionate share of the group’s excess lobbying due to lobbying activities generally will be sub- Status after loss of exemption for lobbying

expenditures. Further, if the expenditure limits, ject to an excise tax of 5% of the lobbying expen- or political activities. As explained earlier, an

described in this section, are exceeded by more ditures. The tax does not apply to private organization can lose its tax-exempt status

than 150%, each organization for which the foundations. Also, the tax does not apply to under section 501(c)(3) of the Code because of

election is effective for that year will lose its organizations that have elected the lobbying lim- lobbying activities or participation or intervention

tax-exempt status under section 501(c)(3). its of section 501(h) or to churches or church-re- in a political campaign on behalf of or in opposiTwo organizations will be considered mem- lated organizations that cannot elect these tion to a candidate for public office. If this hapbers of an affiliated group of organizations if: limits. This tax must be paid by the organization. pens to an organization, it cannot later qualify for

exemption under section 501(c)(4) of the Code. 1) The governing instrument of one of the Tax on managers. Managers may also be

organizations requires it to be bound by liable for a 5% tax on the lobbying expenditures

decisions of the other organization on leg- that result in the disqualification of the organizaislative issues, or tion. For the tax to apply, a manager would have

to agree to the expenditures knowing that the 2) The governing board of one of the organi- expenditures were likely to result in the zations includes persons who: organization’s not being described in section 4.

a) Are specifically designated representa- 501(c)(3). No tax will be imposed if the

tives of the other organization or are manager’s agreement is not willful and is due to

members of the governing board, of- reasonable cause.

ficers, or paid executive staff members Other Section

of the other organization, and Excise taxes on political expenditures. The

law imposes an excise tax on the political expen- b) Have enough voting power to cause or ditures of section 501(c)(3) organizations. A 501(c) prevent action on legislative issues by two-tier tax is imposed on both the organizations the controlled organization by combin- and the managers of those organizations. ing their votes. Organizations Taxes on organizations. An initial tax of

10% of certain political expenditures is imposed

Tax on excess expenditures to influence on a charitable organization. A second tax of

legislation. If an election for a tax year is in 100% of the expenditure is imposed if the politi- Introduction

effect for an organization and that organization cal expenditure that resulted in the imposition of This chapter contains specific information for exceeds the lobbying expenditures limits, an the initial (first-tier) tax is not corrected within a certain organizations described in section excise tax of 25% of the excess lobbying expen- specified period. These taxes must be paid by 501(c), other than those organizations that are ditures for the tax year will be imposed. Excess the organization. described in section 501(c)(3). Section lobbying expenditures for a tax year, in this Taxes on managers. An initial tax of 21

/2% 501(c)(3) organizations are covered in chapter 3 case, means the greater of: of the amount of certain political expenditures of this publication.

1) The amount by which the lobbying expen- (up to $5,000 for each expenditure) is imposed The Table of Contents at the beginning of

ditures made by the organization during on a manager of an organization who agrees to this publication, as well as the Organization Refthe tax year are more than the lobbying such expenditures knowing that they are politi- erence Chart, may help you locate at a glance

nontaxable amount for the organization for cal expenditures. No tax will be imposed if the the type of organization discussed in this chapthat tax year, or manager’s agreement was not willful and was ter.

Page 46 Chapter 4 Other Section 501(c) Organizations
Social activity. If social activities will be the owns and maintains are open to the general

primary purpose of your organization, you public and not just its own members. It also must 501(c)(4) — should not file an application for exemption as a show that it does not engage in exterior mainteCivic Leagues and social welfare organization but should file for nance of private homes.

exemption as a social club described in section A homeowners’ association that is not exSocial Welfare 501(c)(7). empt under section 501(c)(4) and that is a condominium management association, a Retirement benefit program. An organiza- Organizations residential real estate management association, tion established by its members that has as its or a timeshare association generally may elect primary activity providing supplemental retire- If your organization is not organized for profit under the provisions of section 528 to receive ment benefits to its members or death benefits and will be operated only to promote social wel- certain tax benefits that, in effect, permit it to to their beneficiaries does not qualify as an ex- fare, you should file Form 1024 to apply for exclude its exempt function income from its empt social welfare organization. It may qualify recognition of exemption from federal income gross income. under another paragraph of section 501(c) de- tax under section 501(c)(4). The discussion that pending on all the facts. Other organizations. Other nonprofit organi- follows describes the information you must pro- However, a nonprofit association that is es- zations that qualify as social welfare organiza- vide when applying. For application procedures, tablished, maintained, and funded by a local tions include: see chapter 1. government to provide the only retirement bene- To qualify for exemption under section • An organization operating an airport that fits to a class of employees may qualify as a 501(c)(4), the organization’s net earnings must is on land owned by a local government, social welfare organization under section be devoted only to charitable, educational, or which supervises the airport’s operation, 501(c)(4). recreational purposes. In addition, no part of the and that serves the general public in an

organization’s net earnings may benefit any pri- Tax treatment of donations. Donations to area with no other airport,

volunteer fire companies are deductible on the vate shareholder or individual. If the organiza- • A community association that works to donor’s federal income tax return, but only if tion provides an excess benefit to certain improve public services, housing and resi- made for exclusively public purposes. Contribu- persons, an excise tax may be imposed. See dential parking, publishes a free commu- tions to civic leagues or other section 501(c)(4) Excise tax on excess benefit transactions under nity newspaper, sponsors a community organizations generally are not deductible as Public Charities in chapter 3 for more informa- sports league, holiday programs and charitable contributions for federal income tax tion about this tax. meetings, and contracts with a private se- purposes. They may be deductible as trade or curity service to patrol the community, Examples. Types of organizations that are business expenses, if ordinary and necessary in

considered to be social welfare organizations the conduct of the taxpayer’s business. How- • A community association devoted to

are civic associations and volunteer fire compa- ever, see Deduction not allowed for dues used preserving the community’s traditions, arnies. for political or legislative activities under chitecture, and appearance by represent501(c)(6) — Business Leagues, Etc. for more ing it before the local legislature and

Nonprofit operation. You must submit evi- information. administrative agencies in zoning, traffic,

dence that your organization is organized and and parking matters,

will be operated on a nonprofit basis. However, Specific Organizations • An organization that tries to encourage in- such evidence, including the fact that your or- dustrial development and relieve unem- ganization is organized under a state law relat- The following information should be contained in ployment in an area by making loans to ing to nonprofit corporations, will not in itself the application form and accompanying state- businesses so they will relocate to the establish a social welfare purpose. ments of certain types of civic leagues or social area, and welfare organizations.

Social welfare. To establish that your organi- • An organization that holds an annual festi- Volunteer fire companies. If your organiza- zation is organized exclusively to promote social val of regional customs and traditions. tion wishes to obtain exemption as a volunteer welfare, you should submit evidence with your fire company or similar organization, you should application showing that your organization will submit evidence that its members are actively operate primarily to further (in some way) the engaged in fire fighting and similar disaster as- common good and general welfare of the people

of the community (such as by bringing about sistance, whether it actually owns the fire fighting equipment, and whether it provides any 501(c)(5) —

civic betterment and social improvements). assistance for its members, such as death and Labor, Agricultural, An organization that restricts the use of its medical benefits in case of injury to them. facilities to employees of selected corporations If your organization does not have an inde- and Horticultural and their guests is primarily benefiting a private pendent social purpose, such as providing rec- group rather than the community. It therefore reational facilities for members, it may be Organizations does not qualify as a section 501(c)(4) organiza- exempt under section 501(c)(3). In this event, tion. Similarly, an organization formed to repre- your organization should file Form 1023. If you are a member of an organization that sent member-tenants of an apartment complex wants to obtain recognition of exemption from does not qualify, since its activities benefit the Homeowners’ associations. A membership federal income tax as a labor, agricultural, or member-tenants and not all tenants in the com- organization formed by a real estate developer horticultural organization, you should submit an munity. However, an organization formed to pro- to own and maintain common green areas, application on Form 1024. You must indicate in mote the legal rights of all tenants in a particular streets, and sidewalks and to enforce covenants your application for exemption and accompany- community may qualify under section 501(c)(4) to preserve the appearance of the development ing statements that your organization will not as a social welfare organization. should show that it is operated for the benefit of have any net earnings benefiting any member. all the residents of the community. The term In addition, you should follow the procedure for Political activity. Promoting social welfare community generally refers to a geographical obtaining recognition of exempt status de- does not include direct or indirect participation or unit recognizable as a governmental subdivi- scribed in chapter 1. Submit any additional infor- intervention in political campaigns on behalf of sion, unit, or district thereof. Whether a particu- mation that may be required, as described in this or in opposition to any candidate for public of- lar association meets the requirement of section.

fice. However, if you submit proof that your or- benefiting a community depends on the facts

ganization is organized exclusively to promote and circumstances of each case. Even if an area Tax treatment of donations. Contributions to

social welfare, it may still obtain exemption even represented by an association is not a commu- labor, agricultural, and horticultural organizaif it participates legally in some political activity nity, the association can still qualify for exemp- tions are not deductible as charitable contribuon behalf of or in opposition to candidates for tion if its activities benefit a community. tions on the donor’s federal income tax return.

public office. See the discussion in chapter 2 The association should submit evidence that However, such payments may be deductible as

under Political Organization Income Tax Return. areas such as roadways and park land that it business expenses if they are ordinary and necChapter 4 Other Section 501(c) Organizations Page 47
essary in the conduct of the taxpayer’s trade or of marketing or other business conditions in one Trade associations and professional associabusiness. For more information about certain or more lines of business, rather than the im- tions are considered business leagues.

limits affecting the deductibility of these busi- provement of production techniques or the betness expenses, see Deduction not allowed for terment of the conditions of persons engaged in Chamber of commerce. A chamber of comdues used for political or legislative activities agriculture, the organization must qualify for ex- merce usually is composed of the merchants

under 501(c)(6) — Business Leagues, Etc. emption as a business league, board of trade, or and traders of a city.

other organization, as discussed next in the sec- Board of trade. A board of trade often con- Labor Organizations tion on 501(c)(6) organizations. sists of persons engaged in similar lines of busi- The primary purpose of exempt agricultural ness. For example, a nonprofit organization A labor organization is an association of workers and horticultural organizations must be to better

who have combined to protect and promote the formed to regulate the sale of a specified agricul- the conditions of those engaged in agriculture or tural commodity to assure equal treatment of interests of the members by bargaining collec- horticulture, develop more efficiency in agricul- producers, warehouse workers, and buyers is a tively with their employers to secure better work- ture or horticulture, or improve the products. board of trade. ing conditions. The following list contains some examples To show that your organization has the pur- Chambers of commerce and boards of trade of activities that show an agricultural or horticul- pose of a labor organization, you should include usually promote the common economic inter- tural purpose. in the articles of organization or accompanying ests of all the commercial enterprises in a given

statements (submitted with your exemption ap- trade community. 1) Promoting various cooperative agricultural, plication) information establishing that the or- horticultural, and civic activities among ru- ganization is organized to better the conditions Real estate board. A real estate board con- ral residents by a state and county farm of workers, improve the grade of their products, sists of members interested in improving the and home bureau.

and develop a higher degree of efficiency in their business conditions in the real estate field. It is

2) Exhibiting livestock, farm products, and not organized for profit and no part of the net respective occupations. In addition, no net earn- other characteristic features of agriculture earnings benefits any private shareholder or in- ings of the organization may benefit any member. and horticulture. dividual.

3) Testing soil for members and nonmembers Composition of membership. While a labor General purpose. You must indicate in the of the farm bureau on a cost basis, the organization generally is composed of employ- material submitted with your application that results of the tests and other recommen- ees or representatives of the employees (in the your organization will be devoted to the improve- dations being furnished to the community form of collective bargaining agents) and similar ment of business conditions of one or more lines members to educate them in soil treat- employee groups, evidence that an of business as distinguished from the perform- ment. organization’s membership consists mainly of ance of particular services for individual perworkers does not in itself indicate an exempt 4) Guarding the purity of a specific breed of sons. It must be shown that the conditions of a

purpose. You must show in your application that livestock. particular trade or the interests of the community

your organization has the purposes described in will be advanced. Merely indicating the name of 5) Encouraging improvements in the produc- the preceding paragraph. These purposes may the organization or the object of the local statute tion of fish on privately-owned fish farms. be accomplished by a single labor organization under which it is created is not enough to

acting alone or by several organizations acting 6) Negotiating with processors for the price to demonstrate the required general purpose.

together through a separate organization. be paid to members for their crops. Line of business. This term generally refers either to an entire industry or to all compo- Benefits to members. The payment by a la- nents of an industry within a geographic area. It bor organization of death, sick, accident, and does not include a group composed of busi- similar benefits to its individual members with 501(c)(6) — nesses that market a particular brand within an funds contributed by its members, if made under industry. a plan to better the conditions of the members,

does not preclude exemption as a labor organi- Business Leagues, Etc. Common business interest. A common zation. However, an organization does not qual- business interest of all members of the organi- ify for exemption as a labor organization if it has If your association wants to apply for recognition zation must be established by the application no authority to represent members in job-related of exemption from federal income tax as a non- documents. matters, even if it provides weekly income to its profit business league, chamber of commerce,

members in the event of a lawful strike by the real estate board, board of trade, or professional Examples. Activities that would tend to ilmembers’ union, in return for an annual pay- football league (whether or not administering a lustrate a common business interest are:

ment by the member. pension fund for football players), it should file

Form 1024. For a discussion of the procedure to 1) Promotion of higher business standards

Agricultural and follow, see chapter 1. and better business methods and encourYour organization must indicate in its appli- agement of uniformity and cooperation by Horticultural Organizations cation form and attached statements that no part a retail merchants association,

of its net earnings will benefit any private share- Agricultural and horticultural organizations are 2) Education of the public in the use of credit, holder or individual and that it is not organized connected with raising livestock, forestry, culti- for profit or organized to engage in an activity 3) Establishment of uniform casualty rates vating land, raising and harvesting crops or ordinarily carried on for profit (even if the busi- and compilation of statistical information aquatic resources, cultivating useful or orna- ness is operated on a cooperative basis or pro- by an insurance rating bureau operated by mental plants, and similar pursuits. duces only sufficient income to be casualty insurance companies, For the purpose of these provisions, aquatic self-sustaining). resources include only animal or vegetable life, 4) Establishment and maintenance of the inbut not mineral resources. The term harvesting, In addition, your organization must be prima- tegrity of a local commercial market,

in this case, includes fishing and related pur- rily engaged in activities or functions that are the 5) Operation of a trade publication primarily suits. basis for its exemption. It must be primarily sup- intended to benefit an entire industry, and Agricultural organizations may be quasi-pub- ported by membership dues and other income

from activities substantially related to its exempt lic in character and are often designed to en- 6) Encouragement of the use of goods and

courage the development of better agricultural services of an entire industry (such as a purpose.

and horticultural products through a system of A business league, in general, is an associa- lawyer referral service whose main purawards, using income from entry fees, gate re- tion of persons having some common business pose is to introduce individuals to the use

ceipts, and donations to meet the necessary interest, the purpose of which is to promote that of the legal profession in the hope that

expenses of upkeep and operation. When the common interest and not to engage in a regular they will enter into lawyer-client relationactivities are directed toward the improvement business of a kind ordinarily carried on for profit. ships on a paying basis as a result).

Page 48 Chapter 4 Other Section 501(c) Organizations
Improvement of business conditions bying if it contacts prospective members or calls from tax under section 501(a) and limits its

Generally, this must be shown to be the purpose upon its own members to contact their employ- membership to the members of a particular reof the organization. This is not established by ees and customers for the purpose of urging ligion.

evidence of particular services that provide a such persons to communicate with their elected Private benefit prohibited. No part of the convenience or economy to individual members state or Congressional representatives to sup- organization’s net earnings may benefit any per- in their businesses, such as advertising that port the promotion, defeat, or repeal of legisla- son having a personal and private interest in the carries the name of members, interest-free tion that is of direct interest to the organization. activities of the organization. For purposes of loans, assigning exclusive franchise areas, op- Any dues or assessments directly related to this requirement, it is not necessary that net eration of a real estate multiple listing system, or such activities are not deductible by the tax- earnings be actually distributed. Even undistrib- operation of a credit reporting agency. payer, since the individuals being contacted, uted earnings can benefit members. Examples who are not members of the organization, are a Stock or commodity exchange. A stock or of this include a decrease in membership dues segment of the general public. commodity exchange is not a business league, or an increase in the services the club provides

chamber of commerce, real estate board, or Tax treatment of donations. Contributions to to its members without a corresponding inboard of trade and is not exempt under section organizations described in this section are not crease in dues or other fees paid for club sup501(c)(6). deductible as charitable contributions on the port. However, fixed-fee payments to members

donor’s federal income tax return. They may be who bring new members into the club are not an

Legislative activity. An organization that is deductible as trade or business expenses if ordi- inurement of the club’s net earnings, if the payexempt under section 501(c)(6) may work for nary and necessary in the conduct of the ments are reasonable compensation for perthe enactment of laws to advance the common formance of a necessary administrative service. taxpayer’s business. business interests of the organization’s mem- Purposes. To show that your organization bers. possesses the characteristics of a club within

Deduction not allowed for dues used for po- the meaning of the exemption law, you should

litical or legislative activities. A taxpayer 501(c)(7) — submit evidence with your application that percannot deduct the part of dues or other pay- sonal contact, commingling, and fellowship exist

ments to a business league, trade association, Social and among members. You must show that members

labor union, or similar organization that is for any are bound together by a common objective of

of the following activities. Recreation Clubs pleasure, recreation, and other nonprofitable

purposes.

1) Influencing legislation. If your club is organized for pleasure, recreation, Fellowship need not be present between and other similar nonprofitable purposes and each member and every other member of a club 2) Participating or intervening in a political substantially all of its activities are for these if it is a material part in the life of the organiza- campaign for, or against, any candidate for purposes, it should file Form 1024 to apply for tion. A statewide or nationwide organization that public office. recognition of exemption from federal income is made up of individual members, but is divided 3) Trying to influence the general public, or tax. into local groups, satisfies this requirement if part of the general public, with respect to In applying for recognition of exemption, you fellowship is a material part of the life of each

elections, legislative matters, or referen- should submit the information described in this local group. dums (also known as grassroots lobby- section. Also see chapter 1 for the procedures to The term other nonprofitable purposes follow. ing). means other purposes similar to pleasure and Typical organizations that should file for rec- recreation. For example, a club that, in addition 4) Communicating directly with certain execu- ognition of exemption as social clubs include: to its social activities, has a plan for the payment tive branch officials to try to influence their • College alumni associations that are not of sick and death benefits is not operating exclu- official actions or positions.

described in chapter 3 under Alumni asso- sively for pleasure, recreation, and other non- See Dues Used for Lobbying or Political Activi- ciation, profitable purposes.

ties under Required Disclosures in chapter 2 for

more information. • College fraternities or sororities operating Limited membership. The membership in

chapter houses for students, a social club must be limited. To show that your Exception for local legislation. Members organization has a purpose that would charac- may deduct dues (or assessments) to an organi- • Country clubs, terize it as a club, you should submit evidence zation that are for expenses of: • Amateur hunting, fishing, tennis, swim- with your application that there are limits on

ming, and other sport clubs, admission to membership consistent with the 1) Appearing before, submitting statements character of the club. to, or sending communications to mem- • Dinner clubs that provide a meeting place, A social club that issues corporate mem- bers of a local council or similar governing library, and dining room for members, bership is dealing with the general public in the body with respect to legislation or pro- • Hobby clubs, form of the corporation’s employees. Corporate posed legislation of direct interest to the members of a club are not the kind of members member, or • Garden clubs, and contemplated by the law. Gross receipts from

2) Communicating information between the • Variety clubs. these members would be a factor in determining

member and the organization with respect whether the club qualifies as a social club. See

to local legislation or proposed legislation Gross receipts from nonmembership sources, Discrimination prohibited. Your organiza- of direct interest to the organization or the later. Bona fide individual memberships paid for tion will not be recognized as tax exempt if its member. by a corporation would not have an effect on the charter, bylaws, or other governing instrument, gross receipts source. Legislation or proposed legislation is of direct or any written policy statement provides for dis- The fact that a social club may have an interest to a taxpayer if it will, or may reasonably crimination against any person on the basis of associate (nonvoting) class of membership be expected to, affect the taxpayer’s trade or race, color, or religion. will not be, in and of itself, a cause for nonrecog- business. However, a club that in good faith limits its nition of exemption. However, if one member- membership to the members of a particular re- De minimis exception. In-house expendi- ship class pays substantially lower dues and ligion to further the teachings or principles of that tures of $2,000 or less for the year for activities fees than another membership class, although religion and not to exclude individuals of a partic- (1) – (4) listed earlier will not prevent a deduc- both classes enjoy the same rights and privi- ular race or color will not be considered as dis- tion for dues, if the dues meet all other tests to leges in using the club facilities, there may be an criminating on the basis of religion. Also, the be deductible as a business expense. inurement of income to the benefited class, re- restriction on religious discrimination does not sulting in a denial of the club’s exemption. Grassroots lobbying. A tax-exempt trade apply to a club that is an auxiliary of a fraternal

association, labor union, or similar organization beneficiary society (discussed later) if that soci- Support. In general, your club should be

is considered to be engaging in grassroots lob- ety is described in section 501(c)(8) and exempt supported solely by membership fees, dues,

Chapter 4 Other Section 501(c) Organizations Page 49
and assessments. However, if otherwise enti- The benefits must be limited to members and

tled to exemption, your club will not be disquali- 501(c)(8) and 501(c)(10) their dependents. If members will have the abilfied because it raises revenue from members ity to confer benefits to other than themselves

through the use of club facilities or in connection — Fraternal and their dependents, exemption will not be recwith club activities. ognized.

Business activities. If your club will engage Beneficiary Societies Whole-life insurance. Whole-life insurance

in business, such as selling real estate, timber, and Domestic Fraternal constitutes a life benefit under section 501(c)(8)

or other products or services, it generally will be even though the policy may contain investment

denied exemption. However, evidence submit- Societies features such as a cash surrender value or a

ted with your application form that your organi- policy loan. zation will provide meals, refreshments, or This section describes the information to be pro- Reinsurance pool. Payments by a fraternal services related to its exempt purposes only to vided upon application for recognition of exemp- beneficiary society into a state-sponsored rein- its own members or their dependents or guests tion by two types of fraternal societies: will not cause denial of exemption. surance pool that protects participating insurers beneficiary and domestic. The major distinction against excessive losses on major medical Facilities open to public. Evidence that is that fraternal beneficiary societies provide for health and accident insurance will not preclude your club’s facilities will be open to the general the payment of life, sick, accident, or other bene- exemption as a fraternal beneficiary society. public (persons other than members or their fits to their members or their dependents, while

dependents or guests) may cause denial of ex- domestic fraternal societies do not provide these

benefits but rather devote their earnings to fra- Domestic Fraternal Societies emption. This does not mean, however, that any

dealing with outsiders will automatically deprive ternal, religious, charitable, etc., purposes. The (501(c)(10))

a club of exemption. procedures to follow in applying for recognition

of exemption are described in chapter 1. A domestic fraternal society, order, or associa- Gross receipts from nonmembership tion may file an application for recognition of If your organization is controlled by a central sources. A section 501(c)(7) organization organization, you should check with your con- exemption from federal income tax on Form may receive up to 35% of its gross receipts, trolling organization to determine whether your 1024. The application and accompanying state- including investment income, from sources unit has been included in a group exemption ments should establish that the organization: outside of its membership without losing its letter or may be added. If so, your organization tax-exempt status. Of the 35%, up to 15% of the need not apply for individual recognition of ex- 1) Is a domestic fraternal organization, gross receipts may be derived from the use of emption. For more information see Group Ex- 2) Operates under the lodge system, the club’s facilities or services by the general emption Letter in chapter 1 of this publication. public or from other activities not furthering so- 3) Devotes its net earnings exclusively to re- cial or recreational purposes for members. If an Tax treatment of donations. Donations by an ligious, charitable, scientific, literary, edu- organization has outside income that is more individual to a domestic fraternal beneficiary so- cational, and fraternal purposes, and than these limits, all the facts and circumstances ciety or a domestic fraternal society operating will be taken into account in determining 4) Does not provide for the payment of life, under the lodge system are deductible as chari- whether the organization qualifies for exempt sick, accident, or other benefits to its mem- table contributions only if used exclusively for status. bers. religious, charitable, scientific, literary, or educaGross receipts. Gross receipts, for this pur- tional purposes or for the prevention of cruelty to The organization may arrange with insurpose, are receipts from the normal and usual children or animals. ance companies to provide optional insurance to

its members without jeopardizing its exempt sta- (traditionally conducted) activities of the club.

These receipts include charges, admissions, Fraternal Beneficiary tus.

membership fees, dues, assessments, invest- Societies (501(c)(8)) ment income, and normal recurring capital gains

on investments. Receipts do not include initia- A fraternal beneficiary society, order, or association fees and capital contributions. Unusual tion should file an application for recognition of 501(c)(4), 501(c)(9), and amounts of income, such as from the sale of a exemption from federal income tax on Form

clubhouse or similar facility, are not included in 1024. The application and accompanying state- 501(c)(17) — gross receipts or in figuring the percentage lim- ments should establish that the organization:

its. Employees’ 1) Is a fraternal organization, Fraternity foundations. If your organization

2) Operates under the lodge system or for Associations is a foundation formed for the exclusive purpose

of acquiring and leasing a chapter house to a the exclusive benefit of the members of a This section describes the information to be pro- local fraternity chapter or sorority chapter main- fraternal organization itself operating under vided upon application for recognition of exemp- tained at an educational institution and does not the lodge system, and tion by the following types of employees’ engage in any social activities, it may be a title 3) Provides for the payment of life, sick, acci- associations: holding corporation (discussed, later, under sec- dent, or other benefits to the members of tion 501(c)(2) organizations and under section the society, order, or association or their 1) A local association of employees whose 501(c)(25) organizations) rather than a social dependents. membership is limited to employees of a club. designated person or persons in a particuTax treatment of donations. Donations to lar municipality, and whose income will be Lodge system. Operating under the lodge exempt social and recreation clubs are not de- devoted exclusively to charitable, educa- system means carrying on activities under a ductible as charitable contributions on the tional, or recreational purposes, form of organization that comprises local donor’s federal income tax return. branches, chartered by a parent organization 2) A voluntary employees’ beneficiary as- and largely self-governing, called lodges, chap- sociation (including federal employees’ ters, or the like. associations) organized to pay life, sick,

accident, and similar benefits to members Payment of benefits. It is not essential that or their dependents, or designated benefi- every member be covered by the society’s pro- ciaries, if no part of the net earnings of the gram of sick, accident, or death benefits. An association benefits any private share- organization can qualify for exemption if most of holder or individual, and its members are eligible for benefits, and the

benefits are paid from contributions or dues paid 3) A supplemental unemployment benefit

by those members. trust whose primary purpose is providing

Page 50 Chapter 4 Other Section 501(c) Organizations
for payment of supplemental unemploy- organizations in chapter 3 under Application for 2) The benefits provided under each class of

ment benefits. Recognition of Exemption. benefits do not discriminate in favor of

highly compensated individuals. Both the application form to file and the infor- Membership. Membership of a section

mation to provide are discussed later under the A life insurance, disability, severance pay, or 501(c)(9) organization must consist of individusection that describes your employee associa- als who are employees and have an supplemental unemployment compensation

tion. Chapter 1 describes the procedures to fol- benefit does not discriminate in favor of highly employment-related common bond. This comlow in applying for exemption. compensated individuals merely because the mon bond may be a common employer (or affiliated employers), coverage under one or more benefits available bear a uniform relationship to Tax treatment of donations. Donations to collective bargaining agreements, membership the total compensation, or the basic or regular these organizations are not deductible as chari- in a labor union, or membership in one or more rate of compensation, of employees covered by table contributions on the donor’s federal in- locals of a national or international labor union. the plan. come tax return. The membership of an association may in- For purposes of determining whether a plan

clude some individuals who are not employees, meets the nondiscrimination requirements, the Local Employees’ provided they have an employment-related employer may elect to exclude all disability or

Associations (501(c)(4)) bond with the employee-members. For exam- severance payments payable to individuals who

ple, the owner of a business whose employees are in pay status as of January 1, 1985. This will A local employees’ association may apply for are members of the association may be a mem- not apply to any increase in such payment by recognition of exemption by filing Form 1024. ber. An association will be considered com- any plan amendment adopted after June 22, The organization must submit evidence that: posed of employees if 90% of its total 1984.

membership on one day of each quarter of its If a plan provides a benefit for which there is 1) It is of a purely local character, tax year consists of employees. a nondiscrimination provision provided under

2) Its membership is limited to employees of Chapter 1 of the Internal Revenue Code as a Employees. Employees include individuals a designated person or persons in a partic- who became entitled to membership because condition of that benefit being excluded from

ular locality, and gross income, these nondiscrimination require- they are or were employees. For example, an ments do not apply. The benefit will be consid- 3) Its net earnings will be devoted exclusively individual will qualify as an employee even ered nondiscriminatory only if it meets the to charitable, educational, or recreational though the individual is on a leave of absence or nondiscrimination provision of the applicable purposes. has been terminated due to retirement, disabil- Code section. For example, benefits provided ity, or layoff. A local association of employees that has Generally, membership is under a medical reimbursement plan would voluntary if an established a system of paying retirement or meet the nondiscrimination requirements for an affirmative act is required on the part of an em- death benefits, or both, to its members will not association, if the benefits meet the nondiscrimi- ployee to become a member. Conversely, mem- qualify for exemption since the payment of these nation requirements of Code section 105(h)(3) bership is involuntary if the designation as a benefits is not considered as being for charita- member is due to employee status. However, an and 105(h)(4).

ble, educational, or recreational purposes. Simi- association will be considered voluntary if em- Excluded employees. Certain employees larly, a local association of employees that is ployees are required to be members of the or- who are not covered by a plan may be excluded operated primarily as a cooperative buying serv- ganization as a condition of their employment from consideration in applying these require- ice for its members in order to obtain discount and they do not incur a detriment (such as a ments. These include employees: prices on merchandise, services, and activities payroll deduction) as a result of their member- does not qualify for exemption. ship. An employer has not imposed involuntary 1) Who have not completed 3 years of servmembership on the employee if membership is ice, Voluntary Employees’ required as the result of a collective bargaining 2) Who have not attained age 21, Beneficiary Associations agreement or as an incident of membership in a

(501(c)(9)) labor organization. 3) Who are seasonal or less than half-time

employees, Payment of benefits. The information submit- An application for recognition of exemption as a ted with your application must show that your 4) Who are not in the plan and who are in- voluntary employees’ beneficiary association organization will pay life, sick, accident, supple- cluded in a unit of employees covered by a must be filed on Form 1024. The material sub- mental unemployment, or other similar benefits. collective bargaining agreement if the mitted with the application must show that your The benefits may be provided directly by your class of benefits involved was the subject organization: association or indirectly by your association of good faith bargaining, or

through the payments of premiums to an insur- 1) Is a voluntary association of employees, 5) Who are nonresident aliens and who re- ance company (or fees to a medical clinic). Ben- ceive no earned income from the employer 2) Will provide for payment of life, sick, acci- efits may be in the form of medical, clinical, or that has United States source income. dent, or other benefits to members or their hospital services, transportation furnished for dependents or designated beneficiaries medical care, or money payments. Highly compensated individual. A highly and substantially all of its operations are

Nondiscrimination requirements. An organ- compensated individual is one who: for this purpose, and

ization that is part of a plan will not be exempt 3) Will not allow any of its earnings to benefit 1) Owned 5 percent or more of the employer unless the plan meets certain nondiscrimination any private individual or shareholder ex- at any time during the current year or the requirements. However, if the organization is cept in the form of scheduled benefit pay- preceding year, part of a plan that is a collective bargaining ments. agreement that was the subject of good faith 2) Received more than $90,000 for 2002 (ad- bargaining between employee organizations justed for inflation) in compensation from Notice requirement. An organization will not and employers, the plan need not meet these the employer for the preceding year, and be considered tax exempt under this section requirements for the organization to qualify as unless the organization gives notice to the IRS 3) Was among the top 20% of employees by tax exempt. that it is applying for recognition of exempt sta- A plan meets the nondiscrimination require- compensation for the preceding year.

tus. The organization gives notice by filing Form ments only if both of the following statements But the employer can choose not to have (3) 1024. If the notice is not given by 15 months are true. apply. after the end of the month in which the organization was created, the organization will not be 1) Each class of benefits under the plan is Aggregation rules. The employer may

exempt for any period before notice is given. provided under a classification of employ- choose to treat two or more plans as one plan for

The EO area manager may grant an extension ees that is set forth in the plan and does purposes of meeting the nondiscrimination reof time for filing the notice under the same pro- not discriminate in favor of employees who quirements. Employees of controlled groups of

cedures as those described for section 501(c)(3) are highly compensated individuals. corporations, trades or businesses under comChapter 4 Other Section 501(c) Organizations Page 51
mon control, or members of an affiliated service for exemption in any tax year following the tax ally desirable service approximately at cost and

group, are treated as employees of a single year in which the notice of denial was issued. It on a mutual basis. To maintain the mutual charemployer. Leased employees are treated as must file the claim on Form 1024. The organiza- acteristic of democratic ownership and control,

employees of the recipient. tion must include a written declaration that it will they must be so organized and operated that

not knowingly again engage in a prohibited their members have the right to choose the man- One employee. A trust created to provide transaction. An authorized principal officer of agement, to receive services substantially at benefits to one employee will not qualify as a your organization must make this declaration cost, to receive a return of any excess of pay- voluntary employees’ beneficiary associa- under the penalties of perjury. ments over losses and expenses, and to share tion under section 501(c)(9). If your organization has satisfied all require- in any assets upon dissolution.

ments as a supplemental unemployment benefit The rights and interests of members in the Supplemental trust described in section 501(c)(17), it will be annual savings of the organization must be deUnemployment Benefit notified in writing that it has been recognized as termined in proportion to their business with the

Trusts (501(c)(17)) exempt. However, the organization will be ex- organization. Upon dissolution, gains from the

empt only for those tax years after the tax year in sale of appreciated assets must be distributed to

A trust or trusts forming part of a written plan which the claim for exemption (Form 1024) is all persons who were members during the pe-

(established and maintained by an employer, his filed. Tax year in this case means the estab- riod the assets were owned by the organization

or her employees, or both) providing solely for lished annual accounting period of the organiza- in proportion to the amount of business done

the payment of supplemental unemployment tion or, if the organization has not established an during that period. The bylaws must not provide

compensation benefits must file the application annual accounting period, the calendar year. for forfeiture of a member’s rights and interest

for recognition of exemption on Form 1024. The For more information about the requirements for upon withdrawal or termination.

reestablishing an exemption previously denied, trust must be a valid, existing trust under local Membership. Membership of a mutual or- contact the IRS. law and must be evidenced by an executed ganization consists of those who join the organi- document. A conformed copy of the plan of zation to obtain its services, acquire an interest which the trust is a part should be attached to in its assets, and have a voice in its manage- the application. ment. In a stock company, the stockholders are

Notice requirement. An organization will not 501(c)(12) — members. Membership may include distributors

be considered tax exempt under this section who furnish service to individual consumers. Local Benevolent

unless the organization gives notice to the IRS However, it does not include the individual consumers served by the distributor. A mutual serv- that it is applying for recognition of exempt sta- Life Insurance

tus. The organization gives notice by filing Form ice organization may serve nonmembers as

1024. If the notice is not given by 15 months Associations, long as at least 85% of its gross income is

after the end of the month in which the organiza- collected from members. However, a mutual life

insurance organization may have no policyhold- tion was created, the organization will not be Mutual Irrigation

exempt for any period before such notice is ers other than its members.

given. The EO area manager may grant an ex- and Telephone Losses and expenses. In furnishing serv- tension of time for filing the notice under the Companies, and ices substantially at cost, an organization must same procedures as those described for section use its income solely for paying losses and ex- 501(c)(3) organizations in chapter 3 under Appli- Like Organizations penses. Any excess income not retained in rea- cation for Recognition of Exemption. sonable reserves for future losses and

expenses belongs to members in proportion to Types of payments. You must show that the Each of the following organizations may apply their patronage or business done with the organ- supplemental unemployment compensation for recognition of exemption from federal income ization. If such patronage refunds are retained in benefits will be benefits paid to an employee tax by filing Form 1024. reasonable amounts for purposes of expanding because of the employee’s involuntary separa1) Benevolent life insurance associations facilities, retiring capital indebtedness, acquiring tion from employment (whether or not the sepaof a purely local character and like organi- other assets, etc., the organization must main- ration is temporary) resulting directly from a

zations. tain records sufficient to reflect the equity of reduction-in-force, discontinuance of a plant or each member in the assets acquired with the operation, or other similar conditions. In addi- 2) Mutual ditch or irrigation companies funds. tion, sickness and accident benefits (but not and like organizations. vacation, retirement, or death benefits) may be Dividends. Dividends paid to stockholders 3) Mutual or cooperative telephone com- included in the plan if these are subordinate to on stock or the value of a capital equity interest panies and like organizations. the unemployment compensation benefits. constitute a distribution of profits and are

A like organization is an organization that per- not an expense within the term losses and Diversion of funds. It must be impossible forms a service comparable to that performed by expenses. Therefore, a mutual or cooperative under the plan (at any time before the satisfac- any one of the above organizations. association whose shares carry the right to divi- tion of all liabilities with respect to employees The information to be provided upon applica- dends will not qualify for exemption. However, under the plan) to use or to divert any of the tion by each of these organizations is described this prohibition does not apply to the distribution corpus or income of the trust to any purpose in this section. For information as to the proce- of the unexpended balance of collections or as- other than the payment of supplemental unem- dures to follow in applying for exemption, see sessments remaining on hand at the end of the ployment compensation benefits (or sickness or chapter 1. year to members as patronage dividends or re- accident benefits to the extent just explained). funds prorated to each on the basis of their

Discrimination in benefits. Neither the terms General requirements. These organizations patronage or business done with the organizaof the plan nor the actual payment of benefits must use their income solely to cover losses and tion. Such distribution represents a reduction in

may be discriminatory in favor of the company’s expenses, with any excess being returned to the cost of services rendered to the member.

officers, stockholders, supervisors, or highly members or retained for future losses and ex- The 85% requirement. All of the organiza- paid employees. However, a plan is not discrimi- penses. They must collect at least 85% of their tions discussed in this section must submit evi- natory merely because benefits bear a uniform income from members for the sole purpose of dence with their application that they receive relationship to compensation or the rate of com- meeting losses and expenses. 85% or more of their gross income from their pensation. Mutual character. These organizations, members for the sole purpose of meeting losses

Reestablishing exemption. If your organiza- other than benevolent life insurance associa- and expenses. Nevertheless, certain items of

tion is a supplemental unemployment benefit tions, must be organized and operated on a income are excluded from the computation of

trust and has received a denial of exemption mutual or cooperative basis. They are associa- the 85% requirement if the organization is a

because it engaged in a prohibited transaction, tions of persons and organizations, or both, mutual or cooperative telephone or electric comas defined by section 503(b), it may file a claim banded together to provide themselves a mutu- pany.

Page 52 Chapter 4 Other Section 501(c) Organizations
A mutual or cooperative telephone company Other tax-exempt income besides gifts is Mutual or Cooperative will exclude from the computation of the 85% considered as income received from other than Associations requirement any income received or accrued members in applying the 85% test.

from: If the 85% test is not met, your organization, Mutual ditch or irrigation companies, mutual or

if classifiable under this section, will not qualify cooperative telephone companies, and like or- 1) A nonmember telephone company for the for exemption as any other type of organization ganizations need not establish that they are of a performance of communication services described in this publication. purely local character. They may serve noncon- involving the completion of long distance tiguous areas. calls to, from, or between members of the

mutual or cooperative telephone company, Tax treatment of donations. Donations to an Like organization. This is a term generally

organization described in this section are not restricted to organizations that perform a service 2) Qualified pole rentals,

deductible as charitable contributions on the comparable to mutual ditch, irrigation, and tele- 3) The sale of display listings in a directory donor’s federal income tax return. phone companies such as mutual water, com- furnished to its members, or munications, electric power, or gas companies

4) The prepayment of a loan created in 1987, Local Life Insurance all of which satisfy the 85% test. Examples are

1988, or 1989, under section 306A, 306B, an organization structured for the protection of Associations or 311 of the Rural Electrification Act of river banks against erosion whose only income

1936. consists of assessments against the property A benevolent life insurance association or an

owners concerned, a nonprofit organization pro- A mutual or cooperative electric company organization seeking recognition of exemption

on grounds of similarity to a benevolent life in- viding and maintaining a two-way radio system will exclude from the computation any income for its members on a mutual or cooperative ba- received or accrued from qualified pole rentals surance association must submit evidence upon sis, or a local light and water company organized and from the prepayment of loans described in applying for recognition of exemption that it will to furnish light and water to its members. A (4) above. An electric cooperative’s sale of ex- be of a purely local character, that its excess cooperative organization providing cable televi- cess fuel at cost in the year of purchase is not funds will be refunded to members or retained in

sion service to its members may qualify for ex- income for purposes of determining compliance reasonable reserves to meet future losses and

emption as a like organization if the with the 85% requirement. expenses, and that it meets the 85% income requirements discussed in this section are met. The term qualified pole rental means any requirement. If an organization issues policies Associations operating a bus for their mem- rental of a pole (or other structure used to sup- for stipulated cash premiums, or if it requires bers’ convenience, providing and maintaining port wires) if the pole (or other structure) is used: advance deposits to cover the cost of the insur- cooperative housing facilities for the personal ance and maintains investments from which

1) By the telephone or electric company to more than 15% of its income is derived, it will not benefit of individuals, or furnishing a financing

support one or more wires that are used service for purchases made by members of co- be entitled to exemption. by the company in providing telephone or operative organizations are not like organiza- To establish that your organization is of a electric services to its members, and tions.

purely local character, it should show that its

2) Pursuant to the rental to support one or activities will be confined to a particular commu- more wires (in addition to wires described nity, place, or district irrespective of political sub- in (1)) for use in connection with the trans- divisions. If the activities of an organization are mission by wire of electricity or of tele- limited only by the borders of a state, it cannot 501(c)(13) —

phone or other communications. be purely local in character. A benevolent life Cemetery Companies The term rental, for this purpose, includes any insurance association that does not terminate

sale of the right to use the pole (or other struc- membership when a member moves from the If your organization wishes to obtain recognition ture). local area in which the association operates will of exemption from federal income tax as a cemThe 85% requirement is applied on the basis qualify for exemption if it meets the other re- etery company or a corporation chartered solely of an annual accounting period. Failure of an quirements. for the purpose of the disposal of human bodies organization to meet the requirement in a partic- A copy of each type of policy issued by your by burial or cremation, it should file an applica- ular year precludes exemption for that year, but organization should be included with the appli- tion on Form 1024. For the procedure to follow to has no effect upon exemption for years in which cation for recognition of exemption. file an application, see chapter 1. the 85% requirement is met. A nonprofit mutual cemetery company Gain from the sale or conversion of the that seeks recognition of exemption should sub- organization’s property is not considered an Organizations similar to local benevolent life mit evidence with its application that it is owned amount received from members in determining insurance companies. These organizations and operated exclusively for the benefit of its lot whether the organization’s income consists of include those that in addition to paying death owners who hold lots for bona fide burial pur- amounts collected from members. benefits also provide for the payment of sick, poses and not for purposes of resale. A mutual Because the 85% income test is based on accident, or health benefits. However, an organ- cemetery company that also engages in charita- gross income, capital losses cannot be used to ization that pays only sick, accident, or health ble activities, such as the burial of paupers, will reduce capital gains for purposes of this test. benefits, but not life insurance benefits, is not an be regarded as operating within this standard. organization similar to a benevolent life insur- Example. The books of an organization re- The fact that a mutual cemetery company limits ance association and should not apply for recog- flect the following for the calendar year. its membership to a particular class of individu- nition of exemption as described in this section. als, such as members of a family, will not affect

Collections from members ........ $2,400 Burial and funeral benefit insurance its status as mutual so long as all the other

Short-term capital gains . . . . . . . . . 600 organization. This type of organization can requirements of section 501(c)(13) are met.

Short-term capital losses . . . . . . . . . 400 apply for recognition of exemption as an organi- If your organization is a nonprofit corporation Other income ................ None zation similar to a benevolent life insurance chartered solely for the purpose of the disposal Gross income ($2,400 + $600 =$3000) 100% company if it establishes that the benefits are of human bodies by burial or cremation, you Collected from members ($2,400) . . . 80% paid in cash and if it is not engaged directly in the should show that it is not permitted by its charter

Since amounts collected from members do manufacture of funeral supplies or the perform- to engage in any business not necessarily incinot constitute at least 85% of gross income, the ance of funeral services. An organization that dent to that purpose. Operating a mortuary is not

organization is not entitled to exemption from provides its benefits in the form of supplies and permitted. However, selling monuments, markfederal income tax for the year. service is not a life insurance company. Such an ers, vaults, and flowers solely for use in the

Voluntary contributions in the nature of gifts organization may seek recognition of exemption cemetery is permitted if the profits from these

are not taken into account for purposes of the from federal income tax, however, as a mutual sales are used to maintain the cemetery as a

85% computation. insurance company other than life. whole.

Chapter 4 Other Section 501(c) Organizations Page 53
How income may be used. You should show created that is subject to federal income tax. Any

that your organization’s earnings are or will be trust income that is used or permanently set

used only in one or more of the following ways. aside for the care, maintenance, or beautifica- 501(c)(14) —

tion of a particular family burial lot or mausoleum Credit Unions 1) To pay the ordinary and necessary ex- crypt is not deductible in computing the trust’s

penses of operating, maintaining, and im- taxable income. and Other proving the cemetery or crematorium. Common and preferred stock. A cemetery

2) To buy cemetery property. Mutual Financial company that issues common stock may qualify for exemption only if no dividends may be 3) To create a fund that will provide a source paid. The payment of dividends must be legally Organizations of income for the perpetual care of the prohibited either by the corporation’s charter or cemetery or a reasonable reserve for any If your organization wants to obtain recognition by applicable state law. ordinary or necessary purpose. of exemption as a credit union without capital Generally, a cemetery company or crematoNo part of the net earnings of your organiza- stock, organized and operated under state law rium is not exempt if it issues preferred stock.

tion may benefit any private shareholder or indi- However, it can still be exempt if the preferred for mutual purposes and without profit, it should

vidual. file an application including the facts, informa- stock was issued before November 28, 1978, or

Ordinary and necessary expenses in con- was issued after that date under a written plan tion, and attachments described in this section.

nection with the operation, management, main- adopted before that date. The adoption of the In addition, it should follow the procedures for

tenance, and improvement of the cemetery are plan must be shown by the acts of the responsi- filing an application described in chapter 1.

permitted, as are reasonable fees for the serv- ble officers and appear on the official records of Federal credit unions organized and operices of a manager. the organization. ated in accordance with the Federal Credit

The preferred stock issued either before No- Union Act, as amended, are instrumentalities of Buying cemetery property. Payments

may be made to amortize debt incurred to buy vember 28, 1978, or under a plan adopted the United States, and therefore, are exempt

before that date, must meet all the following under section 501(c)(1). They are included in a land, but may not be in the nature of profit

distributions. You must show the method used requirements. group exemption letter issued to the National

Credit Union Administration. They are not dis- to finance the purchase of the cemetery property 1) The preferred stock entitles the holders to and that the purchase price of the land at the cussed in this publication. dividends at a fixed rate that is not more

time of its sale to the cemetery was not unrea- State chartered credit unions and other mu- than the greater of the legal rate of interest sonable. tual financial organizations may file applications in the state of incorporation or 8% a year Except for holders of preferred stock (dis- for recognition of exemption from federal income on the value of the consideration for which

cussed later), no person may have any interest tax under section 501(c)(14). The other mutual the stock was issued.

in the net earnings of a tax-exempt cemetery financial organizations must be corporations

company or crematorium. Therefore, if property 2) The organization’s articles of incorporation or associations without capital stock organized require: is transferred to the organization in exchange for before September 1, 1957, and operated for

an interest in the organization’s net earnings, mutual purposes and without profit to provide a) That the preferred stock be retired at the organization will not be exempt so long as reserve funds for, and insurance of, shares or par as rapidly as funds become avail- that interest remains outstanding. deposits in: able from operations, and An equity interest in the organization is an

interest in the net earnings of the organization. b) That all funds not required for the pay- 1) Domestic building and loan associations,

However, an interest in the organization that is ment of dividends on or for the retire- 2) Cooperative banks (without capital stock) not an equity interest may still be an interest in ment of preferred stock be used by the organized and operated for mutual pur- the organization’s net earnings. For example, a company for the care and improvement poses and without profit, bond issued by a cemetery company that pro- of the cemetery property.

vides for a fixed rate of interest and also pro- 3) Mutual savings banks (not having capital

vides for additional interest payments based on stock represented by shares), or Tax treatment of donations. Donations to the income of the organization is considered an exempt cemetery companies, corporations 4) Mutual savings banks described in section interest in the net earnings of the organization. chartered solely for human burial purposes, and 591(b). Similarly, a convertible debt obligation issued perpetual care funds (operated in connection after July 7, 1975, is considered an interest in with such exempt organizations) are deductible Similar organizations, formed before September

the net earnings of the organization. as charitable contributions on the donor’s fed- 1, 1957, that provide reserve funds for (but not

eral income tax return. However, a donor may insurance of shares or deposits in) one of the Perpetual care organization. A perpetual

not deduct a contribution made for the perpetual types of savings institutions described in (1), (2), care organization, including, for example, a trust

organized to receive, maintain, and administer care of a particular lot or crypt. Payments made or (3) above may be exempt from tax if 85% or

to a cemetery company or corporation as part of more of the organization’s income is from pro- funds that it receives from a nonprofit tax-exempt cemetery pursuant to state law and con- the purchase price of a burial lot or crypt, viding reserve funds and from investments.

tracts, may apply for recognition of exemption whether irrevocably dedicated to the perpetual There is no specific restriction against the issuon Form 1024, even though it does not own the care of the cemetery as a whole or earmarked ance of capital stock for these organizations.

land used for burial. However, the income from for the care of a particular lot, are also not Building and loan associations, savings and

these funds must be devoted exclusively to the deductible. loan associations, mutual savings banks, and

perpetual care and maintenance of the nonprofit cooperative banks, other than those described

cemetery as a whole. Also, no part of the net in this section, are not exempt from tax. Howearnings may benefit any private shareholder or ever, certain corporations organized and operindividual. ated in conjunction with farmers’ cooperatives

In addition, a perpetual care organization not can be exempt.

operated for profit, but established as a civic

enterprise to maintain and administer funds, the Application form. The Internal Revenue

income of which is devoted exclusively to the Service does not provide a printed application perpetual care and maintenance of an aban- form for the use of organizations described in doned cemetery as a whole, may qualify for this section. Any form of written application is exemption. acceptable as long as it shows the information

Care of individual plots. When funds are indicated in this section and includes a declarareceived by a cemetery company for the perpet- tion that it is made under the penalties of perjury.

ual care of an individual lot or crypt, a trust is The application must be submitted in duplicate.

Page 54 Chapter 4 Other Section 501(c) Organizations
State-Chartered investments. There should be attached a con- 7) To provide insurance benefits for its memformed copy of the articles of incorporation or bers or dependents of its members or Credit Unions other document setting forth the permitted pow- both.

Your organization must show on its application ers or activities of the organization; the bylaws or 8) To provide social and recreational activi- other similar code of regulations; and the latest that it is formed under a state credit union law, ties for its members. annual financial statement showing the receipts, the state and date of incorporation, and that the

state credit union law with respect to loans, disbursements, assets, and liabilities of the or- Auxiliary unit. An auxiliary unit or society of a ganization. investments, and dividends, if any, is being com- veterans’ organization may apply for recognition plied with. of exemption provided that the veterans’ organi- A form of statement furnished to applicants zation (parent organization) meets the require- by the Credit Union National Association is ac- ments explained earlier in this section. The ceptable in meeting the application require- 501(c)(19) — auxiliary unit or society must also meet all the ments for credit unions, and may be used following additional requirements. instead of the statement form of application just Veterans’

described. The following is a reproduction of that 1) It is affiliated with, and organized in accorform. Organizations dance with, the bylaws and regulations forClaim for Exemption from Federal Income mulated by the parent organization.

Tax (Date) A post or organization of past or present mem- 2) At least 75% of its members are either The undersigned (Complete bers of the Armed Forces of the United States

may file Form 1024 to apply for recognition of past or present members of the U.S. name) Credit Union, Inc., (Com- Armed Forces, spouses of those mem- plete address, including street and number), a exemption from federal income tax. You should bers, or related to those members within credit union operating under the credit union law follow the general procedures outlined in chap- two degrees of kinship (grandparent, of the State of , claims exemption ter 1. The organization must also meet the quali- brother, sister, and grandchild represent from federal income tax and supplies the follow- fications described in this section.

the most distant allowable relationship). ing information relative to its operation. Examples of groups that would qualify for

exemption are posts or auxiliaries of the Ameri- 3) All of its members either are members of 1) Date of incorporation . can Legion, Veterans of Foreign Wars, and simi- the parent organization, spouses of a

2) It was incorporated under the credit union lar organizations. member of the parent organization, or relaw of the State of , and is To qualify for recognition of exemption, your lated to a member of such organization

being operated under uniform bylaws within two degrees of kinship. application should show:

adopted by said state. 4) No part of its net earnings benefit any pri- 1) That the post or organization is organized 3) In making loans, the state credit union law vate shareholder or individual.

in the United States or any of its posses- requirements, including their purposes, se- sions, curity, and rate of interest charged Trusts or foundations. Trusts or foundations

thereon, are complied with. 2) That at least 75% of the members are past for a veterans’ organization also may apply for

or present members of the U.S. Armed recognition of exemption provided that the par- 4) Its investments are limited to securities Forces and that at least 97.5% of all mem- ent organization meets the requirements ex- which are legal investments for credit un- bers of the organization are past or pres- plained earlier. The trust or foundation must also ions under the state credit union law. ent members of the U.S. Armed Forces, meet all the following qualifications.

5) Its dividends on shares, if any, are distrib- cadets (including only students in college

uted as prescribed by the state credit 1) The trust or foundation is in existence or university ROTC programs or at armed

union law. under local law and, if it is organized for services academies) or spouses, widows, charitable purposes, has a dissolution pro- or widowers of any of those listed here, I, the undersigned, a duly authorized officer of vision similar to charitable organizations. and the Credit Union, Inc., declare (See Articles of Organization in chapter 3 that the above information is a true statement of 3) That no part of net earnings benefit any of this publication.) facts concerning the credit union. private shareholder or individual. Signature of 2) The corpus or income cannot be diverted

Officer Title In addition to these requirements, a veter- or used other than for:

ans’ organization also must be operated exclusively for one or more of the following purposes. a) The funding of a veterans’ organization, Other Mutual described in this section,

Financial Organizations 1) To promote the social welfare of the com- b) Religious, charitable, scientific, literary, munity (that is, to promote in some way Every other organization included in this section or educational purposes or for the pre- the common good and general welfare of must show in its application the state in which vention of cruelty to children or animals, the people of the community). or the organization is incorporated and the date of

incorporation; the character of the organization; 2) To assist disabled and needy war veterans c) An insurance set aside. the purpose for which it was organized; its actual and members of the U.S. Armed Forces

activities; the sources of its receipts and the and their dependents and the widows and 3) The trust income is not unreasonably ac- disposition thereof; whether any of its income orphans of deceased veterans. cumulated and, if the trust or foundation is

may be credited to surplus or may benefit any 3) To provide entertainment, care, and assis- not an insurance set aside, a substantial

private shareholder or individual; whether the tance to hospitalized veterans or members portion of the income is in fact distributed law relating to loans, investments, and dividends of the U.S. Armed Forces. to the parent organization or for the pur- is being complied with; and, in general, all facts poses described in item (2)(b). relating to its operations that affect its right to 4) To carry on programs to perpetuate the

memory of deceased veterans and mem- 4) It is organized exclusively for one or more exemption.

bers of the Armed Forces and to comfort of the purposes listed earlier in this section The application must include detailed infor- that are specifically applicable to the par- mation showing either that the organization pro- their survivors.

ent organization. vides both reserve funds for and insurance of 5) To conduct programs for religious, charita- shares and deposits of its member financial or- ble, scientific, literary, or educational pur- ganizations or that the organization provides Tax treatment of donations. Donations to poses. reserve funds for shares or deposits of its mem- war veterans’ organizations are deductible as

bers and 85% or more of the organization’s charitable contributions on the donor’s federal 6) To sponsor or participate in activities of a

income is from providing reserve funds and from patriotic nature. income tax return. At least 90% of the

Chapter 4 Other Section 501(c) Organizations Page 55
organization’s membership must consist of war nal liability of the person who entire amount less expenses to a single parent

veterans. The term war veterans means per- established or contributed to the trust), organization that is exempt from income tax, it

sons, whether or not present members of the should file its application on Form 1024. The c) Investment in public debt securities of U.S. Armed Forces, who have served in the U.S. information to submit upon application is de- the U.S., obligations of a state or local Armed Forces during a period of war (including scribed in this section. For a discussion of the government that are not in default as to the Korean and Vietnam conflicts, the Persian procedures for obtaining recognition of exemp- principal or interest, or time or demand Gulf war, and later declared wars). tion, see chapter 1. deposits in a bank or an insured credit You must show that your organization is a union located in the U.S. (These invest- corporation. If you are in doubt as to whether ments are restricted to the extent that your organization qualifies as a corporation for the trustee determines that a portion of 501(c)(20) — this purpose, contact your IRS office. the assets is not currently needed for A title-holding corporation will qualify for ex- the purposes described in (1), above), Group Legal Services emption only if there is effective ownership and or control over it by the distributee exempt organi- Plan Organizations d) Accident and health benefits or insur- zation. For example, the distributee organization

ance premiums and other administra- may control the title-holding corporation by ownAn organization or trust created in the U.S. for tive expenses for retired coal miners ing its voting stock or possessing the power to

the exclusive function of forming a part of a and their spouses. The amount of as- select nominees to hold its voting stock.

qualified group legal services plan or plans can- sets available for such use is generally

not be exempt under section 501(c)(20) after Corporate charter. The corporate charter that limited to 110% of the present value of

June 30, 1992. However, it may qualify for ex- you submit upon application must confine the the liability for black lung benefits.

emption under section 501(c)(9). purposes and powers of your organization to

holding title to property, collecting income from

An annual information return is required of the property, and turning the income over to an

exempt trusts described in section 501(c)(21). exempt organization. If the charter authorizes

501(c)(21) — Form 990–BL, Information and Initial Excise your organization to engage in activities that go

Tax Return for Black Lung Benefit Trusts and beyond these limits, its exemption may not be

Black Lung Certain Related Persons, must be used for this recognized even if its actual operations are so

purpose. However, a trust that normally has limited. If your organization’s original charter

Benefit Trusts gross receipts in each tax year of not more than does not limit its powers, you may amend the

$25,000 is excepted from this filing requirement. charter to conform to the required limits and

If your organization wishes to obtain recognition submit evidence with your application that the Excise taxes. If your organization makes of exemption as a black lung benefit trust, it must charter has been so amended.

any expenditures, payments, or investments file its application by letter and include a copy of other than those described earlier in this section, Payment of income. You must show that your its trust instrument. The general procedures to a tax equal to 10% of the amount of such expen- corporation is required to turn over the entire follow for obtaining recognition are discussed in ditures is imposed on the trust. If there are any income from the property, less expenses, to one chapter 1 of this publication. This section de- acts of self-dealing between the trust and a or more exempt organizations. scribes the additional (or specific) information to disqualified person, a tax equal to 10% of the Actual payment of the income is required. A be provided upon application. amount involved is imposed on the disqualified mere obligation to use the income for the exRequirements. A black lung benefit trust that person. Both of these excise taxes are reported empt organization’s benefit, or the fact that such

is established in writing, created or organized in on Schedule A (Form 990–BL). See the Form organization has control over the income does

the United States, and contributed to by any 990–BL instructions for more information on not satisfy this requirement.

person (except an insurance company) will qual- these taxes and what has to be filed, even if the Expenses. Expenses may reduce the ify for tax-exempt status if it meets both of the trust is excepted from filing. amount of income required to be turned over to following requirements. the tax-exempt organization for which your or- Tax treatment of donations. Contributions

1) Its only purpose is: ganization holds property. The term expenses by a taxpayer (generally, the coal mine operator) (for this purpose) includes not only ordinary and to a black lung benefit trust are deductible for a) To satisfy in whole or in part the liability necessary expenses paid or incurred, but also federal income tax purposes under section 192 of that person (generally, the coal mine reasonable additions to depreciation reserves of the Code. The deduction is limited, and any operator contributing to the trust) for, or and other reserves that would be proper for a excess contributions are subject to an excise tax with respect to, claims for compensa- business corporation holding title to and main- of 5%. Form 6069, Return of Excise Tax on tion arising under federal or state stat- taining property. Excess Contributions to Black Lung Benefit utes for disability or death due to In addition, the title-holding corporation may Trust Under Section 4953 and Computation of pneumoconiosis, retain part of its income each year to apply to Section 192 Deduction, is used to compute the debt on property to which it holds title. This b) To pay the premiums for insurance that allowable deduction and any excise tax liability. transaction is treated as if the income had been covers only that liability, and The form does not have to be filed if there is no

turned over to the exempt organization and the excise tax liability. For more information about c) To pay the administrative and other in- latter had used the income to make a contribu- these contributions, see Form 6069 and its in- cidental expenses of that trust (includ- tion to the capital of the title-holding corporation structions. ing legal, accounting, actuarial, and that in turn, applied the contribution to the debt.

trustee expenses) in connection with Waiver of payment of income. Generally, the operation of the trust and process- there is no payment of rent when the occupant of ing of black lung claims against such 501(c)(2) — property held by your title-holding corporation is person arising under federal or state the exempt organization for which your corpora- statutes. Title-Holding tion holds the title. In this situation, the statutory

requirement that income be paid over to the 2) No part of its assets may be used for, or Corporations exempt organization is satisfied if your corpora- diverted to, any purposes other than: tion turns over whatever income is available. for Single Parents a) The purposes described in (1), above, Application for recognition of exemption.

b) Payments into the Black Lung Disability If your organization wants to obtain recognition In addition to the information required by Form

Trust Fund or into the general fund of of exemption from federal income tax as a cor- 1024, the title-holding corporation must furnish

the U.S. Treasury (other than in satis- poration organized to hold title to property, col- evidence that the organization for which title is

faction of any tax or other civil or crimi- lect income from that property, and turn over the held has obtained recognition of exempt status.

Page 56 Chapter 4 Other Section 501(c) Organizations
If that organization has not been specifically The organizing document must permit the

notified in writing by the IRS that it is exempt, the shareholders or beneficiaries to terminate their

title-holding corporation must submit the neces- interests by at least one of the following meth- 501(c)(26) —

sary application and supporting documents to ods. State-Sponsored enable the IRS to determine whether the organization for which title is held qualifies for exemp- 1) By selling or exchanging their stock or High-Risk Health

tion. A copy of a ruling or determination letter beneficial interest to any organization deissued to the organization for which title is held scribed in IRC 501(c)(25)(C), provided that Coverage

will be proof that it qualifies for exemption. How- the sale or exchange does not cause the

ever, until the organization for which title is held number of shareholders or beneficiaries to Organizations

obtains recognition of exempt status or proof is exceed 35.

A state-sponsored organization established to submitted to show that it qualifies, the title-hold- 2) By having their stock or beneficial interest provide medical care to high-risk individuals ing corporation cannot obtain recognition of ex- redeemed by the 501(c)(25) organization should apply by letter for recognition of exemp- emption. upon 90 days notice. tion from federal income tax under section

501(c)(26). Tax treatment of donations. Donations to an If state law prevents a corporation from including

exempt title-holding corporation generally are in its articles of incorporation the above provi- To qualify for exemption, the organization

not deductible as charitable contributions on the sions, such provisions must instead be included must be a membership organization established

donor’s federal income tax return. in the bylaws of the corporation. by a state exclusively to provide coverage for

medical care on a nonprofit basis to high-risk A 501(c)(25) organization may be organized individuals who are state residents. It may pro- as a nonstock corporation if its articles of incor- vide coverage either by issuing insurance itself poration or bylaws provide members with the or by entering into an arrangement with a health 501(c)(25) — same rights as described above. maintenance organization (HMO).

Title-Holding The state must determine the composition of Subsidiaries. A wholly-owned subsidiary will membership in the organization. No part of the not be treated as a separate corporation, and all Corporations or Trusts net earnings of the organization can benefit any assets, liabilities, and items of income, deduc- private shareholder or individual. tion, and credit will be treated as belonging to for the section 501(c)(25) organization. Subsidiar- High-risk individuals. These are individuals, ies should not apply separately for recognition of Multiple Parents their spouses and qualifying children, who, be- exemption. cause of a pre-existing medical condition:

If your organization wants to obtain recognition Tax treatment of donations. Donations to an 1) Cannot get medical care coverage for that of exemption from federal income tax as an exempt title-holding corporation generally are condition through insurance or an HMO, or organization organized for the exclusive pur- not deductible as charitable contributions on the pose of acquiring, holding title to, and collecting 2) Can get coverage for that condition only at donor’s federal income tax return. income from real property, and turning over the a rate that is substantially higher than the

entire amount less expenses to member organi- rate for the same coverage from the

zations exempt from income tax, it should file its Unrelated Business Income state-sponsored organization.

application on Form 1024. For a discussion of In general, the receipt of unrelated business the procedures for obtaining recognition of ex- income by a section 501(c)(25) organization will emption, see chapter 1. subject the organization to loss of exempt status

Who can control the organization. Organi- since the organization cannot be exempt from

taxation if it engages in any business other than 501(c)(27) —

zations recognized as exempt under this section

may have up to 35 shareholders or beneficia- that of holding title to real property and collect- State-Sponsored ing the income from the property. However, ex- ries, in contrast to title-holding organizations empt status generally will not be affected by the Workers’ recognized as exempt under IRC 501(c)(2), receipt of debt-financed income that is treated which may have only 1 controlling parent organization. as unrelated business taxable income solely be- Compensation

cause of section 514.

Organizational requirements. A 501(c)(25) Under section 514(c)(9), certain sharehold- Reinsurance

organization must be either a corporation or a ers or beneficiaries are not subject to unrelated Organizations trust. Only one class of stock is permitted in the debt-financed income tax under section 514 on

case of a corporation. In the case of a trust, only their investments through the organization. A state-sponsored workers’ compensation rein- one class of beneficial interest is allowed. These shareholders are generally schools, col- surance organization should apply by letter for Organizations eligible to acquire or hold in- leges, universities, or supporting organizations recognition of exemption from federal income terests in this type of title-holding organization of such educational institutions. Organizations tax under section 501(c)(27). are qualified pension, profit-sharing, or stock other than these will take into account as gross To qualify for exemption, any membership bonus plans, governmental plans, governments income from an unrelated trade or business their organization must meet all the following require- and their agencies and instrumentalities, and pro rata share of income that is treated as unre- ments. charitable organizations. lated debt-financed income because section

514(c)(9) does not apply. These organizations The articles of incorporation or trust instru- 1) It was established by a state before June

ment must include provisions showing that the will also take their pro rata share of the allowable 1, 1996, exclusively to reimburse its mem- deductions from unrelated taxable income. corporation or trust is organized to meet the bers for losses under workers’ compensarequirements of the statute, including compli- tion acts.

ance with the limitations on membership and Real property. Real property can include per- 2) The state requires that the membership classes of stock or beneficial interest, and com- sonal property leased in connection with real consist of all persons who issue insurance pliance with the income distribution require- property, but only if the rent from the personal covering workers’ compensation losses in ments. The organizing document must permit property is not more than 15% of the total rent the state and all persons and government for both the real property and the personal prop- the organization’s shareholders or beneficiaries entities who self-insure against those erty. to dismiss the organization’s investment advi- losses. sor, if any, upon a vote of the shareholders or Real property acquired after June 10, 1987,

beneficiaries holding a majority interest in the cannot include any interest as a tenant in com- 3) It operates as a nonprofit organization by

organization. mon (or similar interest) or any indirect interest. returning surplus income to its members or

Chapter 4 Other Section 501(c) Organizations Page 57
workers’ compensation policyholders on a b) Provide related coverage which is inci- organization or by providing the initial opperiodic basis and by reducing initial pre- dental to workmen’s compensation in- erating capital of the organization.

miums in anticipation of investment in- surance. 4) The assets of the organization revert to the come. state upon dissolution or the organization 2) It provides workmen’s compensation insur- Any organization (including a mutual insur- is not permitted to dissolve under state ance to any employer in the state (for em- ance company) can qualify for exemption if it law. ployees in the state or temporarily meets all of the following requirements. assigned out-of-state) which seeks such 5) The majority of the board of directors or

insurance and meets other reasonable re- oversight body of such organization are 1) It is created by state law and is organized quirements relating to the insurance. appointed by the chief executive officer or and operated under state law exclusively other executive branch official of the state, to: 3) The state makes a financial commitment to by the state legislature, or by both. such organization either by extending its a) Provide workmen’s compensation in- full faith and credit to the initial debt of the surance which is required by state law

or state law must provide significant

disincentives if employers fail to

purchase such insurance, and

Page 58 Chapter 4 Other Section 501(c) Organizations
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Chapter 5 How To Get Tax Help Page 59
Organization Reference Chart

Section of Application Annual return Contributions

1986 Code Description of organization General nature of activities Form No. required to be allowable

filed

501(c)(1) Corporations Organized under Act Instrumentalities of the No Form None Yes, if made for

of Congress (including Federal Credit United States exclusively

Unions) public purposes

501(c)(2) Title Holding Corporation For Holding title to property of an 1024 9901 or 990EZ8 No2

Exempt Organization exempt organization

501(c)(3) Religious, Educational, Charitable, Activities of nature implied by 1023 9901 or 990EZ8, Yes, generally

Scientific, Literary, Testing for Public description of class of organization or 990-PF

Safety, to Foster National or

International Amateur Sports

Competition, or Prevention of Cruelty

to Children or Animals Organizations

501(c)(4) Civic Leagues, Social Welfare Promotion of community welfare; 1024 9901 or 990EZ8 No, generally 2, 3

Organizations, and Local charitable, educational or recreational

Associations of Employees

501(c)(5) Labor, Agricultural, and Horticultural Educational or instructive, the 1024 9901 or 990EZ8 No2

Organizations purpose being to improve conditions of

work, and to improve products of

efficiency

501(c)(6) Business Leagues, Chambers of Improvement of business 1024 9901 or 990EZ8 No2

Commerce, Real Estate Boards, conditions of one or more lines of

Etc. business

501(c)(7) Social and Recreational Clubs Pleasure, recreation, social activities 1024 9901 or 990EZ8 No2

501(c)(8) Fraternal Beneficiary Societies Lodge providing for payment of life, 1024 9901 or 990EZ8 Yes, if for certain

and Associations sickness, accident or other benefits Sec. 501(c)(3)

to members purposes

501(c)(9) Voluntary Employees Beneficiary Providing for payment of life, sickness, 1024 9901 or 990EZ8 No2

Associations accident, or other benefits to members

501(c)(10) Domestic Fraternal Societies Lodge devoting its net earnings to 1024 9901 or 990EZ8 Yes, if for certain

and Associations charitable, fraternal, and other Sec. 501(c)(3)

specified purposes. No life, sickness, or purposes

accident benefits to members

501(c)(11) Teachers’ Retirement Fund Teachers’ association for payment of No Form6 9901 or 990EZ8 No2

Associations retirement benefits

501(c)(12) Benevolent Life Insurance Activities of a mutually beneficial 1024 9901 or 990EZ8 No2

Associations, Mutual Ditch or nature similar to those implied by the

Irrigation Companies, Mutual or description of class of organization

Cooperative Telephone Companies

Etc.

501(c)(13) Cemetery Companies Burials and incidental activities 1024 9901 or 990EZ8 Yes, generally

501(c)(14) State Chartered Credit Unions, Loans to members No Form6 9901 or 990EZ8 No2

Mutual Reserve Funds

501(c)(15) Mutual Insurance Companies or Providing insurance to members 1024 9901 or 990EZ8 No2

Associations substantially at cost

501(c)(16) Cooperative Organizations to Financing crop operations in No Form6 9901 or 990EZ8 No2

Finance Crop Operations conjunction with activities of a

marketing or purchasing association

501(c)(17) Supplemental Unemployment Provides for payment of 1024 9901 or 990EZ8 No2

Benefit Trusts supplemental unemployment

compensation benefits

501(c)(18) Employee Funded Pension Trust Payment of benefits under a No Form6 9901 or 990EZ8 No2

(created before June 25, 1959) pension plan funded by employees

501(c)(19) Post or Organization of Past or Activities implied by nature of 1024 9901 or 990EZ8 No, generally7

Present Members of the Armed organization

Forces

501(c)(21) Black Lung Benefit Trusts Funded by coal mine operators to No Form6 990-BL No4

satisfy their liability for disability or

death due to black lung diseases

Page 60 Chapter 5 How To Get Tax Help
Section of Application Annual return Contributions

1986 Code Description of organization General nature of activities Form No. required to be allowable

filed

501(c)(22) Withdrawal Liability Payment Fund To provide funds to meet the No Form6 990 or 990EZ8 No5

liability of employers withdrawing from

a multi-employer pension fund

501(c)(23) Veterans Organization (created To provide insurance and other No Form6 990 or 990EZ8 No, generally7

before 1880) benefits to veterans

501(c)(25) Title Holding Corporations or Trusts Holding title and paying over 1024 990 or 990EZ No

with Multiple Parents income from property to 35 or fewer

parents or beneficiaries

501(c)(26) State-Sponsored Organization Provides health care coverage to No Form6 9901 or 990EZ8 No

Providing Health Coverage for high-risk individuals

High-Risk Individuals

501(c)(27) State-Sponsored Workers’ Reimburses members for losses No Form6 9901 or 990EZ8 No

Compensation Reinsurance under workers’ compensation acts

Organization

501(c)(28) National Railroad Retirement Manages and invests the assets of the No Form11 Not yet No

Investment Trust Railroad Retirement Account determined

501(d) Religious and Apostolic Associations Regular business activities. No Form 10659 No2

Communal religious community

501(e) Cooperative Hospital Service Performs cooperative services for 1023 9901 or 990EZ8 Yes

Organizations hospitals

501(f) Cooperative Service Organizations Performs collective investment 1023 9901 or 990EZ8 Yes

of Operating Educational services for educational organizations

Organizations

501(k) Child Care Organizations Provides cares for children 1023 990 or 990EZ8 Yes

501(n) Charitable Risk Pools Pools certain insurance risks of 1023 9901 or 990EZ8 Yes

501(c)(3)

521(a) Farmers’ Cooperative Associations Cooperative marketing and 1028 990-C No

purchasing for agricultural procedures

527 Political organizations A party, committee, fund, 8871 1120-POL10 No

association, etc., that directly or 990 or 990EZ8

indirectly accepts contributions or

makes expenditures for political

campaigns

1For exceptions to the filing requirement, see chapter 2 and the form 6Application is by letter to the address shown on Form 8718. A copy of the

instructions. organizing document should be attached and the letter should be signed by

an officer. 2An organization exempt under a subsection of Code sec. 501 other than

501(c)(3) may establish a charitable fund, contributions to which are 7Contributions to these organizations are deductible only if 90% or more of

deductible. Such a fund must itself meet the requirements of section the organization s members are war veterans.

501(c)(3) and the related notice requirements of section 508(a). 8For limits on the use of Form 990EZ, see chapter 2 and the general 3Contributions to volunteer fire companies and similar organizations are instructions for Form 990EZ (or Form 990).

deductible, but only if made for exclusively public purposes. 9Although the organization files a partnership return, all distributions are 4Deductible as a business expense to the extent allowed by Code section 192 deemed dividends. The members are not entitled to pass-through treatment

of the organization’s income or expenses. 5Deductible as a business expense to the extent allowed by Code section

194A. 10Form 1120–POL is required only if the organization has taxable income as

defined in IRC 527(c).

11Application procedures not yet determined.

Chapter 5 How To Get Tax Help Page 61
To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A D 1024 . . . 3, 13, 47, 48, 49, 50, Integral-part test . . . . . . . . . 43

Acknowledgement of Determination letter ........ 4 51, 52, 53, 55, 56, 57

contributions . . . . . . . . . . 13 Disclosures, required: 1040 . . . . . . . . . . . . . . . 10 L

Advance ruling 1065 ................ 8 . . . . . . . . . 4, 38 Dues used for lobbying . . . 15 Labor organization ...... 15, 48 Nondeductible 1120–POL . . . . . . . . . . . 10 Adverse determination ...... 4 Law, public interest . . . . . . . 25 1128 . . . . . . . . . . . . . . . 15 Aged, home for . . . . . . . . . . 24 contributions . . . . . . . . . 15

2848 . . . . . . . . . . . . . . 4, 5 Legislative activity ...... 45, 49 Quid pro quo Agricultural organization . . . . 48 4720 . . . . . . . . . . . . . . . 46 Literary organizations . . . . . . 26 contributions . . . . . . . . . 12 Airport . . . . . . . . . . . . . . . . 47 Services available from 5578 . . . . . . . . . . . . . . . 23 Loans, organizations

Alumni association . . . . . . . . 22 5768 . . . . . . . . . . . . . . . 45 providing . . . . . . . . . . . . . 24 government . . . . . . . . . 15

Amateur athletic Dispositions of donated 6069 . . . . . . . . . . . . . . . 56 Lobbying expenditures . . . . . 45

organizations . . . . . . . . . . 26 property . . . . . . . . . . . . . 12 8274 ................ 9 Local benevolent life

Animals, prevention of cruelty 8282 Disqualified persons . . . . . . . . . . . . . . . 12 insurance associations . . . 53 . . . . . . . 42 to . . . . . . . . . . . . . . . . . . 26 8283 . . . . . . . . . . . . . . . 12 Domestic fraternal society . . . 50 Local employees’

Appeal procedures ......... 5 8300 . . . . . . . . . . . . . . . 13 association . . . . . . . . . . . 51 Dues used for political or Application procedures: 8718 . . . . . . . . . . . . . . 3, 4 Lodge system . . . . . . . . . . . 50 legislative activities .... 15, 49 872–C . . . . . . . . . . . . 34, 38 Bylaws ............... 3

8821 ................ 5 Conformed copy ......... 3 8871 ............. 10, 13 M Description of activities .... 3 E 8872 ............. 10, 13 Medical research Employer identification Educational 990 . . . . . . . . . . 7, 8, 13, 45 organization . . . . . . . . . . . 30 number ............. 3 organizations ........ 21, 30 990–BL . . . . . . . . . . . . 8, 56 Medicare and Medicaid Financial data .......... 3 Employees’ association . . . . 50 990–EZ . . . . . . . . . . . . . . 8 payments . . . . . . . . . . . . 33

Organizing documents ..... 3 Employment taxes ......... 9 990–PF . . . . . . . . . . . . 9, 26 Membership fee ....... 33, 39 Aquatic resources . . . . . . . . 48 Endowment fund . . . . . . . . . 30 990–T . . . . . . . . . . . . . . . 9 Modification of exemption .... 4

Articles of organization . . . . . 19 Estimated tax ............ 9 SS–4 . . . . . . . . . . . . . . 3, 6 More information (See Tax help) Assistance (See Tax help) Excess benefit transaction: W–2 . . . . . . . . . . . . . . . 10 Mutual financial

Athletic organization ..... 22, 26 Date occurs . . . . . . . . . . . 29 Fraternal beneficiary organization . . . . . . . . . . . 54

Attorney’s fees . . . . . . . . . . 25 Disqualified person .... 27, 28 society . . . . . . . . . . . . . . 50 Mutual or cooperative

Attribution, special rules . . . . 43 Controlled entity, 35% . . 28 Fraternal societies ...... 15, 50 association . . . . . . . . . . . 53 Family members . . . . . . 28 Free tax services . . . . . . . . . 59

Substantial influence . . . 28 Funeral benefit insurance . . . 53

B Disregarded benefits . . . . . 29 N

Black lung benefit trust . . . . . 56 Excise tax . . . . . . . . . . . . 27 Nursing bureau . . . . . . . . . . 24

Initial contracts . . . . . . . . . 29 G Board of trade . . . . . . . . . . . 48

Organization managers . . . 27 Gifts and contributions, public Bureau defined . . . . . . . . . . 39 charity . . . . . . . . . . . . . . 39 O Reasonable Burial benefit insurance . . . . 53 One-third support test . . . . . . 31 compensation . . . . . . . . 29 Governmental unit . . . . . . . . 30 Business income, unrelated . . . 9 Rebuttable presumption . . . 29 Organization assets: Grant: Business league . . . . . . . . . 48 Dedication . . . . . . . . . . . . 19 Excise tax: Distinguished from gross Distribution . . . . . . . . . . . 19 Black lung benefit trust . . . 56 receipts . . . . . . . . . . . . 39

Organization Reference Lobbying expenditures . . . 46 Exclusion for unusual C Political expenditures Chart ............. 60, 61 . . . . 46 grant ............ 34, 37 Cemetery company . . . . . . . 53 Private foundations . . . . . . 26 From public charity .... 33, 40 Organizational changes . . . . 15

Chamber of commerce . . . . . 48 Exempt function . . . . . . . . . 10 Grantor and contributor, Change in legal structure . . . 15 Exempt purposes . . . . . . . . 16 reliance on ruling . . . . . . . 44 P Charitable Extensions of time . . . . . . . . 17 Gross receipts from Payments for terroristic contributions ........ 13, 16 nonmembership sources . . 50 attacks . . . . . . . . . . . . . . 26 Charitable organization . . . 16, 24 Group exemption letter ...... 6 Penalties: Charitable risk pools . . . . . . . 24 F Failure to allow public Child care organization . . . . . 16 Facts and circumstances H inspection . . . . . . . . . . 14

Children, prevention of cruelty test . . . . . . . . . . . . . . . . 31 Failure to disclose ..... 12, 15 Health coverage to . . . . . . . . . . . . . . . . . . 26 Fair market value, estimate Failure to file ........... 9 organization . . . . . . . . . . . 57 Church: of . . . . . . . . . . . . . . . . . . 12 Perpetual care Help (See Tax help) Integrated auxiliaries . . . . . 25 Filing requirements: organization . . . . . . . . . . . 54

Annual information High-risk health coverage Civic leagues . . . . . . . . . . . 47 Political activity ..... 15, 17, 47 organization . . . . . . . . . . . 57 Clinic returns .............. 8 . . . . . . . . . . . . . . . . . 24 Political organization: Donee information Home for the aged . . . . . . . . 24 College bookstore, Income tax return . . . . . . . 10

return . . . . . . . . . . . . . 12 Homeowners’ association . . . 47 restaurant . . . . . . . . . . . . 22 Taxable income . . . . . . . . 10

Due date . . . . . . . . . . . . . 10 Horticultural organization . . . 48 Comments .............. 2 Power of attorney ......... 4 Employment tax ......... 9 Hospital ............. 24, 30 Community association . . . . . 47 Preferred stock . . . . . . . . . . 54 Excise tax . . . . . . . . . . . . 26

Community nursing Prevention of cruelty to Political organization . . . . . 10

bureau . . . . . . . . . . . . . . 24 I children or animals . . . . . . 26 Private foundations ....... 9

Community trust . . . . . . . . . 36 Unrelated business Inactive organization . . . . . . 15 Private delivery service . . . . . 17

Contributions, Industrial development income ............. 9 . . . . . 47 Private foundations . . . . . . . 26

charitable .......... 13, 16 Forms: Instrumentalities . . . . . . . . . 16 Private operating

Court appeals ............ 6 1023 . . 3, 5, 6, 13, 17, 18, 22, Insurance, organizations foundation . . . . . . . . . . . . 44

Credit union . . . . . . . . . . . . 54 26, 45, 47 providing . . . . . . . . . . . . . 23 Private school . . . . . . . . . . . 22

Page 62
Public charity: Requests other than Special computation Title-holding corporation . . . . 56

Gifts and contributions . . . . 39 applications ............ 4 period for new TTY/TDD information . . . . . . 59

Grant from . . . . . . . . . . . . 40 Responsiveness test . . . . . . 42 organizations ........ 32, 37

Section 509(a)(1) . . . . . . . 30 Revocation of exemption ..... 4 Specified organizations . . . . . 41 U Section 509(a)(2) . . . . . . . 37 Ruling letter ............. 4 Sports organization, Unemployment benefit Section 509(a)(3) . . . . . . . 40 amateur . . . . . . . . . . . . . 26 trust . . . . . . . . . . . . . . . . 52 Section 509(a)(4) . . . . . . . 44 State-sponsored: Support test S Unrelated business income . . . 9 ......... 31, 37 High-risk health coverage

Public inspection: Scholarship: Unusual grants ........ 34, 37 organization . . . . . . . . . 57

Annual return . . . . . . . . . . 13 Private school . . . . . . . . . 23 Workers’ compensation User fee . . . . . . . . . . . . . . 3, 4

Exemption applications . . . 13 Scholarships . . . . . . . . . . . . 24 reinsurance

Forms 8871 and 8872 . . . . 13 School, private . . . . . . . . . . 22 organization . . . . . . . . . 57 V

Public-interest law firm . . . . . 25 Scientific organizations . . . . . 25 Stock or commodity Veterans’ organization . . . . . 55

Publications (See Tax help) Section 501(c)(3) organizations: exchange . . . . . . . . . . . . 49 Voluntary employees’

Publicly-supported Amateur athletic . . . . . . . . 26 Suggestions ............. 2 beneficiary association . . . 51

organization ......... 30, 31 Charitable . . . . . . . . . . . . 24 Supplemental unemployment Volunteer fire company . . . . . 47

Attraction of public Educational . . . . . . . . . . . 21 benefit trust . . . . . . . . . . . 52

support . . . . . . . . . . . . 31 Literary . . . . . . . . . . . . . . 26

Ten-percent-of-support . . . 31 Prevention of cruelty . . . . . 26 Support ............. 32, 33 W

Private foundations . . . . . . 26 Support test: War veterans’ organization . . 55 Facts and Public charities . . . . . . . . . 27 Withdrawal of application .... 4 R circumstances . . . . . . . . 31 Qualifications . . . . . . . . . . 16 Withholding information from Racial composition . . . . . . . . 22 One-third . . . . . . . . . . . . 31 Religious . . . . . . . . . . . . . 25 public ................ 4

Racially nondiscriminatory Public charity . . . . . . . . . . 37 Scientific . . . . . . . . . . . . . 25 Workers’ compensation policy . . . . . . . . . . . . . . . 22 Single entity . . . . . . . . . . . . 36 reinsurance organization . . 57 Real estate board . . . . . . . . 48 Social clubs .......... 15, 49 T

Recognition of exemption, Tax help . . . . . . . . . . . . . . . 59 ■ Social welfare

application . . . . . . . . . . . . 17 organization ......... 15, 47 Taxpayer Advocate . . . . . . . 59

Reliance period . . . . . . . . . . 35 Technical advice .......... 5

Religious organizations . . . . . 25 Testing for public safety . . . . 44

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