Source: http://lyster.com/nonprofits/organizational_test.htm
Timestamp: 2018-07-16 16:16:12
Document Index: 331301652

Matched Legal Cases: ['§ 501', '§ 501', '§ 115', '§ 115', '§ 115', '§ 115', '§ 115', '§ 115', '§ 115', '§ 115', '§ 501', '§ 115', '§ 1', '§ 501', '§ 115', '§ 115', '§ 3', '§ 501', '§ 501', '§ 501', '§ 1', '§ 501', '§ 1', '§ 1', '§ 1', '§ 501', '§ 1', '§ 115', '§ 501', '§ 115', '§ 1', '§ 115', '§ 115', '§ 115', '§ 501', '§ 501', '§ 1', '§ 501', '§ 115', '§ 501', '§ 115', '§ 115', '§ 115', '§ 501', '§ 501', '§ 1', '§ 501', '§ 115', '§ 115', '§ 501', '§ 115', '§ 501', '§ 501', '§ 115', '§ 1', '§ 115', '§ 115', '§ 115', '§ 115', '§ 115']

Organizational Test – IRC 501(c)(3)
Organizational Test – IRC 501\(c\)\(3\)
Examples of Acceptable and Unacceptable Purposes,
Q.2: Effect of the “Notwith-standing” Clause
Examples of the “Notwith-standing Clause”
Exempt Purposes: Q & A’s and Examples, Continued
Dissolution Provision: Q & A’s
Q. 8: Effect of No Dissolution Provision and
Q.9 & 10 Substitutes for “Exempt Purpose”
This article addresses specific issues that have arisen in determining whether the organizational test is satisfied. The organizational test requires that the articles of organization (hereafter “creating document”) of an organization described in IRC 501(c)(3) contain an explicit statement that its purposes are 501(c)(3) exempt purposes. The organizational test also requires an appropriate dissolution provision unless operation of state law or court action produces the same result. Private foundations have additional organizational test requirements.
An organization’s creating document may be articles of incorporation, articles of association, trust indenture, or constitution. A limited liability company’s (LLC’s) creating document is its state-approved articles of organization. If an LLC has adopted an operating agreement then this document is part of the creating document, but it would not, separately, be required to meet the organizational test. The required provisions in the creating document or state law are important because they subject an organization to enforcement of these provisions by appropriate Federal, State, and judicial authorities.
Most of the issues will be illustrated using a Question-and-Answer (Q & A) approach, along with numerous examples.
Exempt Purposes: Q & A’s and Examples
 Limits the purposes of such organizations to one or more exempt purposes,
 Does not expressly empower the organization to engage, other than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes, and
 Permanently dedicates the organization’s assets to 501(c)(3) purposes on dissolution.
See Reg. 1.501(c)(3)-1(b)(1)(i) and 1.501(a)(3)-1(b)(1)(4).
The organizational test must be met by the creating document or state law. It cannot be met by oral representations or representations made in other documents. See Reg. 1.501(c)(3)-1(b)(1)(iv).
 Charitable
 Religious
 Educational
 Scientific
 Literary
 Testing for public safety
 Fostering national or international amateur sports competition
 Preventing cruelty to children or animals.
The exempt purposes described in 501(c)(3) regulations encompass the general legal definition of the term “charitable.” The regulations list the following specific charitable purposes:
 Relief of the poor, the distressed, or the underprivileged;
 Advancement of religion
 Advancement of education or science
 Erecting or maintaining public buildings, monuments, or works
 Lessening the burdens of government
 Lessening neighborhood tensions
 Eliminating prejudice and discrimination
 Defending human and civil rights secured by law
 Combating community deterioration and juvenile delinquency
 (800) 829-3676 to order IRS tax forms and publications
 www.irs.gov .
Q1. Must an organization’s creating document contain a provision expressly limiting its purposes to one or more exempt purposes?
Example: If a creating document states that the organization is formed to operate for educational purposes, this statement would satisfy the purpose requirement since the term “educational” is contained in IRC 501(c)(3).
Example: If a creating document states that the organization is formed to eliminate prejudice and discrimination, this statement would satisfy the purpose requirement since the term “eliminate prejudice and discrimination” is contained in Reg. 1.501(c)(3)-1(d)(2).
Example: If a creating document states that the organization is formed to operate a school, this statement would not satisfy the purpose requirement. The term “school” is not contained in IRC 501(c)(3) or the applicable regulations. To operate a school does not necessarily further an exempt purpose. See Reg. 1.501(c)(3)-1(b)(1)(ii).
Example: If a creating document states that an organization was formed to promote health, this statement would not satisfy the purpose requirement. To promote health does not necessarily further an exempt purpose. For example, a hospital might promote health by providing medical care without necessarily dedicating itself to the promotion of health in a charitable manner as described in Rev. Rul. 69-545, 1969-2 C.B. 117.
A2. Yes. However, if the creating document contains a purpose that does not satisfy the organizational test, but such purpose is not expressly contrary to 501(c)(3) exempt purposes, the following type of provision in the creating document will meet the purpose requirement of the organizational test: “Notwithstanding other language (or provisions) in the creating document, the purposes will be limited exclusively to exempt purposes within the meaning of IRC 501(c)(3).” In this circumstance, no further amendment is necessary. This type of provision is generally referred to as a “notwithstanding clause.”
Example: A creating document provides that an organization is formed to provide scholarship assistance to individuals. Without further limitation, the term “providing scholarship assistance to individuals” could describe purposes outside the scope of IRC 501(c)(3). For example, the term could include providing financial assistance to children who are pre-selected by the organization’s founder. Therefore, this statement would not satisfy the purpose requirement of the organizational test.
A3. No. A provision in an organization’s creating document limiting its activities to those described in IRC 501(c)(3) would not cure an overly broad purpose statement.
Example: A creating document states that an organization is formed to provide tutoring. The instrument also states that notwithstanding other language in the creating document, it will not engage in activities that are not described in IRC 501(c)(3). The provision of tutoring does not necessarily accomplish exempt purposes within the meaning of IRC 501(c)(3). If the notwithstanding clause had limited the organization’s purposes to those described in IRC 501(c)(3), rather than its activities, no amendment would be necessary. Limiting the organization’s activities does not correct its overly broad purposes statement.
A4. Yes. IRC 170(c) refers to charitable contributions rather than charitable purposes. Under that section, contributions to organizations other than those described in IRC 501(c)(3) are treated as charitable contributions. For example, IRC 170(c)(5) refers to contributions to a cemetery company. Thus, a creating document stating that an organization’s purposes will be limited to those carried out by organizations described in IRC 170 would allow an organization to operate a cemetery.
Q6. Must an organization’s creating document include language that:
 Prohibits the inurement of net earnings to its members, trustees, officers, or other private persons;
 Limits its activities to those described in IRC 501(c)(3);
 States that no substantial part of the activities of the organization shall be the carrying on of propaganda, or otherwise attempting to influence legislation; and/or,
 States that the organization will not participate in or intervene in a political campaign on behalf of or in opposition to a candidate for public office?
 Expressly states that there will be inurement of net earnings, such as a statement that the profits of the organization will be distributed to its members, officers, directors or other individuals;
 Describes activities that are outside the scope of IRC 501(c)(3) and does not indicate that such activities will be insubstantial;
 Expressly states that the organization will be engaged in the carrying on of propaganda, or otherwise attempting to influence legislation but does not indicate that the activities will be insubstantial or will come within the limits set forth in IRC 501(h); or,
 Expressly states that the organization participates in, or intervenes in, any political campaign on behalf of or in opposition to any candidate for public office.
Example: A creating document provides that an organization is formed for educational purposes. It also provides that the organization will be attempting to influence legislation. The creating document does not state that the legislative activities will be insubstantial. Therefore, the organization would need to specifically state that legislative activities will be insubstantial.
In this case, the organization would only need to add this restriction on influencing legislation and would otherwise not need to add any of the other limitations provisions listed in Q.6.
Q8. Must an organization’s creating document permanently dedicate its assets to an exempt purpose?
A8. Yes. An organization will not qualify for exemption unless its creating document contains a dissolution provision that permanently dedicates its assets to an exempt purpose. Publication 557, Tax-Exempt Status for Your Organization, (Rev. May 2003), at Chapter 3, Articles of Organization, contains samples of language that will meet the dissolution provision requirement.
A9. An organization’s creating document must specify that its assets must be used for a public purpose if they are to be distributed upon dissolution to a State or local government. See Reg. 1.501(c)(3)-1(b)(4).
Q10. The language at Reg. 1.501(c)(3)-1(b)(4) provides that the assets of an organization described in IRC 501(c)(3) must be “dedicated to an exempt purpose.” In that section, it does not expressly refer to IRC 501(c)(3). Does this mean that a dissolution provision that refers to an exempt purpose without further limitation is sufficient?
A10. No. Reg. 1.501(c)(3)-1(a)(2) provides that for purposes of Reg. 1.501(c)(3)-1, the term “exempt purpose or purposes” means any purpose or purposes specified in IRC 501(c)(3). Accordingly, the reference to an exempt purpose at Reg. 1.501(c)(3)-1(b)(4) would include only those purposes described in IRC 501(c)(3). Thus, the creating document must expressly refer to IRC 501(c)(3) unless the language in the creating document indicates that the assets will be distributed:
Under IRC 508(e), a private foundation’s creating document must contain certain provisions concerning IRC 4941, 4942, 4943, 4944, and 4945.
January 27, 2003 SECTION 1. PURPOSE This Revenue Procedure provides guidance on dissolution provisions for any organization described in § 501(c)(3) and exempt from federal income tax under § 501(a) of the Code that requests a letter ruling that its income is excluded from gross income under § 115(1). SECTION 2. BACKGROUND .01 Section 115(1) of the Code provides that gross income does not include income that is (i) derived from a public utility or from the exercise of any essential governmental function (the "essential government function test"), and (ii) accruing to a State, any political subdivision thereof, or the District of Columbia (the "accrual test"). An entity is not required to obtain a ruling from the Service to claim an exclusion from gross income under § 115(1). .02 One aspect of the accrual test of § 115(1) is that assets of the organization must be distributed upon the organization's dissolution to one or more States, political subdivisions thereof, the District of Columbia, or to other organizations the income of which is excluded from gross income under § 115(1) (the "distribution of assets upon dissolution requirement"). The assets of an entity described in § 115(1) may not be distributed upon dissolution (or at any other time) to the United States government. See Rev. Rul. 90-74, 1990-2 C.B. 34; Rev. Rul. 77-261, 1977-2 C.B. 45; Rev. Rul. 71-589, 1971-2 C.B. 94. An organization seeking a ruling under § 115(1) will not be found to satisfy the distribution of assets upon dissolution requirement of the § 115(1) accrual test if its articles of organization fail to limit distribution of all the organization's assets upon dissolution to one or more States, political subdivision(s) thereof, the District of Columbia, or to other organizations whose income is excluded from gross income under § 115(1). .03 An organization may be described in § 501(c)(3) of the Internal Revenue Code and its income may also be excluded from gross income under § 115(1). See Treas. Reg. § 1.6033-2(g)(1)(v) (a state institution exempt from taxation under § 501(a) the income of which is excluded from gross income under § 115(a) (now § 115(1)) is not required to file an annual information return on Form 990, Return of Organization Exempt From Income Tax); see also Rev. Proc. 95-48, §§ 3.01, 4.02, 1995-2 C.B. 418. .04 To qualify as an organization described in § 501(c)(3) and exempt from federal income tax under § 501(a), an organization must meet the requirements of the organizational test of § 501(c)(3). One requirement of the organizational test is that the assets of the organization be dedicated to an exempt purpose. Treas. Reg. § 1.501(c)(3)-1(b)(4) .
.05 A § 501(c)(3) organization's articles of organization must contain a dissolution clause that satisfies the organizational test of § 1.501(c)(3)-1(b)(4) of the Treasury Regulations , unless the organization is organized under State laws that satisfy the distribution of assets upon dissolution provisions of § 1.501(c)(3)-1(b)(4). See Treas. Reg. § 1.501(c)(3)-1(b)(4) ; Rev. Proc. 82-2, 1982-1 C.B. 367.
SECTION 3. APPLICATION A § 501(c)(3) organization can satisfy the organizational test of § 1.501(c)(3)-1(b)(4) of the Treasury Regulations by reason of its articles of organization or by operation of law. However, for purposes of obtaining a § 115(1) ruling, a § 501(c)(3) organization will not satisfy the "distribution of assets upon dissolution requirement" of § 115(1) unless its articles of organization also limit distribution of assets on dissolution (to the extent consistent with § 1.501(c)(3)-1(b)(4)) to one or more States, political subdivisions of States, the District of Columbia, or other organizations the income of which is excluded under § 115(1). For purposes of obtaining a § 115(1) ruling, the organization may not rely on a provision of state law to satisfy the distribution of assets upon dissolution requirement of § 115(1). SECTION 4. EXAMPLES .01 Organization A is exempt from federal income tax under § 501(a) as an organization described in § 501(c)(3). Organization A has a dissolution clause in its articles of organization that satisfies Treas. Reg. § 1.501(c)(3)-1(b)(4) . Organization A's articles state that, upon dissolution, any assets remaining after the payment of debts and the satisfaction of liabilities are to be distributed (1) to an organization described in § 501(c)(3) for one or more exempt purposes, or (2) to the United States government, or to a State or local government, for a public purpose. Organization A requests a letter ruling that its income is excluded from gross income under § 115(1). Although the dissolution clause in the articles of Organization A meets the organizational requirements of § 501(c)(3), the dissolution clause allows for distribution to entities to which distributions may not be made under § 115(1). The dissolution clause, therefore, fails to satisfy the distribution of assets upon dissolution requirement of the accrual test of § 115(1). In these circumstances, a favorable ruling on § 115(1) would not be issued. .02 Organization B is exempt from federal income tax under § 501(a) as an organization described in § 501(c)(3). Organization B has a dissolution clause in its articles of organization that satisfies Treas. Reg. § 1.501(c)(3)-1(b)(4) . Organization B's articles state that, upon dissolution, any assets remaining after the payment of debts and the satisfaction of liabilities are to be distributed either (1) to a State or political subdivision thereof for a public purpose or (2) for one or more exempt purposes to an organization described in § 501(c)(3) and whose income is also excludable from gross income under § 115(1). Organization B requests a letter ruling that its income is excluded from gross income under § 115(1). The dissolution clause in the articles of Organization B meets the requirements of the organizational test of § 501(c)(3) and also satisfies the distribution of assets upon dissolution requirement of the accrual test of § 115(1).
.03 Organization C is exempt from federal income tax under § 501(a) as an organization described in § 501(c)(3). Upon dissolution, Organization C's remaining assets will be distributed by operation of the law of Organization C's state of incorporation to a political subdivision of the state for a public purpose. Organization C requests a letter ruling that its income is excluded from gross income under § 115(1). Although state law provides a dissolution distribution scheme that meets the organizational test of Treas. Reg. § 1.501(c)(3)-1(b)(4) , the state's dissolution provision fails to satisfy the accrual test of § 115(1) for purposes of obtaining a § 115(1) letter ruling. In these circumstances, a favorable ruling on § 115(1) would not be issued. To receive a favorable § 115(1) letter ruling, Organization C must have articles of organization that contain a provision satisfying the distribution of assets upon dissolution requirement for the § 115(1) accrual test. SECTION 5. DRAFTING INFORMATION The principal author of this revenue procedure is Sara T. S. Wolff of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).