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Publication 557 Contents (Rev. October 2010)
Reminders ………………… . 2 Department Cat. No. 46573C of the Introduction ……………….. . 2 Treasury Chapter 1. Application, Approval, Internal and Appeal Procedures ……… . 3 Tax-Exempt Revenue Application Procedures ……….. .3 Service Forms Required …………. .3 Required Inclusions ………. .4 Status for Your Miscellaneous Procedures …… .4 Rulings and Determination Letters ……………… . 5 Organization Effective Date of Exemption ….. .5 Revocation or Modification of Exemption …………. . 5 Appeal Procedures ………….. .6 Appeals Office Consideration …. .6 EO Technical Consideration ….. .6 Administrative Remedies ……. .6 Appeal to Courts ………… .6 Group Exemption Letter ………. .7 Central Organization Application Procedure ….. . 7 Keeping the Group Exemption Letter inForce ……………. . 8 Events Causing Loss of Group Exemption …….. . 8
Chapter 2. Filing Requirements and Required Disclosures ……. . 8 Annual Information Returns …….. .9 Unrelated Business Income Tax Return ……………… .11 Employment Tax Returns …….. .11 Political Organization Income Tax Return ……………… .12 Reporting Requirements for a Political Organization …….. .12 Donee Information Return …….. .14 Information Provided to Donors …. .14 Report of Cash Received ……… .16 Public Inspection of Exemption Applications, Annual Returns,and Political OrganizationReporting Forms ……….. .16 Required Disclosures ……….. .18 Solicitation of Nondeductible Contributions ……….. .18 Sales of Information or Services Available FreeFrom Government ……. .19 Dues Used for Lobbying or Political Activities …….. .19 Miscellaneous Rules ………… .19
Chapter 3. Section 501(c)(3) Organizations …………… .20 Contributions to 501(c)(3) Organizations …………. .20 Application for Recognition of Exemption ……………. .21 Articles of Organization ………. .23 Educational Organizations and Private Schools ………… .24 Organizations Providing Insurance ……………. .26 Get forms and other information Other Section 501(c)(3) faster and easier by: Organizations …………. .26 Private Foundations and Public Internet IRS.gov Charities …………….. .28 Lobbying Expenditures ………. .44
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Chapter 4. Other Section 501(c) determining whether small insurance com- Organizations …………… .45 panies qualify as tax-exempt under sec-tion 501(c)(15) has changed. See Notice 501(c)(4) – Civic Leagues and 2006-42, 2006-19 I.R.B. 878. What’s New Social Welfare Organizations … .45
501(c)(5) – Labor, Agricultural, ·Prohibited tax shelter transactions. and Horticultural New excise taxes are imposed under sec- ·New penalty provisions for nonfiling. Organizations …………. .46 tion 4965 on certain tax-exempt organiza- For annual tax periods beginning after tions entering into prohibited tax shelter 2006, the law requires most tax-exempt 501(c)(6) – Business Leagues, transactions. organizations, other than churches, to file etc. ……………….. .47 an annual Form 990, 990-EZ, or 990-PF 501(c)(7) – Social and Recreation ·Pension Protection Act of 2006 tax with the Internal Revenue Service (IRS), Clubs ………………. .48 changes. The Pension Protection Act of or to submit an annual electronic notice, 2006 made numerous changes to the tax 501(c)(8) and 501(c)(10) – Form 990-N ( e-Postcard) , to the IRS. If an law provisions affecting tax-exempt orga- Fraternal Beneficiary organization fails to file an annual return or nizations. Unless otherwise noted, most of Societies and Domestic submit an annual notice as required for 3 the changes became effective on August Fraternal Societies ………. .49 consecutive years, it will automatically 17, 2006. 501(c)(4), 501(c)(9), and lose its tax-exempt status. 501(c)(17) – Employees’ ·Section 501(c)(3) organizations must ·Redesigned Form 990 and Instructions. Associations ………….. .49 make their Form 990-T open for public in- The Form 990 has been redesigned for spection for a period of 3 years from the 501(c)(12) – Local Benevolent 2008 and future years. The new form con- date the Form 990-T is required to be filed Life Insurance Associations, sists of an 11-page, 11-part core form that (determined with regard to any extension Mutual Irrigation and is required to be completed by all organi- of time for filing) or is actually filed, which- Telephone Companies, and zations that file Form 990. It also consists ever is later. Like Organizations ………. .51 of 16 schedules to be completed by those 501(c)(13) – Cemetery organizations that satisfy the applicable ·Increase in excise taxes relating to public Companies …………… .52 requirements for each schedule. charities, social welfare organizations, and 501(c)(14) – Credit Unions and private foundations. ·Elimination of the advance public char- Other Mutual Financial ity status. New regulations eliminate the ·Additional standards for credit counseling Organizations …………. .53 advance ruling process for a section organizations. 501(c)(19) – Veterans’ 501(c)(3) organization. Under the new reg- ·Definition of convention or association of Organizations …………. .54 ulations, a new section 501(c)(3) organiza- churches has been modified. tion will be classified as a publicly 501(c)(20) – Group Legal supported organization and not a private Services Plan Organizations …. .55 ·Entities not required to file Form 990 or foundation if it can show when it applies 990-EZ must file new Form 990-N, Elec- 501(c)(21) – Black Lung Benefit for tax-exempt status that it reasonably tronic Notice (e-Postcard) for Tax-Exempt Trusts ………………. .55 can be expected to be publicly supported. Organizations Not Required to File Form 501(c)(2) – Title-Holding The new rules no longer require the or- 990 or 990-EZ. Corporations for Single ganization to file Form 8734 after complet- Parents …………….. .55 ·Requirements of disclosure to state offi- ing its first 5 tax years. The new rules cials relating to exempt organizations has 501(c)(25) – Title-Holding apply to organizations with advance rul- been modified. Corporations or Trusts for ings expiring on or after June 9, 2008. Multiple Parents ………… .56 ·Excise taxes imposed on excess benefit ·Report significant new or changed pro- 501(c)(26) – State-Sponsored transactions involving donor advised funds gram services and changes to organi- High-Risk Health Coverage and sponsoring organizations. zational documents. An organization Organizations …………. .56 should report new significant program ·New excise taxes on Prohibited Tax Shel- 501(c)(27) – State-Sponsored services or significant changes in how it ter Transactions. Workers’ Compensation conducts program services, and significant Reinsurance Organizations …. .56 changes to its organizational documents,on its Form 990 rather than in a letter to Chapter 5. Excise Taxes …….. .57 the IRS Exempt Organizations Determina- Prohibited Tax Shelter Introduction tions (EO Determinations). EO Determina- Transactions ………….. .57 tions no longer issues letters confirming This publication discusses the rules and proce- Excess Benefit Transactions …… .58 the tax-exempt status of organizations that dures for organizations that seek recognition of Excess Business Holdings …….. .61 report new services or significant changes, exemption from federal income tax under sec- Taxable Distributions of or changes to organizational documents. tion 501(a) of the Internal Revenue Code (the Sponsoring Organizations ….. .61 Code). It explains the procedures you must fol- Taxes on Prohibited Benefits low to obtain an appropriate ruling or determina- Distributed From Donor tion letter recognizing your organization’s Advised Funds …………. .62 exemption, as well as certain other information Reminders Excise Taxes On Private that applies generally to all exempt organiza- Foundations ………….. .62 tions. To qualify for exemption under the Code, ·Electronic filing requirement for large your organization must be organized for one or Excise Taxes on Black Lung organizations. For tax years ending on or more of the purposes specifically designated in Benefit Trusts …………. .62 after December 31, 2006, only organiza- the Code. Organizations that are exempt under Chapter 6. How To Get Tax tions that file 250 returns during the calen- section 501(a) include those organizations de- Help ………………. .63 dar year and that have total assets of $10 scribed in section 501(c). Section 501(c) organi- million or more are required to file Form Organization Reference Chart …. .65 zations are covered in this publication. 990 electronically. Index …………………. .67 Chapter 1 provides general information about the procedures for obtaining recognition Appendix. Sample Articles of ·Section 501(c)(15) gross receipts . The of tax-exempt status. Organization …………. .69 definition of gross receipts for purposes of
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Chapter 2 contains information about annual if you indicate in your correspondence the ap- filing requirements and other matters that may propriate Code section. Check the IRS website, Application affect your organization’s tax-exempt status. IRS.gov, for the latest updates. Chapter 3 contains detailed information on Procedures Comments and suggestions. We welcome various matters affecting section 501(c)(3) orga- your comments about this publication and your nizations, including a section on the determina- Oral requests for recognition of exemption will suggestions for future editions. tion of private foundation status. not be considered by the IRS. Your application Chapter 4 includes separate sections for You can e-mail us while visiting our website for tax-exempt status must be in writing using specific types of organizations described in sec- at IRS.gov. the appropriate forms as discussed below. tion 501(c). You can write to us at the following address: Chapter 5 provides information on when ex- Forms Required Internal Revenue Service cise taxes may be imposed. TEGE and Specialty Forms and Most organizations seeking recognition of ex- Publications Branch Organizations not discussed in this publica- emption from federal income tax must use spe- SE:W:CAR:MP:T:T tion. Certain organizations that may qualify for cific application forms prescribed by the IRS. 1111 Constitution Ave. NW, IR-6526 exemption are not discussed in this publication, Two forms currently required by the IRS are Washington, DC 20224 although they are included in the Organization Form 1023, Application for Recognition of Ex- Reference Chart . These organizations (and the emption Under Section 501(c)(3) of the Internal Code sections that apply to them) are as follows. We respond to many letters by telephone. Revenue Code, including Notice 1382, Changes Therefore, it would be helpful if you would in- for Form 1023, and Form 1024, Application for Corporations organized under Acts clude your daytime phone number, including the Recognition of Exemption Under Section of Congress …………… .501(c)(1) area code, in your correspondence. 501(a). For information about how to obtain the Teachers’ retirement fund If you wish telephone assistance, please call associations …………… .501(c)(11) latest revision, see chapter 6 . 1-877-829-5500. This toll-free telephone service Mutual insurance companies …. .501(c)(15) Forms 1023 and 1024 contain instructions is available Monday through Friday. Corporations organized to finance and checklists to help you provide the informa- crop operations …………. .501(c)(16) tion required to process your application. Incom- Employee funded pension trusts plete applications may not be processed. See (created before June 25, 1959) .. .501(c)(18) Incomplete application later, under Miscellane- Withdrawal liability payment fund ..501(c)(22) ous Procedures . Veterans’ organizations (created Some organizations do not have to use spe- before 1880) …………… .501(c)(23) cific application forms. The application your or- National Railroad Retirement 1. ganization must use is specified in the chapter in Investment Trust ………… .501(c)(28) this publication dealing with your kind of organi- Religious and apostolic associations 501(d) zation. It is also shown in the Organization Ref- Cooperative hospital serviceorganizations ………….. . 501(e) erence Chart. . Application, Cooperative service organizations of When no specific application form is pre- operating educational organizations 501(f) scribed for your organization, application for ex- Approval, and emption is by letter to the IRS. Send the Section 501(c)(24) organizations (section application to the appropriate address shown on 4049 ERISA trusts) are neither discussed in the Form 8718, User Fee for Exempt Organization text nor listed in the Organization Reference Appeal Determination Letter Request. The letter must Chart . be signed by an authorized individual such as an Likewise, farmers’ cooperative associations Procedures officer of the organization or a person authorized that qualify for exemption under section 521, by a power of attorney. (See Power of attorney qualified state tuition programs described in sec- under Miscellaneous Procedures , later.) Send tion 529, and pension, profit-sharing, and stock the power of attorney with the application letter bonus plans described in section 401(a) are not Introduction when you file it. The letter should also contain discussed in this publication. If you think your If your organization is one of the organizations the name and telephone number of the person organization falls within one of these categories, described in this publication and is seeking rec- to contact. The information described below contact the IRS for any additional information ognition of tax-exempt status from the IRS, you under Required Inclusions must be sent with the you need. For telephone assistance, call should follow the procedures described in this letter. 1-877-829-5500 . chapter and the instructions that accompany the Check the Table of Contents at the begin- appropriate application forms. ning of this publication to determine whether Exemption for terrorist organizations. An your organization is described in this publica- For information on section 501(c)(3) organi- organization that is identified or designated as a tion. If it is, read the chapter (or section) that zations, see Section 501(c)(3) Organization- terrorist organization within the meaning of sec- applies to your type of organization for the spe- schapter 3 . If your organization is seeking tion 501(p)(2) is not eligible to apply for recogni- cific information you must give when applying for exemption under one of the other paragraphs of tion of exemption. recognition of exemption. section 501(c), see chapter 4 .
User fee. The law requires the payment of a Organization Reference Chart. This chart Topics user fee for determination letter requests such enables you to locate at a glance the section of as your application for recognition of tax-exempt This chapter discusses: the Code under which your organization might status. If you are not required to use Form 1023, qualify for exemption. It also shows the required you should use Form 8718 to figure the amount ·Application procedures that generally ap- application form and, if your organization meets of your fee and to pay it. If you are using Form ply to all organizations discussed in this the exemption requirements, the annual return 1023, user fee information is included in Part XI. publication, including the application to be filed (if any), and whether or not a contribu- Your payment must accompany your request. forms; tion to your organization will be deductible by a The IRS will not process a request unless the donor. It also describes each type of qualifying ·Rulings and determination letters (approv- fee has been paid. organization and the general nature of its activi- als/disapprovals); To find the correct amounts for user ties. ·Appeal procedures available if an adverse fees and the length of time to process a You may use this chart to determine the determination letter is proposed; and request, call 1-877-829-5500 or check Code section that you think applies to your or- the IRS website, IRS.gov, key word User fee for ganization. Any correspondence with the IRS (in ·Group exemption letters. assistance. requesting forms or otherwise) will be expedited
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Description of activities. Your application date. In that case, if the original submission was Required Inclusions must include a full description of the proposed timely, the application will be considered timely activities of your organization, including each of filed as discussed in chapter 3, under Applica- Employer identification number (EIN). the fundraising activities of a section 501(c)(3) tion for Recognition of Exemption. Every exempt organization must have an EIN, organization and a narrative description of antic- whether or not it has any employees. An EIN is ipated receipts and contemplated expenditures. Application made under wrong paragraph of required before an exemption application is sub- When describing the activities in which your section 501(c). Occasionally, an organization mitted. An EIN can be applied for: organization expects to engage, you must in- appears to qualify for exemption under a para- clude the standards, criteria, procedures, or ·Online ÐClick on the Employer ID Num- graph of section 501(c) that is different from the other means that your organization adopted or bers (EINs) link at www.IRS.gov/busi- one for which the organization applied. If the planned for carrying out those activities. nesses/small . The EIN is issued application was made on Form 1024, which ap- To determine the information you need to immediately once the application informa- plies to more than one paragraph of section provide, you should study the part of this publi- tion is validated. 501(c), the organization can be recognized as cation that applies to your organization. The exempt under any paragraph to which the form ·By telephone at 1-800-829-4933 from 7:00 appropriate chapter will describe the purposes applies if the organization has agreed to have its a.m. to 10:00 p.m. in the organization’s and activities that your organization must pur- application considered under that paragraph. It local time zone. sue, engage in, and include in your application in must also supply any additional information re- order to achieve exempt status. ·By mailing or faxing Form SS-4, Applica- quired for the application under the new para- Often your organization’s articles of organi- tion for Employer Identification Number. graph. zation (or other organizing instruments) contain Different application form needed. If a dif- descriptions of your organization’s purposes Use only one method for each entity so you do ferent application form is required for your or- and activities. not receive more than one EIN for an entity. ganization, the IRS will so advise your Your application should describe completely If you previously applied for an EIN and have organization and will provide the appropriate and in detail your past, present, and planned not yet received it, or you are unsure whether application form for your convenience in reapp- activities. you have an EIN, please call our toll-free cus- lying under that paragraph, if you wish to do so. tomer account services number, Financial data. You must include in your ap- Although supporting information previously fur- 1-877-829-5500, for assistance. plication financial statements showing your re- nished need not be duplicated, you must provide ceipts and expenditures and a balance sheet for any necessary additional information required Organizing documents. Each application for the current year and the 3 preceding years (or for the application. If your reply is not received exemption must be accompanied by a con- for the number of years your organization was in within a limited time, your application will be formed copy of your organization’s Articles of existence, if less than 4 years). For each ac- processed only for the paragraph under which Incorporation (and the Certificate of Incorpora- counting period, you must describe the sources you originally applied. tion, if available), Articles of Association, Trust of your receipts and the nature of your expendi- When a specific application form is needed Indenture, Constitution, or other enabling docu- tures. for the paragraph under which your organization ment. If the organization does not have an or- If you have not yet begun operations, or have qualifies, that form is required before a letter ganizing document, it will not qualify for operated for less than 1 year, a proposed budget recognizing exemption can be issued. This in- exemption. for 2 full accounting periods and a current state- cludes cases in which a determination letter is ment of assets and liabilities will be acceptable. modified to recognize an organization’s exempt Bylaws. Bylaws alone are not organizing status under a paragraph other than the para- documents. However, if your organization has Other information. The IRS may require you graph under which it originally established ex- adopted bylaws, include a current copy. The to provide additional information necessary to emption. bylaws need not be signed if submitted as an clarify the nature of your organization. Some attachment. examples are: IRS responses. Organizations that submit a If your organization’s name has been offi- ·Representative copies of advertising complete application will receive an acknowl- cially changed by an amendment to your or- placed; edgment from the IRS. Others will receive a ganizing instruments, you should also attach a letter requesting more information or returning ·Copies of publications, such as conformed copy of that amendment to your ap- an incomplete application. Applicants also will magazines; plication. be notified if the application is forwarded to EO ·Distributed written material used for ex- Bylaws may be considered an organiz- Technical Office for consideration. These letters pressing views on proposed legislation; ing document only if they are properly will be sent out as soon as possible after receipt and structured (includes name, purpose, of the organization’s application. signatures, and intent to form an organization). ·Copies of leases, contracts, or agree- Withdrawal of application. An application ments into which your organization has Conformed copy. A conformed copy is a may be withdrawn at any time before the issu- entered. copy that agrees with the original and all amend- ance of a ruling or determination letter upon the ments to it. If the original document required a written request of a principal officer or author- signature, the copy should either be signed by a Miscellaneous Procedures ized representative of your organization. How- principal officer or, if not signed, be accompa- ever, the withdrawal will not prevent the nied by a written declaration signed by an au- To help in processing your application, be sure information contained in the application from thorized officer of the organization. With either to attach all schedules, statements, and other being used by the IRS in any subsequent exami- option, the officer must certify that the document documents required by the application form. If nation of your organization’s returns. The infor- is a complete and accurate copy of the original. you do not attach them, you may have to resub- mation forwarded with an application will not be A certificate of incorporation should be approved mit your application or you may otherwise en- returned to your organization and, generally, and dated by an appropriate state official. counter a delay in processing your application. when an application is withdrawn, the user feepaid will not be refunded. Incomplete application. If the application Attachments. When submitting attachments, does not contain the required information, it may every attachment should show your organiza- Requests for withholding of information be returned with a letter of explanation without tion’s name and EIN. It should also state that it is from the public. The law requires many ex- being considered on its merits. Alternatively, if an attachment to your application form and iden- empt organizations and private foundations to the application is substantially complete, the IRS tify the part and line item number to which it make their application forms and annual infor- may retain the application and request addi- applies. mation returns available for public inspection. tional information as needed. If the completed Original documents. Do not submit origi- The law also requires the IRS to make available application is resubmitted within the time period nal documents because they become part of the for public inspection, in accordance with section indicated in the letter from the IRS, it will be IRS file and cannot be returned. 6104 and the related regulations, your approved considered received on the original submission
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application for recognition of exemption (includ- Power of attorney. If your organization ex- exemption under section 501(c)(3).) Upon ob- pects to be represented by an agent or attorney, taining recognition of exemption, the organiza- ing any papers submitted in support of the appli- whether in person or by correspondence, you tion can file a claim for a refund of income taxes cation) and the ruling or determination letter must file a power of attorney with your exemp- paid for the period for which its exempt status is (discussed later, under Rulings and Determina- tion application specifically authorizing the recognized. tion Letters ). agent or attorney to represent your organization. If an organization is required to alter its activi- Any information submitted in the application Form 2848, Power of Attorney and Declaration ties or substantially amend its charter to qualify, or in support of it that relates to any trade secret, of Representative, can be used for this purpose. the ruling or determination letter recognizing ex- patent, process, style of work, or apparatus, emption will be effective as of the date speci- upon request, can be withheld from public in- Reminder. The law requires payment of a fied in the letter. If a nonsubstantive spection if the IRS determines that the disclo- user fee for determination letter requests. Use amendment is made, such as correction of a sure of such information would adversely affect Form 8718 or Form 1023 to figure the amount clerical error in the enabling instrument or the the organization. Your request must: and pay the fee. Payment must accompany addition of a dissolution clause, exemption will 1. Identify the material to be withheld (the each request. ordinarily be recognized as of the date of forma- document, page, paragraph, and line) by tion if the activities of the organization before the clearly marking it, ªNot Subject To Public ruling or determination are consistent with the Inspection.º exemption requirements. A ruling or determination letter recognizing Rulings and 2. Include the reasons for your organization’s exemption cannot be relied on if there is a mate- position that the information is of the type rial change, inconsistent with exemption, in the Determination Letters that can be withheld from public inspec- character, the purpose, or the method of opera- tion. tion of the organization. Also, a ruling or determi- A ruling or determination letter will be issued to 3. Be filed with the office where your organi- nation letter cannot be relied on if it is based on your organization if its application and support- any inaccurate material factual representations. zation files the documents in which the ing documents establish that it meets the partic- material to be withheld is contained. ular requirements of the section under which it isclaiming exemption. However, the IRS will not Revocation or Modification ordinarily issue rulings or determination letters Where to file. Your application for recognition of Exemption recognizing exemption if an issue involving the of tax-exempt status must be filed with the IRS organization’s exempt status is pending in litiga- A ruling or determination letter recognizing ex- at the address shown on Form 8718 or Form tion or is under consideration within the IRS. emption may be revoked or modified by: 1023.
Your application will be considered by EO Advance ruling. A ruling or determination let- 1. A notice to the organization to which the Determinations, who will either issue a favorable ter may be issued in advance of operations if ruling or determination letter originally was determination letter to your organization, issue your organization can describe its proposed op- issued, an adverse determination letter denying the ex- erations in enough detail to permit a conclusion 2. Enactment of legislation or ratification of a empt status claimed in the application, or refer that it will clearly meet the particular require- tax treaty, the case to the Exempt Organizations Technical ments of the section under which it is claiming Office (EO Technical). exemption. A restatement of the organization’s 3. A decision of the United States Supreme purpose or a statement that it will be operated in Court, Requests other than applications. furtherance of that purpose will not satisfy this Requests other than applications for 4. Issuance of temporary or final regulations, requirement. The organization must describe recognition of exemption (for example, or fully the activities in which it expects to engage. requests for rulings involving feeder organiza- This includes standards, procedures, or other 5. Issuance of a revenue ruling, a revenue tions, application of excise taxes to activities of means adopted or planned by the organization procedure, or other statement published in private foundations, taxation of unrelated busi- for carrying out its activities, expected sources the Internal Revenue Bulletin or Cumula- ness income, etc.) should be sent to: of funds, and the nature of its contemplated tive Bulletin. Internal Revenue Service, Attention: EO expenses. Technical, P.O. Box 27720, McPherson When an organization does not supply the Station, Washington, DC 20038 When revocation takes effect. If the organi- information previously mentioned under Appli- zation omitted or misstated a material fact, oper- cation Procedures , or fails to furnish a suffi- ated in a manner materially different from that These requests, like applications for ciently detailed description of its proposed originally represented, or, with regard to organi- recognition of exemption, must be activities to permit a conclusion that it will clearly zations to which section 503 applies, engaged in accompanied by the appropriate user fee. be exempt, a proposed adverse determination a prohibited transaction (such as diverting letter or ruling may be issued. corpus or income from its exempt purpose), the Referral to EO Technical. EO Determina- revocation or modification may be retroactive. tions will refer to EO Technical any exempt or- Adverse determination. A proposed adverse ganization issue concerning qualification for ruling or determination letter will be issued to an Material change in organization. If there is a exemption or foundation status for which there is organization that has not provided sufficiently material change, inconsistent with exemption, in no published precedent or for which there is detailed information to establish that it qualifies the character, purpose, or method of operation reason to believe that nonuniformity exists. EO for exemption or if the information provided es- of the organization, revocation or modification Determinations can request technical advice on tablishes that it does not qualify for exemption. will ordinarily take effect as of the date of that any technical or procedural question that cannot An organization can appeal a proposed adverse material change. be resolved on the basis of law, regulations, or a ruling or determination letter. See Appeals Pro- Relief from retroactivity. If a ruling or de- clearly applicable revenue ruling or other pub- cedures , later. termination letter was issued in error or is no lished precedent. An organization can request longer in accord with the holding of the IRS, and that an issue be referred to EO Technical for Effective Date of Exemption if section 7805(b) relief is granted, retroactivity technical advice if it feels that a lack of uniformity of the revocation or modification ordinarily will exists as to the disposition of the issue or if an A ruling or determination letter recognizing ex- be limited to a date not earlier than that on which issue is so unusual or complex as to warrant emption is usually effective as of the date of the original ruling or determination letter was consideration by EO Technical. If a determina- formation of an organization if, during the pe- modified or revoked. For more information on tion letter is issued based on technical advice riod before the date of the ruling or determina- requesting section 7805(b) relief, see Revenue from EO Technical regarding qualification for tion letter, its purposes and activities were those Procedure 2010-4, sec. 13 (or later update). exemption or foundation status, no further ad- required by the law. (See Application for Recog- ministrative appeal is available on the issue that nition of Exemption in chapter 3 for the special Foundations. The determination of the ef- was the subject of technical advice. rule for organizations applying for recognition of fective date is the same for the revocation or
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modification of foundation status or operating 3. A copy of the letter showing the determina- Administrative Remedies foundation status unless the effective date is tion you disagree with, or the date and expressly covered by statute or regulations. symbols on the determination letter. In the case of an application under section501(c)(3), all of the following actions, called ad- 4. A statement of facts supporting the organi- ministrative remedies, must be completed by Written notice. If an EO area manager con- zation’s position in any contested factual your organization before an unfavorable ruling cludes, as a result of examining an information issue. or determination letter from the IRS can be ap- return or considering information from any other pealed to the courts. 5. A statement outlining the law or other au- source, that a ruling or determination letter thority the organization is relying on. should be revoked or modified, the organization 1. The filing of a substantially completed ap- will be advised in writing of the proposed action 6. A statement as to whether a conference at plication Form 1023 or group exemption and the reasons for it. the Appeals Office is desired. request under section 501(c)(3) (described The organization will also be advised of its earlier in this chapter) or the filing of a The statement of facts (item 4) must be de- right to protest the proposed action by request- request for a determination of foundation clared true under penalties of perjury. This may ing Appeals Office consideration. The appeal status (see Private Foundations and Public be done by adding to the protest the following procedures are discussed next. Charities in chapter 3). signed declaration: 2. In the case of a late-filed application, re- ªUnder penalties of perjury, I declare questing relief under section 301.9100 of that I have examined the statement of the Income Tax Regulations regarding ap- Appeal Procedures facts presented in this protest and in plications for extensions of time for making any accompanying schedules and an election or application for relief from tax If an organization applies for tax-exempt status statements and, to the best of my (see Application for Recognition of Exemp- knowledge and belief, it is true, correct, and receives adverse rulings issued by EO tion in chapter 3). and complete.º Technical, the organization will be advised of its 3. The timely submission of all additional in- right to protest the determination by requesting Signature. formation requested to perfect an exemp- Appeals Office consideration (this process does tion application or request for not apply to adverse determinations issued by If the organization’s representative submits the determination of private foundation status. EO Technical). The organization must submit a appeal, a substitute declaration must be in- statement of its views fully explaining its reason- 4. Exhaustion of all administrative appeals cluded, stating: ing. The statement must be submitted within 30 available within the IRS, including protest days from the date of the adverse determination of an adverse ruling issued by EO Techni- 1. That the representative prepared the ap- letter and must state whether it wishes Appeals cal in an exemption application. peal and accompanying documents, and Office consideration. The actions just described will not be consid- 2. Whether the representative knows person- ered completed until the IRS has had a reasona- ally that the statements of fact contained in Representation. A principal officer or trustee ble time to act upon the appeal or protest, as the the appeal and accompanying documents can represent an organization at any level of case may be. are true and correct. appeal within the IRS. Or an attorney, certified An organization will not be considered to public accountant, or individual enrolled to prac- Be sure the appeal contains all of the infor- have exhausted its administrative remedies tice before the IRS can represent the organiza- mation requested. Incomplete appeals will be before the earlier of: tion. returned for completion.
If the organization’s representative attends a If a conference is requested, it will be held at 1. The completion of the steps just listed and conference without a principal officer or trustee, the Appeals Office, unless the organization re- the sending by certified or registered mail the representative must file a proper power of of a notice of final determination, or quests that the meeting be held at a field office attorney or a tax information authorization convenient to both parties. 2. The expiration of the 270-day period in before receiving or inspecting confidential infor- The Appeals Office, after considering the which the IRS has not issued a notice of mation. Form 2848, or Form 8821, Tax Informa- organization’s appeal as well as information final determination and the organization tion Authorization, as appropriate (or any other presented in any conference held, will notify the has taken, in a timely manner, all reasona- properly written power of attorney or authoriza- organization of its decision and issue an appro- ble steps to secure a ruling or determina- tion), can be used for this purpose. These forms priate determination letter. An adverse decision tion. can be obtained from the IRS. For more informa- can be appealed to the courts (discussed later). tion, see Publication 947, Practice Before the The Appeals Office must request technical 270-day period. The 270-day period will be IRS and Power of Attorney. advice from EO Technical on any exempt organ- considered by the IRS to begin on the date a ization issue concerning qualification for exemp- substantially completed Form 1023 or group ex- Appeals Office tion or foundation status for which there is no emption request is sent to the IRS. See Applica- published precedent or for which there is reason Consideration tion Procedures , earlier, for information needed to believe that nonuniformity exists. If an organi- to complete Form 1023. EO Determinations will consider the statement zation believes that its case involves such an If the application does not contain all of the protesting and appealing (hereinafter appealing ) issue, it should ask the Appeals Office to request required items, it will not be further processed the adverse determination and decide if the in- technical advice from EO Technical. and may be returned to the applicant for comple- formation affects its determination. If the appeal Any determination letter issued on the basis tion. The 270-day period, in this event, will not does not provide a basis to reconsider its ad- of technical advice from EO Technical cannot be be considered as starting until the date the appli- verse determination, it will forward the appeal appealed to the Appeals Office for those issues cation is remailed to the IRS with the requested and case file to the Appeals Office. For more that were the subject of the technical advice information, or, if a postmark is not evident, on information about the role of the Appeals Office, from EO Technical. the date the IRS receives a substantially com- see Publication 892, Exempt Organization Ap- pleted application. peal Procedures for Unagreed Issues. The ap- EO Technical Consideration peal should include the following information. Appeal to Courts If an application is referred to EO Technical for 1. The organization’s name, address, day- issuance of a ruling and an adverse ruling is If the IRS issues an unfavorable determination time telephone number, and employer issued, the organization will be informed of the letter or ruling to your organization and you have identification number. basis for the conclusion, its right to file a protest exhausted all the administrative remedies just 2. A statement that the organization wants to within 30 days, and its right to have a conference discussed, your organization can seek judicial protest the determination. at Headquarters. remedies.
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For example, if your organization has paid under section 501(c) of subordinate organiza- central organization must submit information for tions on whose behalf the central organization the tax resulting from the adverse determination those subordinates to be included in the group has applied for recognition of exemption. and met all other statutory prerequisites, it can exemption letter. The information should be for- A central organization is an organization that file suit for a refund in a U.S. District Court or the warded in a letter signed by a principal officer of has one or more subordinates under its general U.S. Court of Federal Claims. Or, if your organi- the central organization setting forth or including supervision or control. zation elected not to pay the tax deficiency re- as attachments the following. A subordinate organization is a chapter, lo- sulting from the adverse determination and met 1. Information verifying that the subordinates: cal, post, or unit of a central organization. A all other statutory prerequisites, it can file suit for central organization may be a subordinate itself, a redetermination of the tax deficiencies in the a. Are affiliated with the central organiza- such as a state organization that has United States Tax Court. For more information tion; subordinate units and is itself affiliated with a on these types of suits, get Publication 556, national (central) organization. b. Are subject to its general supervision or Examination of Returns, Appeal Rights, and A subordinate organization may or may not control; Claims for Refund. be incorporated, but it must have an organizing In certain situations, your organization can c. Are all eligible to qualify for exemption document. A subordinate that is organized and file suit for a declaratory judgment in the U.S. under the same paragraph of section operated in a foreign country cannot be included District Court for the District of Columbia, the 501(c), though not necessarily the para- in a group exemption letter. A subordinate de- U.S. Court of Federal Claims, or the U.S. Tax graph under which the central organiza- scribed in section 501(c)(3) cannot be included Court. This remedy is available if your organiza- tion is exempt; in a group exemption letter if it is a private tion received an adverse notice of final determi- foundation described in section 509(a). d. Are not private foundations if the appli- nation, or if the IRS failed to make a timely If your organization is a subordinate one con- cation for a group exemption letter in- determination on your initial or continuing qualifi- trolled by a central organization (for example, a volves section 501(c)(3); cation or classification as an exempt organiza- church, the Boy Scouts, or a fraternal organiza- tion. However, your exempt status claim must e. Are all on the same accounting period tion), you should check with the central organi- be as: as the central organization if they are to zation to see if it has been issued a group be included in group returns; and exemption letter that covers your organization. If ·An organization qualifying under section it has, you do not have to file a separate applica- 501(c)(3), f.Are organizations that have been tion unless your organization no longer wants to formed within the 15-month period pre- ·An organization to which a deduction for a be included in the group exemption letter. ceding the date of submission of the contribution is allowed under section If the group exemption letter does not cover group exemption application if they are 170(c)(2), your organization, ask your central organization claiming section 501(c)(3) status and about being included in the next annual group ·An organization that is a private founda- are subject to the requirements of sec- ruling update that it submits to the IRS. tion under section 509(a), tion 508(a) and wish to be recognizedas exempt from their dates of creation ·A private operating foundation under sec- Central Organization (a group exemption letter may be is- tion 4942(j)(3), or Application Procedure sued covering subordinates, one or ·A cooperative organization that is exempt more of which have not been organized from tax under section 521. If your organization is a central organization with within the 15-month period preceding affiliated subordinates under its control, it can the date of submission, if all subordi- apply for a group exemption letter for its subordi- Adverse notice of final determination. The nates are willing to be recognized as nates, provided it has obtained recognition of its adverse notice of final determination referred to exempt only from the date of applica- own exemption before or concurrently with the above is a ruling or determination letter sent by tion). group exemption. You should make the applica- certified or registered mail holding that your or- tion for such subordinates by letter instead of ganization: 2. A detailed description of the purposes and submitting either Form 1023 or 1024. This pro- activities of the subordinates, including the ·Is not described in section 501(c)(3) or cedure relieves each of the subordinates cov- sources of receipts and the nature of ex- section 170(c)(2), ered by a group exemption letter from filing its penditures. own application. A central organization obtains ·Is a private foundation as defined in sec- its own recognition of exemption by sending its 3. A sample copy of a uniform governing in- tion 4942(j)(3), or application to the IRS address shown on Form strument (such as a charter or articles of ·Is a public charity described in a part of 8718 or Form 1023. association) adopted by the subordinates, section 509(a) or section 170(b)(1)(A) If the central organization has previously ob- or, in its absence, copies of representative other than the part under which your or- tained recognition of its own exemption, it must instruments. ganization requested classification. indicate its employer identification number and 4. An affirmation to the effect that, to the best the date of the letter recognizing its exemption. It of the officer’s knowledge, the purposes need not forward documents already submitted. Favorable court rulings – IRS procedure. If and activities of the subordinates are as However, if it has not already done so, the cen- a suit results in a final determination that your stated in (2) and (3), above. tral organization must submit a copy of any organization is exempt from tax, the IRS will amendment to its governing instruments or in- 5. A statement that each subordinate to be issue a favorable ruling or determination letter, ternal regulations as well as any information included in the group exemption letter has provided your organization has filed an applica- about changes in its character, purposes, or given written authorization to that effect, tion for exemption and submitted a statement method of operation. signed by an authorized officer of the that the underlying facts and applicable law arethe same as in the period considered by the subordinate, to the central organization Employer identification number. The cen- court. (see also New 501(c)(3) organizations that tral organization must have an employer identifi- want to be included , later in this section). cation number (EIN) before it submits acompleted exemption application. Each 6. A list of subordinates to be included in the subordinate must have its own EIN, even if it has group exemption letter to which the IRS Group Exemption no employees. The central organization must has issued an outstanding ruling or deter- send with the group exemption application an mination letter relating to exemption. Letter EIN for each subordinate organization. 7. If the application for a group exemptionletter involves section 501(c)(3) and is sub- A group exemption letter is a ruling or determi- Information required for subordinate organi- ject to the provisions of the Code requiring nation letter issued to a central organization zations. In addition to the information required recognizing on a group basis the exemption to obtain recognition of its own exemption, the that it give timely notice that it is not a
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private foundation (see Private Founda- 2. The central organization notifies the IRS, Information Required Annually by its annual submission or otherwise, that tions in chapter 3), an affirmation to the To maintain a group exemption letter, the central any of its subordinates will no longer fulfill effect that, to the best of the officer’s organization must submit annually, at least 90 the conditions for continued effectiveness, knowledge and belief, no subordinate to be days before the close of its annual accounting explained earlier, or included in the group exemption letter is a period, all of the following information. private foundation as defined in section 3. The IRS notifies the central organization or 509(a). 1. Information about all changes in the pur- the affected subordinate that the group ex- poses, character, or method of operation emption letter will no longer have effect for 8. For each subordinate that is a school of the subordinates included in the group some or all of the group because the con- claiming exemption under section exemption letter. ditions for continued effectiveness of a 501(c)(3), the information required by Rev- group exemption letter have not been ful- enue Ruling 71-447, 1971-2 C.B. 230 and 2. A separate list (that includes the names, filled. Revenue Procedure 75-50, 1975-2 C.B. mailing addresses, actual addresses if dif- 587 (these requirements are fully de- ferent, and EINs of the affected subordi- When notice is given under any of these three scribed in chapter 3, under Private nates) for each of the three following conditions, the IRS will no longer recognize the Schools ; see also Schedule B, Form categories. exempt status of the affected subordinates until 1023 ). they file separate applications on their own be- a. Subordinates that have changed their half or the central organization files complete 9. For any school affiliated with a church, the names or addresses during the year. supporting information for their reinclusion in the information to show that the provisions of b. Subordinates no longer to be included group exemption at the time of its annual sub- Revenue Ruling 75-231 have been met. in the group exemption letter because mission. However, when the notice is given by 10. A list of the names, mailing addresses, ac- they no longer exist or have disaffiliated the IRS and the withdrawal of recognition is tual addresses if different, and EINs of from or withdrawn their authorization to based on the failure of the organization to com- subordinates to be included in the group the central organization. ply with the requirements for recognition of exemption letter. A current directory of tax-exempt status under the particular subsec- c. Subordinates to be added to the group subordinates may be furnished instead of tion of section 501(c), the revocation will ordinar- exemption letter because they are the list if it includes the required informa- ily take effect as of the date of that failure. The newly organized or affiliated or because tion and if the subordinates not to be in- notice, however, will be given only after the they have recently authorized the cen- cluded in the group exemption letter are appeal procedures described earlier in this tral organization to include them. identified. chapter are completed. An annotated directory of subordinates willnot be accepted for this purpose. If there New 501(c)(3) organizations that want to be were none of the above changes, the central included. A new organization, described in organization must submit a statement to that section 501(c)(3), that wants to be included in a effect. group exemption letter must submit its authori- 3. The information required to be submitted zation (as explained in item number 5, earlier, by a central organization on behalf of sub- 2. under Information required for subordinate orga- ordinates to be included in the group ex- nizations ) to the central organization before the emption letter is required for subordinates end of the 15th month after it was formed in to be added to the letter. (This information order to satisfy the requirement of section is listed in items 1 through 9, under Infor- Filing 508(a). The central organization must also in- mation required for subordinate organiza- clude this subordinate in its next annual submis- tions , earlier. However, if the information sion of information, as discussed later, under Requirements upon which the group exemption letter was Information Required Annually . based applies in all material respects tothese subordinates, a statement to this ef- and Required Keeping the Group fect may be submitted instead of the infor- Exemption Letter in Force mation required by items 1 through 4 ofthat list.) Disclosures Continued effectiveness of a group exemptionletter is based on the following conditions. The organization should send this in-formation to: 1. The continued existence of the central or- Introduction ganization. Ogden Service Center Most exempt organizations (including private Mail Stop 6271 2. The continued qualification of the central foundations) must file various returns and re- Ogden, UT 84404-4749 organization for exemption under section ports at some time during (or following the close 501(c). of) their accounting period. Submitting the required information an- 3. The submission by the central organization nually does not relieve the central or- Topics of the information required annually (de- ganization or any of its subordinates of This chapter discusses: scribed below under Information Required the duty to submit any other information thatmay be required by an EO area manager to Annually ). ·Annual information returns determine whether the conditions for continued 4. The annual filing of an information return exemption are being met. ·Unrelated business income tax return (Form 990, for example) by the central or-ganization if required. ·Employment tax returns Events Causing The continued effectiveness of a group exemp- ·Political organization income tax return Loss of Group Exemption tion letter as to a particular subordinate is based ·Reporting requirements for a political or- on these four conditions, as well as on the con- A group exemption letter no longer has effect, ganization tinued conformity by the subordinate to the re- for either a particular subordinate or the group quirements for inclusion in a group exemption ·Donee information return as a whole, when: letter, the authorization for inclusion, and the ·Information provided to donors annual filing of any required information return 1. The central organization notifies the IRS for the subordinate. that it is going out of existence, ·Report of cash received
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·Public inspection of exemption applica- o Schedule O (Form 990) Supplemental See chapter 6 for information about gettingthese publications and forms. tions, annual returns, and political organi- Information to Form 990 zations reporting forms o Schedule R (Form 990) Related ·Required disclosures Organizations and UnrelatedPartnerships ·Miscellaneous rules Annual Information o 990-PF Return of Private Foundation orSection 4947(a)(1) Nonexempt Returns Useful Items Charitable Trust Treated as a You may want to see: Every organization exempt from federal income Private Foundation tax under section 501(a) must file an annual o 990-BL Information and Initial Excise Tax Publication information return except : Return for Black Lung Benefit o 15 Circular E, Employer’s Tax Guide Trusts and Certain Related Persons 1. A church, an interchurch organization oflocal units of a church, a convention or o 15-A Employer’s Supplemental Tax o 990-T Exempt Organization Business association of churches, or an integrated Guide Income Tax Return auxiliary of a church (as defined later o 15-B Employer’s Tax Guide to Fringe o 990-W Estimated Tax on Unrelated under Religious Organizations in chapter Benefits 3); Business Taxable Income forTax-Exempt Organizations o 598 Tax on Unrelated Business Income 2. A church-affiliated organization that is ex- of Exempt Organizations clusively engaged in managing funds or o 1120-POL U.S. Income Tax Return for maintaining retirement programs; Certain Political Organizations Form (and Instructions) 3. A school below college level affiliated with o 4720 Return of Certain Excise Taxes o 941 Employer’s Quarterly Federal Tax a church or operated by a religious order, Under Chapters 41 and 42 of the Return even though it is not an integrated auxiliary Internal Revenue Code of a church; o 990 Return of Organization Exempt o 5768 Election/Revocation of Election by From Income Tax 4. A mission society sponsored by or affili- an Eligible Section 501(c)(3) ated with one or more churches or church Organization To Make Expenditures o 990-EZ Short Form Return of denominations, more than half of the soci- To Influence Legislation Organization Exempt From Income ety’s activities are conducted in, or di- Tax o 6069 Return of Excise Tax on Excess rected at, persons in foreign countries; Contributions to Black Lung Benefit o Schedule A (Form 990 or 990-EZ) 5. An exclusively religious activity of any re- Trust Under Section 4953 and Public Charity Status and Public ligious order; Computation of Section 192 Support Deduction 6. A state institution, the income of which is o Schedule B (Form 990, 990-EZ, or excluded from gross income under section o 7004 Application for Automatic Extension 990-PF) Schedule of Contributors 115; of Time to File Certain Business o Schedule C (Form 990 or 990-EZ) 7. A corporation described in section Income Tax, Information, and Other Political Campaign and Lobbying 501(c)(1) (a corporation that is organized Returns Activities under an Act of Congress and is: o 8274 Certification by Churches and o Schedule D (Form 990) Supplemental Qualified Church-Controlled a. an instrumentality of the United States, Financial Statements Organizations Electing Exemption and o Schedule E (Form 990 or 990-EZ) from Employer Social Security and b. exempt from federal income taxes); Schools Medicare Taxes
o Schedule F (Form 990) Statement of 8. A black lung benefit trust described in sec- o 8282 Donee Information Return Activities Outside the United States tion 501(c)(21) (required to file Form o 8300 Report of Cash Payments Over 990-BL, Information and Initial Excise Tax o Schedule G (Form 990 or 990-EZ) $10,000 Received in a Trade or Return for Black Lung Benefit Trusts and Supplemental Information Business Certain Related Persons. See chapter 4 Regarding Fundraising or Gaming for more information); o 8453-X Political Organization Declaration Activities for Electronic Filing of Notice of 9. A stock bonus, pension, or profit-sharing o Schedule H (Form 990) Hospitals Section 527 Status trust that qualifies under section 401 (re- o Schedule I (Form 990) Grants and Other quired to file Form 5500, Annual Return/ o 8868 Application for Extension of Time to Assistance to Organizations, Report of Employee Benefit Plan); File an Exempt Organization Return Governments, and Individuals in the 10. A religious or apostolic organization de- o 8870 Information Return for Transfers United States scribed in section 501(d) (required to file Associated with Certain Personal o Schedule J (Form 990) Compensation Form 1065, U.S. Return of Partnership In- Benefits Contracts Information come); o 8871 Political Organization Notice of o Schedule K (Form 990) Supplemental 11. A foreign organization described in section Section 527 Status Information on Tax-Exempt Bonds 501(a) (other than a private foundation) o 8872 Political Organization Report of that normally does not have more than o Schedule L (Form 990 or 990-EZ) Contributions and Expenditures $25,000 in annual gross receipts from Transactions With Interested sources within the United States and has o 8886-T Disclosure by Tax-Exempt Entity Persons no significant activity in the United States. Regarding Prohibited Tax Shelter o Schedule M (Form 990) Noncash For further information, see Revenue Pro- Transaction Contributions cedure 94-17, 1994-1 C.B. 579; o 8899 Notice of Income from Donated o Schedule N (Form 990 or 990-EZ) 12. A governmental unit or an affiliate of a gov- Intellectual Property Liquidation, Termination, ernmental unit that meets the requirements o 8921 Applicable Insurance Contracts Dissolution, or Significant of Revenue Procedure 95-48, 1995-2 C.B. Disposition of Assets Information Return 418;
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13. An exempt organization (other than a pri- ·Any name under which it operates and An organization can file Form 990-EZ in- stead of Form 990 if its gross receipts and total vate foundation, discussed in chapter 3) does business; assets are below certain amounts. For tax years having gross receipts in each tax year that ·Its Internet website address (if any); beginning in 2009, an organization with annual normally are not more than $25,000. (See ·Its taxpayer identification number; gross receipts less than $500,000 and total as- the instructions for Form 990 for more sets less than $1,250,000 at the end of the tax information about what constitutes annual ·The name and address of a principal of- year can choose to file Form 990 or 990-EZ. (For gross receipts that are normally not more ficer; 2008, these amounts were less than $1,000,000 than $25,000.); ·Organization’s annual tax period; in gross receipts and $2,500,000 in total assets.) 14. A private foundation exempt under section Beginning in tax year 2010, an organization ·Verification that the organization’s annual 501(c)(3) and described in section 509(a). can file either Form 990 or 990-EZ if it meets the gross receipts are normally $25,000 or (Required to file Form 990-PF); or following: less; and 15. A U.S. possession organization described 1. Its gross receipts during the year are less ·Notification if the organization has termi- in section 501(a) (other than a private than $200,000. nated. foundation) that normally does not havemore than $25,000 in annual gross re- 2. Its total assets (line 25, column (B) of Form Form 990-N is due by the 15th day of the fifth ceipts from sources within the United 990-EZ) at the end of the year are less month after the close of the tax year. For tax States and has no significant activity in the than $500,000. years beginning after December 31, 2006, any United States. For further information, see If your organization does not meet either of organization that fails to meet its annual report- Rev. Proc. 2003-21, 2003-6 I.R.B. 448. these conditions, you cannot file Form 990-EZ. ing requirement for 3 consecutive years will au- Instead you must file Form 990. tomatically lose its tax-exempt status. To regainits exempt status an organization will have to Group return. A group return on Form 990 reapply for recognition as a tax-exempt organi- may be filed by a central, parent, or like organi- zation. zation for two or more local organizations, none Supporting Organization Annual of which is a private foundation. This return is in Information Return Exceptions. This filing requirement does addition to the central organization’s separate not apply to: For tax years ending after August 17, 2006, all annual return if it must file a return. It cannot be ·Churches, their integrated auxiliaries, and section 509(a)(3) supporting organizations are included in the group return. See the instructions conventions or associations of churches, required to file Form 990 or 990-EZ with the IRS for Form 990 for the conditions under which this regardless of the organization’s gross receipts, procedure may be used. ·Organizations that are included in a group unless it qualifies as one of the following: return; In any year that an organization isproperly included as a subordinate or- 1. An integrated auxiliary of a church; ·Private foundations required to file Form ganization on a group return, it should 990-PF; and 2. The exclusively religious activities of a re- not file its own Form 990. ligious order; or ·Section 509(a)(3) supporting organizations Schedule A (Form 990 or 990-EZ). Organiza- required to file Form 990 or Form 990-EZ. 3. An organization, the gross receipts of tions, other than private foundations, that are which are normally not more than $5,000, described in section 501(c)(3) and that are oth- that supports a section 509(a)(3) religious Forms 990 and 990-EZ erwise required to file Form 990 or 990-EZ must order. also complete Schedule A of that form. Exempt organizations, other than private foun- If the organization is described in item (3) dations, must file their annual information re- Schedule B (Form 990, Form 990-EZ, or above, then it must submit Form 990-N turns on Form 990 or 990-EZ, unless excepted 990-PF). Organizations that file Form 990 or (e-Postcard) unless it voluntarily files Form 990 from filing or allowed to submit Form 990-N, 990-EZ use this schedule to provide required or 990-EZ. described earlier. information regarding their contributors. On its annual information return, at Part I, Generally, political organizations with gross Schedule A (Form 990 or 990-EZ) a supporting Schedule O (Form 990). Organizations that receipts of $25,000 ($100,000 for a qualified organization must: file Form 990 must use this schedule to provide state or local political organization (QSLPO)) or required additional information or if additional ·List the section 509(f)(3) organizations more for the tax year are required to file Form space is needed. with respect to which it provides support, 990 or 990-EZ unless specifically excepted from Other schedules may be required to be filed filing the annual return. The following political ·Indicate whether it is a Type I, Type II, or with Form 990 or 990-EZ. See the instructions organizations are not required to file Form 990 Type III supporting organization, and for Form 990 or the instructions for Form 990-EZ or Form 990-EZ. for more information. ·Certify that the organization is not con- ·A state or local committee of a political trolled directly or indirectly by disqualified party. persons (other than by foundation manag- Form 990-PF ers and other than one or more publicly ·A political committee of a state or local supported organizations). candidate. All private foundations exempt under section501(c)(3) must file Form 990-PF. These organi- ·A caucus or association of state or local zations are discussed in chapter 3. officials. Annual Electronic Filing
Requirement for Small Tax-Exempt ·A political organization that is required to Organizations report as a political committee under the Electronic Filing Federal Election Campaign Act. Most small tax-exempt organizations with an- You may be required to file Form 990, Form nual gross receipts normally $25,000 or less ·A 501(c) organization that has expendi- 990-EZ, or Form 990-PF, and related forms, now must submit Form 990-N, Electronic Notice tures for influencing or attempting to influ- schedules, and attachments electronically. (e-Postcard) for Tax-Exempt Organizations Not ence the selection, nomination, election, If an organization is required to file a return Required to File Form 990 or 990-EZ, with the or appointment of any individual for a fed- electronically but does not, the organization is IRS annually, if they choose not to file a Form eral, state, or local public office. considered to have not filed its return. See Reg- 990 or 990-EZ. Form 990-N requires the follow- ulations section 301.6033-4 for more informa- ing information: Form 990-EZ. This is a shortened version of tion. ·The organization’s legal name, and mail- Form 990. It is designed for use by small exempt The IRS may waive the requirement to file ing address; organizations and nonexempt charitable trusts. electronically in cases of undue hardship. For
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information on filing a waiver, see Notice Maximum penalty. The maximum penalty a travel tour is developed, promoted, and oper- 2010-13, 2010-4 I.R.B. 327, available at www. for any one return is the smaller of $10,000 or ated. IRS.gov/irb/2010-4_IRB/ar14.html . 5% of the organization’s gross receipts for the Example. ABC, a university alumni associa- year. Form 990. An organization is required to file tion, is tax exempt as an educational organiza- Organization with gross receipts over $1 Form 990 electronically if it files at least 250 tion under section 501(c)(3). As part of its million. For an organization that has gross returns during the calendar year and has total activities, ABC operates a travel tour program. receipts of over $1 million for the year, the pen- assets of $10 million or more at the end of the The program is open to all current members of alty is $100 a day up to a maximum of $50,000. tax year. ABC and their guests. ABC works with travel Managers. If the organization is subject to agents to schedule approximately ten tours an- Form 990-PF. An organization is required to this penalty, the IRS may specify a date by nually to various destinations around the world. file Form 990-PF electronically if it files at least which the return or correct information must be Members of ABC pay $1,000 to XYZ Travel 250 returns during the calendar year. supplied by the organization. Failure to comply Agency to participate in a tour. XYZ pays ABC a with this demand will result in a penalty imposed per person fee for each participant. Although the Due Date upon the manager of the organization, or upon literature advertising the tours encourages ABC any other person responsible for filing a correct members to continue their lifelong learning by Forms 990, 990-EZ, or 990-PF must be filed by return. The penalty is $10 a day for each day joining the tours, and a faculty member of ABC’s the 15th day of the fifth month after the end of that a return is not filed after the period given for related university frequently joins the tour as a your organization’s accounting period. Thus, for filing. The maximum penalty imposed on all per- guest of the alumni association, none of the a calendar year taxpayer, Forms 990, 990-EZ, sons with respect to any one return is $5,000. tours include any scheduled instruction or curric- or 990-PF is due May 15 of the following year. ulum related to the destinations being visited. Exception for reasonable cause. No pen- The travel tours made available to ABC’s mem- alty will be imposed if reasonable cause for Extension of time to file. Use Form 8868 to bers do not contribute importantly to the accom- failure to file timely can be shown. request an automatic 3-month extension of time plishment of ABC’s educational purpose. to file Forms 990, 990-EZ, or 990-PF and also to Rather, ABC’s program is designed to generate Automatic revocation penalty. If the organi- apply for an additional (not automatic) 3-month revenues for ABC by regularly offering its mem- zation fails to file a Form 990, 990-EZ, or extension if needed. bers travel services. Therefore, ABC’s tour pro- 990-PF, or fails to submit a Form 990-N, as Do not apply for both the automatic 3-month gram is an unrelated trade or business. required for 3 consecutive years, it will automati- extension and the additional 3-month extension For additional information on unrelated busi- cally lose its tax-exempt status. Beginning in at the same time. For more information, see ness income, see Publication 598 and the In- 2010, automatic revocations will start for organi- Form 8868 and its instructions. structions for Form 990-T. zations not filing for the third consecutive year. When filing Form 8868 for an automatic Organizations that lose their tax-exempt status 3-month extension, neither a signature, nor an must file income tax returns and pay income explanation is required. However, when filing taxes. Check the IRS website, www.IRS.gov/eo , Form 8868 for an additional 3-month extension, Employment for updates. both a signature and an explanation are re-quired. Tax Returns
Application for exemption pending. An or- Every employer, including an organization ex- ganization that claims to be exempt under sec- Unrelated Business empt from federal income tax, who pays wages tion 501(a) but has not established its exempt to employees is responsible for withholding, de- status by the due date for filing an information Income Tax Return positing, paying, and reporting federal income return should complete and file Form 990 or tax, social security and Medicare (FICA) taxes, 990-EZ (or Form 990-PF if it considers itself a Even though an organization is recognized as and federal unemployment tax (FUTA), unless private foundation). If the organization’s applica- tax exempt, it still may be liable for tax on its that employer is specifically excepted by law tion is pending with the IRS, it must so indicate unrelated business income. Unrelated business from those requirements or if the taxes clearly on Forms 990, 990-EZ, or 990-PF (whichever income is income from a trade or business, do not apply. applies) by checking the application pending regularly carried on, that is not substantially re- For more information, obtain a copy of Publi- block at the top of page 1 of the return. For more lated to the charitable, educational, or other pur- cation 15, which summarizes the responsibilities information on the filing requirements, see the pose that is the basis for the organization’s of an employer, Publication 15-A, Publication Instructions for Forms 990, 990-EZ, and exemption. An exempt organization that has 15-B, and Form 941. 990-PF. $1,000 or more of gross income from an unre-lated business must file Form 990-T. Trust fund recovery penalty. If any person State reporting requirements. Copies of The obligation to file Form 990-T is in addi- required to collect, truthfully account for, and Forms 990, 990-EZ, or 990-PF may be used to tion to the obligation to file an annual information pay over any of these taxes willfully fails to satisfy state reporting requirements. See the return such as the Form 990, 990-EZ, or satisfy any of these requirements or willfully tries instructions for those forms. 990-PF. in any way to evade or defeat any of them, that Form 8870. Organizations that filed a Form person will be subject to a penalty. The penalty Estimated tax. Exempt organizations must 990, 990-EZ, or 990-PF, and paid premiums or is equal to the tax evaded, not collected, or not make quarterly payments of estimated tax on received transfers on certain life insurance, an- accounted for and paid over. The term person unrelated business income. An organization nuity, and endowment contracts (personal ben- includes: must make estimated tax payments if it expects efit contracts), must file Form 8870. For more its tax for the year to be $500 or more. Use Form ·An officer or employee of a corporation, or information, see Form 8870 and the instructions 990-W to figure the organization’s estimated tax for that form. ·A member or employee of a partnership. payments.
Travel tour programs. Travel tour activities Exception. The penalty is not imposed on Penalties that are a trade or business are an unrelated any unpaid volunteer director or member of a trade or business if the activities are not sub- board of trustees of an exempt organization if stantially related to the purpose to which tax the unpaid volunteer serves solely in an honor- Penalties for failure to file. Generally, an ex- exemption was granted to the organization. ary capacity, does not participate in the empt organization that fails to file a required day-to-day or financial operations of the organi- return must pay a penalty of $20 a day for each Whether travel tour activities conducted by zation, and does not have actual knowledge of day the failure continues. The same penalty will an organization are substantially related to the the failure on which the penalty is imposed. apply if the organization does not give all the organization’s tax exempt purpose is deter- information required on the return or does not mined by looking at all the relevant facts and This exception does not apply if it results in give the correct information. circumstances, including, but not limited to, how no one being liable for the penalty.
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FICA and FUTA tax exceptions. Payments Schedule SE (Form 1040), Self-Employment 1. The total amount of its exempt function Tax, should be attached to the employee’s in- expenditures, or for services performed by a minister of a church come tax return. in the exercise of the ministry, or a member of a 2. The organization’s net investment income. religious order performing duties required by theorder, are generally not subject to FICA or FUTA Separate fund. A section 501(c) organiza- taxes. tion can set up a separate segregated fund that Political Organization will be treated as an independent political organ- FUTA tax exception. Payments for serv- ization. The earnings and expenditures made by ices performed by an employee of a religious, Income Tax Return the separate fund will not be attributed to the charitable, educational, or other organization section 501(c) organization. described in section 501(c)(3) that are generally Generally, a political organization is treated as subject to FICA taxes if the payments are $100 Section 501(c)(3) organizations are an organization exempt from tax. Certain politi- or more for the year, are not subject to FUTA precluded from, and may suffer loss of cal organizations, however, must file an annual taxes. exemption for, engaging in any political income tax return, Form 1120-POL, for any year campaign on behalf of, or in opposition to, any they have political organization taxable income FICA tax exemption election. Churches candidate for public office. in excess of the $100 specific deduction allowed and qualified church-controlled organizations under section 527. can elect exemption from employer FICA taxes Due date. Form 1120-POL is due by the 15th by filing Form 8274. A political organization that has day of the 3rd month after the end of the tax $25,000 ($100,000 for a qualified state To elect the exemption, Form 8274 must be year. Thus, for a calendar year taxpayer, Form or local political organization) or more filed before the first date on which a quarterly 1120-POL is due on March 15 of the following in gross receipts for the tax year must file Form employment tax return would otherwise be due year. If any due date falls on a Saturday, Sun- 990 or Form 990-EZ (and Schedule B of the from the electing organization. The organization day, or legal holiday, the organization can file form), unless excepted. See Forms 990 and can make the election only if it is opposed for the return on the next business day. 990-EZ , earlier. religious reasons to the payment of FICA taxes. Form 1120-POL is not required of an The election applies to payments for serv- Political organization. A political organiza- exempt organization that makes ex- ices of current and future employees other than tion is a party, committee, association, fund, or penditures for political purposes if its services performed in an unrelated trade or other organization (whether or not incorporated) gross income does not exceed its directly con- business. organized and operated primarily for the pur- nected deductions by more than $100 for the tax pose of directly or indirectly accepting contribu- Revoking the election. The election can be year. tions or making expenditures, or both, for an revoked by the IRS if the organization fails to file exempt function. Form W-2, Wage and Tax Statement, for 2 years Extension of time to file. Use Form 7004 to and fails to furnish certain information upon re- Exempt function. An exempt function request an automatic 6-month extension of time quest by the IRS. Such revocation will apply means influencing or attempting to influence the to file Form 1120-POL. The extension will be retroactively to the beginning of the 2-year pe- selection, nomination, election, or appointment granted if you complete Form 7004 properly, riod. of any individual to any federal, state, local pub- make a proper estimate of the tax (if applicable), lic office or office in a political organization, or file Form 1120-POL by the due date of and pay Definitions. For purposes of this election, the election of the Presidential or Vice Presiden- any tax that is due. the term church means a church, a convention tial electors, whether or not such individual or or association of churches, or an elementary or Failure to file. A political organization that electors are selected, nominated, elected, or secondary school that is controlled, operated, or fails to file Form 1120-POL is subject to a pen- appointed. It also includes certain office ex- principally supported by a church or by a con- alty equal to 5% of the tax due for each month penses of a holder of public office or an office in vention or association of churches. (or partial month) the return is late up to a maxi- a political organization. mum of 25% of the tax due, unless the organiza- The term qualified church-controlled organi- Certain political organizations are re- tion shows the failure was due to reasonable zation means any church-controlled section quired to notify the IRS that they are cause. 501(c)(3) tax-exempt organization, other than section 527 organizations. These orga- an organization that both: For more information about filing Form nizations must use Form 8871. Some of these 1120-POL, refer to the instructions accompany- 1. Offers goods, services, or facilities for sale, section 527 organizations must use Form 8872 ing the form. other than on an incidental basis, to the to file periodic reports with the IRS disclosing Failure to pay on time. An organization general public at other than a nominal their contributions and expenditures. For a dis- that does not pay the tax when due generally charge that is substantially less than the cussion on these forms, see Reporting Require- may have to pay a penalty of 1/2 of 1% of the cost of providing such goods, services, or ments for a Political Organization, later. unpaid tax for each month or part of a month the facilities, and Political organization taxable income. tax is not paid, up to a maximum of 25% of the 2. Normally receives more than 25% of its Political organization taxable income is the ex- unpaid tax. The penalty will not be imposed if the support from the sum of governmental cess of: organization can show that the failure to pay on sources and receipts from admissions, time was due to reasonable cause. 1. Gross income for the tax year (excluding sales of merchandise, performance of exempt function income) minus services, or furnishing of facilities, in activi-ties that are not unrelated trades or busi- 2. Deductions directly connected with the nesses. earning of gross income. Reporting
To figure taxable income, allow for a $100 spe- Effect on employees. If a church or quali- Requirements for a cific deduction, but do not allow for the net oper- fied church-controlled organization has made an ating loss deduction, the dividends-received election, payment for services performed for that Political Organization deduction, and other special deductions for cor- church or organization, other than in an unre- porations. lated trade or business, will not be subject to Certain political organizations are required to FICA taxes. However, the employee, unless oth- Exempt organization not a political organiza- notify the IRS that the organization is to be erwise exempt, will be subject to tion. An organization exempt under section treated as a section 527 political organization. self-employment tax on the income. The tax 501(c) that spends any amount for an exempt The organization is also required to periodically applies to income of $108.28 or more for the tax function must file Form 1120-POL for any year report certain contributions received and expen- year from that church or organization, and no which it has political taxable income. These or- ditures made by the organization. To notify the deductions for trade or business expenses are ganizations must include in gross income the IRS of section 527 treatment, an organization allowed against this self-employment income. lesser of: must file Form 8871. To report contributions and
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expenditures, certain tax-exempt political orga- How to file. An organization must file Form All other tax-exempt section 527 organizations nizations must file Form 8872. 8871 electronically via the IRS Internet website that accept contributions or make expenditures at www.IRS.gov/polorgs (Keyword: political for an exempt function are required to file Form orgs). 8872. Form 8871
Qualified state or local political organiza- Form 8453-X. After electronically submitting A political organization must electronically file tion. A state or local political organization may Form 8871, the political organization must print, Form 8871 to notify the IRS that it is to be treated be a QSLPO if: sign, and mail Form 8453-X to the IRS. Upon as a section 527 organization. However, an or- receipt of the Form 8453-X, the IRS will send the ganization is not required to file Form 8871 if: 1. All of its political activities relate solely to organization a username and password that state or local public office (or office in a must be used to file an amended or final Form ·It reasonably expects its annual gross re- state or local political organization). 8871 or to electronically file Form 8872. ceipts to always be less than $25,000.
2. It is subject to a state law that requires it to ·It is a political committee required to report report (and it does report) to a state under the Federal Election Campaign Act Penalties agency information about contributions of 1971 (FECA) (2 U.S.C. 431(4)). and expenditures that is similar to the in- Failure to file. An organization that is re- ·It is a state or local candidate committee. formation that the organization would oth- quired to file Form 8871, but fails to do so on a erwise be required to report to the IRS. ·It is a state or local committee of a political timely basis, will not be treated as a tax-exempt party. 3. The state agency and the organization section 527 organization for any period before make the reports publicly available. the date Form 8871 is filed. Also, the taxable ·It is a section 501(c) organization that has income of the organization for that period will made an ªexempt function expenditure.º 4. No federal candidate or office holder: include its exempt function income (including All other political organizations are required to contributions received, membership dues, and a. Controls or materially participates in the file Form 8871. political fundraising receipts) minus any deduc- direction of the organization, tions directly connected with the production of An organization must provide on Form 8871: b. Solicits contributions for the organiza- that income. tion, or Failure to file an amended Form 8871 will 1. Its name and address (including any busi- cause the organization not to be treated as a ness address, if different) and its electronic c. Directs the disbursements of the organi- tax-exempt section 527 organization. If an or- mailing address; zation. ganization is treated as not being a tax-exempt 2. Its purpose; section 527 organization, the taxable income of Information required on Form 8872. If an the organization will be determined by consider- 3. The names and addresses of its officers, organization pays an individual $500 or more for ing any exempt function income and deductions highly compensated employees, contact the calendar year, the organization is required to during the period beginning on the date of the person, custodian of records, and mem- disclose the individual’s name, address, occu- material change and ending on the date that the bers of its Board of Directors; pation, employer, amount of the expense, the amended Form 8871 is filed. 4. The name and address of, and relationship date the expense was paid, and the purpose of The tax is computed by multiplying the or- to, any related entities (within the meaning the expense on Form 8872. ganization’s taxable income by the highest cor- of section 168(h)(4)); and If an organization receives contributions of porate tax rate. $200 or more from one contributor for the calen- 5. Whether it intends to claim an exemption Fraudulent returns. Any individual or cor- dar year, the organization must disclose the from filing Form 8872, Form 990, or Form poration that willfully delivers or discloses to the donor’s name, address, occupation, employer, 990-EZ. IRS any list, return, account, statement or other and the date the contributions were made. document known to be fraudulent or false as to For additional information that is required, Employer identification number. Before any material matter will be fined not more than see Form 8872. filing Form 8871, the political organization must $10,000 ($50,000 in the case of a corporation) have its own EIN even if it has no employees. If or imprisoned for not more than 1 year or both. Due dates. The due dates for filing Form 8872 your organization needs an EIN, you can apply vary depending on whether the form is due for a Waiver of penalties. The IRS may waive for one: reporting period that occurs during a calendar any additional tax assessed on an organization ·Online ÐClick on the Employer ID Num- year in which a regularly scheduled election is for failure to file Form 8871 if the failure was due bers (EINs) link at www.IRS.gov/busi- held, or any other calendar year (a nonelection to reasonable cause and not willful neglect. nesses/small . year). Additional information. For more information If the due date falls on a Saturday, Sunday, ·By telephone at 1-800-829-4933 from 7:00 on Form 8871, see the form and its instructions. or legal holiday, the organization can file on the am to 10:00 pm in the organization’s local For a discussion on the public inspection re- next business day. time zone. quirements for the form, see Public Inspection of Exemption Applications, Annual Returns, and Election year filing. In election years, Form ·By mailing or faxing Form SS-4. Political Organ , later. 8872 must be filed on either a quarterly or amonthly basis. Both a pre-election report and a If you previously applied for an EIN and have post-election report are also required to be filed not yet received it, or you are unsure whether Form 8872 in an election year. An election year is any year you have an EIN, please call our toll-free cus- in which a regularly scheduled general election tomer account services number, Every tax-exempt section 527 political organiza- for federal office is held (an even-numbered 1-877-829-5500, for assistance. tion that accepts a contribution or makes an year). expenditure, for an exempt function during the Due dates. The initial Form 8871 must be filed calendar year, must file Form 8872 except: within 24 hours of the date on which the organi- Nonelection year filing. In nonelection zation was established. If there is a material ·A political organization that is not required years, the form must be filed on a semiannual or change an amended Form 8871 must be filed to file Form 8871 (discussed earlier). monthly basis. A complete listing of these filing within 30 days of the material change. When the periods are in the Form 8872 Instructions. A ·A political organization that is subject to organization terminates its existence, it must file nonelection year is any odd-numbered year. tax on its income because it did not file or a final Form 8871 within 30 days of termination. amend Form 8871. If the due date falls on a Saturday, Sunday, How to file. Form 8872 can be filed either or legal holiday, the organization can file on the ·A qualified state or local political organiza- electronically or by mail; however, organizations next business day. tion (QSLPO), discussed below. that have, or expect to have, contributions or
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expenditures of $50,000 or more for the year otherwise disposes of the property, the organi- also indicates knowledge of the information re-porting requirements on dispositions, as previ- zation must file Form 8282, Donee Information must file electronically. ously discussed. A copy of Form 8283 must be Return . However, an organization is not re- To file by mail, send Form 8872 to the: given to the donee. quired to file Form 8282 if:
·The property is valued at $500 or less, or Department of the Treasury ·The property is consumed or distributed Internal Revenue Service Center for charitable purposes. Information Provided Ogden, UT 84201-0027
Form 8282 must be filed with the IRS within to Donors Electronic filing. File electronically via the 125 days after the disposition. Additionally, a IRS internet website at www.IRS.gov/polorgs . In some situations, a donor must obtain certain copy of Form 8282 must be given to the previous You will need a user ID and password to elec- information from a donee organization to obtain donor. If the organization fails to file the required tronically file Form 8872. Organizations that a deduction for a charitable contribution. In other information return, penalties may apply. have completed the electronic filing of Form situations, the donee organization is required to 8871 and submitted a completed and signed Charitable deduction property. This is provide information to the donor. For example, a Form 8453-X will receive a username and pass- any property (other than money or publicly charitable organization must give a donor a dis- traded securities) for which the donee organiza- word in the mail. closure statement for a quid pro quo contribution tion signed an appraisal summary or Form 8283, Organizations that have completed the elec- over $75. A donor cannot deduct a charitable Noncash Charitable Contributions. tronic filing of Form 8871, but have not received contribution of $250 or more unless the donor their user ID and password can request one by has a written acknowledgment from the charita- Publicly traded securities. These are se- writing to the following address: ble organization. curities for which market quotations are readily In certain circumstances, an organization available on an established securities market as Internal Revenue Service may be able to meet both of these requirements of the date of the contribution. Attn: Request for 8872 Password with the same written document. Mail Stop 6273 Appraisal summary. If the value of the Ogden, UT 84201 donated property exceeds $5,000, the donor Disclosure of must get a qualified appraisal for contributions of Quid Pro Quo Contributions Lost username and password. If you have property, see the Exceptions. below. forgotten or misplaced the username and pass- A charitable organization must provide a written Exceptions. A written appraisal is not word issued to your organization after you filed disclosure statement to donors of a quid pro quo needed if the property is: your initial Form 8871, send a letter requesting a contribution over $75. ·Nonpublicly traded stock of $10,000 or new username and password to the address Quid pro quo contribution. This is a pay- less, under Electronic filing . You can also fax your ment a donor makes to a charity partly as a request to (801) 620-3249. It may take 3-6 ·A vehicle (including a car, boat, or air- contribution and partly for goods or services. For weeks for your new username and password to plane) donated after 2004 if your deduc- example, if a donor gives a charity $100 and arrive, as they will be mailed to the organization. tion for the vehicle is limited to the gross receives a concert ticket valued at $40, the do- proceeds from its sale, nor has made a quid pro quo contribution. In thisexample, the charitable contribution part of the ·Intellectual property donated after June 3, Penalty payment is $60. Even though the deductible part 2004, A penalty will be imposed if the organization is of the payment is not more than $75, a disclo- ·Certain securities considered to have mar- required to file Form 8872 and it: sure statement must be filed because the do- ket quotations readily available (see Regu- nor’s payment (quid pro quo contribution) is ·Fails to file the form by the due date, or lations section 1.170A-13(c)(7)(xi)(B)), more than $75. ·Files the form but fails to report all of the ·Inventory and other property donated by a Disclosure statement. The required written information required or reports incorrect corporation that are qualified contributions disclosure statement must: information. for the care of the ill, the needy, or infants,within the meaning of section 170(e)(3)(A), 1. Inform the donor that the amount of the The penalty is 35% of the total amount of or contribution that is deductible for federal contributions and expenditures to which a failure income tax purposes is limited to the ex- ·Any donation of stock in trade, inventory, relates. cess of any money (and the value of any or property held primarily for sale to cus- property other than money) contributed by Fraudulent returns. Any individual or cor- tomers in the ordinary course of your trade the donor over the fair market value of or business. poration that willfully delivers or discloses any goods or services provided by the charity, list, return, account, statement, or other docu- and The donee organization is not a qualified ap- ment known to be fraudulent or false as to any praiser for the purpose of valuing the donated material matter will be fined not more than 2. Provide the donor with a good faith esti- property. For more information, get Publication $10,000 ($50,000 in the case of a corporation), mate of the fair market value of the goods 561, Determining the Value of Donated Prop- or imprisoned for not more than 1 year, or both. or services that the donor received. erty. Waiver of penalties. The IRS may waive The charity must furnish the statement in con- Form 8283. For noncash donations over any additional tax assessed on an organization nection with either the solicitation or the receipt $5,000, the donor must attach Form 8283 to the for failure to file Form 8872 if the failure was due of the quid pro quo contribution. If the disclosure tax return to support the charitable deduction. to reasonable cause and not willful neglect. statement is furnished in connection with a par- The donee must sign Part IV of Section B, Form ticular solicitation, it is not necessary for the 8283 unless publicly traded securities are organization to provide another statement when donated. The person who signs for the donee it actually receives the contribution. must be an official authorized to sign the do- No disclosure statement is required if any of Donee Information nee’s tax or information returns, or a person the following are true. specifically authorized to sign by that official. Return The signature does not represent concurrence 1. The goods or services given to a donor in the appraised value of the contributed prop- have insubstantial value as described in Dispositions of donated property. If an or- erty. A signed acknowledgment represents re- Revenue Procedure 90-12, 1990-1 C.B. ganization receives charitable deduction prop- ceipt of the property described on Form 8283 on 471, and Revenue Procedure 92-49, the date specified on the form. The signature erty and within 3 years sells, exchanges, or 1992-1 C.B. 507 (as adjusted for inflation).
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2. There is no donative element involved in a conducted by a well-known artist. The artist ·A pay stub, Form W-2, or other document particular transaction with a charity (for ex- does not provide tours on a commercial basis. showing a contribution to a donee organi- ample, there is generally no donative ele- Tours of the museum normally are free to the zation, together with ment involved in a visitor’s purchase from public. A good faith estimate of the FMV of the ·A pledge card or other document from the a museum gift shop). evening museum tour is $0 even though it is donee organization that shows its name. conducted by the artist. 3. There is only an intangible religious benefitprovided to the donor. The intangible relig- For contributions of $250 or more, the docu- Penalty for failure to disclose. A penalty is ious benefit must be provided to the donor ment must state that the donee organization imposed on a charity that does not make the by an organization organized exclusively provides no goods or services for any payroll required disclosure of a quid pro quo contribu- for religious purposes, and must be of a contributions. The amount withheld from each tion of more than $75. The penalty is $10 per type that generally is not sold in a commer- payment of wages to a taxpayer is treated as a contribution, not to exceed $5,000 per fundrais- cial transaction outside the donative con- separate contribution. ing event or mailing. The charity can avoid the text. For example, a donor who, for a penalty if it can show that the failure was due to payment, is granted admission to a relig- Acknowledgment of Vehicle reasonable cause. ious ceremony for which there is no admis- Contribution sion charge is provided an intangiblereligious benefit. A donor is not provided Acknowledgment of If an exempt organization receives a contribu- intangible religious benefits for payments Charitable Contributions of tion of a qualified vehicle with a claimed value of made for tuition for education leading to a more than $500, the donee organization is re- $250 or More recognized degree, travel services, or con- quired to provide a contemporaneous written sumer goods. A donor can deduct a charitable contribution of acknowledgment to the donor. The donee or- 4. The donor makes a payment of $75 or less $250 or more only if the donor has a written ganization can use a completed Form 1098-C, per year and receives only annual mem- acknowledgment from the charitable organiza- Contributions of Motor Vehicles, Boats, and Air- bership benefits that consist of: tion. The donor must get the acknowledgment planes, for the contemporaneous written ac- by the earlier of: knowledgment. See section 3.03 of Notice a. Any rights or privileges (other than the 2005-44 for guidance on the information that right to purchase tickets for college ath- 1. The date the donor files the original return must be included in a contemporaneous written letic events) that the taxpayer can exer- for the year the contribution is made, or acknowledgment and the deadline for furnishing cise often during the membership 2. The due date, including extensions, for fil- the acknowledgment to the donor. period, such as free or discounted ad- ing the return. missions or parking or preferred access Any donee organization that provides a con- to goods or services, or temporaneous written acknowledgment to a do- The donor is responsible for requesting and ob- nor is required to report to the IRS the taining the written acknowledgment from the do- b. Admission to events that are open only information contained in the acknowledgment. nee. A charitable organization that receives a to members and the cost per person of The report is due by February 28 (March 31 if payment made as a contribution is treated as the which is within the limits for low-cost filing electronically) of the year following the year donee organization for this purpose even if the articles described in Revenue Proce- in which the donee organization provides the organization (according to the donor’s instruc- dure 90-12 (as adjusted for inflation). acknowledgment to the donor. The organization tions or otherwise) distributes the amount re- must file the report on Copy A of Form 1098-C. ceived to one or more charities. Good faith estimate of fair market value An organization that files Form 1098-C on (FMV). An organization can use any reasona- paper should send it with Form 1096, Annual Quid pro quo contribution. If the donee pro- ble method to estimate the FMV of goods or Summary and Transmittal of U.S. Information vides goods or services to the donor in ex- services it provided to a donor, as long as it Returns. See the Instructions for Form 1096 for change for the contribution (a quid pro quo applies the method in good faith. the correct filing location. contribution), the acknowledgment must include The organization can estimate the FMV of a good faith estimate of the value of the goods or An organization that is required to file 250 or goods or services that generally are not com- services. See Disclosure of Quid Pro Quo Con- more Forms 1098-C during the calendar year mercially available by using the FMV of similar tributions, earlier. must file the forms electronically or magneti- or comparable goods or services. Goods or cally. Specifications for filing Form 1098-C elec- services may be similar or comparable even if Form of acknowledgment. Although there is tronically or magnetically can be found in they do not have the unique qualities of the no prescribed format for the written acknowledg- Publication 1220, Specifications for Filing Forms goods or services being valued. ment, it must provide enough information to sub- 1097-BTC, 1098, 1099, 3921, 3922, 5498, stantiate the amount of the contribution. For 8935, and W-2G Electronically at www.IRS.gov/ Example 1. A charity provides a 1-hour ten- more information, get IRS Publication 1771, pub/irs-pdf/p1220.pdf . nis lesson with a tennis professional for the first Charitable Contributions ± Substantiation and $500 payment it receives. The tennis profes- Disclosure Requirements. sional provides 1-hour lessons on a commercial Acknowledgment basis for $100. A good faith estimate of the Cash contributions. To deduct a contribu- lesson’s FMV is $100. tion of cash, a check, or other monetary gift For a contribution of a qualified vehicle (regardless of the amount), a donor must main- with a claimed value of $500 or less, do Example 2. For a payment of $50,000, a tain a bank record or a written communication not file Form 1098-C. However, you museum allows a donor to hold a private event from the donee organization showing the do- can use it as the contemporaneous written ac- in a room of the museum. A good faith estimate nee’s name, date, and amount of the contribu- knowledgment under section 170(f)(8) by pro- of the FMV of the right to hold the event in the tion. In the case of a lump-sum contribution viding the donor with Copy C only. See the museum can be made by using the cost of (rather than a contribution by payroll deduction) renting a hotel ballroom with a capacity, ameni- Instructions for Form 1098-C. made through the Combined Federal Campaign ties, and atmosphere comparable to the mu- Generally, the organization should complete or a similar program such as a United Way seum room, even though the hotel ballroom Form 1098-C as the written acknowledgment to Campaign, the written communication must in- lacks the unique art displayed in the museum the donor and the IRS. The contents of the clude the name of the donee organization that is room. If the hotel ballroom rents for $2,500, a the ultimate recipient of the charitable contribu- acknowledgment depend upon whether the or- good faith estimate of the FMV of the right to tion. ganization: hold the event in the museum is $2,500. Contributions by payroll deduction. An ·Sells a qualified vehicle without any signifi- organization may substantiate an employee’s cant intervening use or material improve- Example 3. For a payment of $1,000, a contribution by deduction from its payroll by: charity provides an evening tour of a museum ment,
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·Intends to make a significant intervening a needy individual without a significant interven- legal life of the qualified intellectual property, or ing use or material improvement within 6 months the 10-year period beginning with the date of the use of or material improvement to a quali- of the date of the contribution. contribution. fied vehicle prior to sale, or If a charity sells a donated vehicle at auction, ·Sells a qualified vehicle to a needy individ- the IRS will not accept as substantiation an Qualified intellectual property. Qualified in- ual at a price significantly below fair mar- acknowledgment from the charity stating that tellectual property is generally any patent, copy- ket value, or a gratuitous transfer to a the vehicle is to be transferred to a needy indi- right, trademark, trade name, trade secret, needy individual in direct furtherance of a vidual for significantly below fair market value. know-how, software or similar property, or appli- charitable purpose of the organization of Vehicles sold at auction are not sold at prices cations or registrations of such property (other relieving the poor and distressed or the significantly below fair market value, and the than property contributed to or for the use of a underprivileged who are in need of a IRS will not treat vehicles sold at auction as private foundation as defined in section 509(a) means of transportation. qualifying for this exception. that is not described in section 170(b)(1)(F)). The penalty for a false or fraudulent acknowl- See Exceptions below. For more information on the acknowledg- edgment where the donee certifies that the vehi- Exceptions. The following property is not ment, see Notice 2005-44, 2005-25 I.R.B. 1287 cle will not be transferred for money, other considered qualified intellectual property for pur- at www.IRS.gov/pub/irs-irbs/irb05-25.pdf. property, or services before completion of mate- poses of the additional charitable deduction: rial improvements or significant intervening use Material improvements or significant inter- or the donee certifies that the vehicle is to be 1. Computer software that is readily available transferred to a needy individual for significantly vening use. To constitute significant interven- for purchase by the general public, is sub- below fair market value in furtherance of the ing use, the organization must actually use the ject to a nonexclusive license, and has not donee’s charitable purpose is the larger of vehicle to substantially further the organization’s been substantially modified. $5,000 or the claimed value of the vehicle multi- regularly conducted activities, and the use must 2. A copyright held by a taxpayer: plied by 39.6%. be significant, not incidental. Factors in deter- The penalty for an acknowledgment relating mining whether a use is a significant intervening ·Whose personal efforts created the prop- to a qualified vehicle being sold in an arm’s use depend on its nature, extent, frequency, and erty, or length transaction to an unrelated party is the duration. For this purpose, use includes provid- larger of the gross proceeds from the sale or the ing transportation on a regular basis for a signifi- ·In whose hands the basis of the property sales price stated in the acknowledgment multi- cant period of time or significant use directly is determined, for purposes of determining plied by 39.6%. related to training in vehicle repair. Use does not gain from a sale or exchange, in whole orin part by reference to the basis of the include the use of a vehicle to provide training in Qualified Intellectual property in the hands of a taxpayer whose business skills, such as marketing or sales. Ex- personal efforts created the property. amples of significant use include: Property
·Driving a vehicle every day for 1 year to A taxpayer who contributes qualified intellectual deliver meals to needy individuals, if deliv- property to a charity may be entitled to a charita- ering meals is an activity regularly con- ble deduction, in addition to any initial deduction ducted by the organization. Report of Cash allowed in the year of contribution. The addi-tional deduction is based on a specified percent- ·Driving a vehicle for 10,000 miles over a Received age of the qualified donee income with respect 1-year period to deliver meals to needy to the qualified intellectual property. To qualify individuals, if delivering meals is an activ- An exempt organization that receives, in the for the additional charitable deduction, the donor ity regularly conducted by the organiza- course of its activities, more than $10,000 cash must provide notice to the donee at the time of tion. in one transaction (or two or more related trans- the contribution that the donor intends to treat actions) that is not a charitable contribution must the contribution as qualified intellectual property Material improvements include major repairs report the transaction to the IRS on Form 8300, contribution for purposes of sections 170(m) and and additions that improve the condition of the Report of Cash Payments Over $10,000 Re- 6050L. vehicle in a manner that significantly increases ceived in a Trade or Business. Every donee organization described in sec- the value. To be a material improvement, the tion 170(c) (except private foundation as defined improvement cannot be funded by an additional in section 509(a) that is not described in section payment to the organization from the donor of 170(b)(1)(F)) that receives or accrues net in- the vehicle. Material improvements do not in- come from a charitable gift of qualified intellec- Public Inspection clude cleaning, minor repairs, routine mainte- tual property must file Form 8899. nance, painting, removal of dents or scratches, of Exemption cleaning or repair of upholstery, and installation Form 8899. Form 8899, Notice of Income of theft deterrent devices. Applications, Annual From Donated Intellectual Property, is used by adonee to report net income from qualified intel- Returns, and Political Penalties. Section 6720 imposes penalties on lectual property to the donor of the property and any organization that is required under section to the IRS and is due by the last day of the first Organization Reporting 170(f)(12) to furnish an acknowledgment to a full month following the close of the donee’s tax donor if the organization knowingly: year. This form must be filed for each tax year of Forms the donee in which the donated property pro- ·Furnishes a false or fraudulent acknowl- duces net income, but only if all or part of that tax edgment, or The following rules apply to private foundations year occurs during the 10-year period beginning as well as other tax-exempt organizations. Pri- ·Fails to furnish an acknowledgment in the on the date of the contribution and that tax year vate foundations filing annual returns are sub- manner, at the time, and showing the in- does not begin after the expiration of the legal ject to the public disclosure requirements under life of the donated property. formation required by section 170(f)(12). section 6104(d).
Included in this section is a discussion on the Qualified donee income. Qualified donee in- Other penalties may apply. See part O public inspection requirements for political orga- come is any net income received by or accrued in the 2010 General Instructions for nizations filing Forms 8871 and 8872. to the donee that is properly allocable to the Certain Information Returns (Forms qualified intellectual property for the tax year of 1098, 1099, 3921, 3922, 5498, and W-2G). the donee which ends within or with the tax year Annual Information Return An acknowledgment containing a certifica- of the donor. Income is not treated as allocated tion will be presumed to be false or fraudulent if An exempt organization must make available for to qualified intellectual property if it is received or the qualified vehicle is sold to a buyer other than public inspection, upon request and without accrued after the earlier of the expiration of the
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charge, a copy of its original and amended an- ·Any material that is required to be withheld within a reasonable amount of time after receiv-ing a request for inspection (normally not more from public inspection, see Material re- nual information returns. Each information re- than 2 weeks) and at a reasonable time of day. quired to be withheld from public inspec- turn must be made available from the date it is At its option, it can mail, within 2 weeks of receiv- tion , next; required to be filed (determined with regard to ing the request, a copy of its application for tax any extensions), or is actually filed, whichever is ·In the case of a tax-exempt organization exemption and annual information returns to the later. An original return does not have to be other than a private foundation, the names requester in lieu of allowing an inspection. The made available if more than 3 years have and addresses of contributors to the or- organization can charge the requester for copy- passed from the date the return was required to ganization; or ing and actual postage costs only if the re- be filed (including any extensions) or was filed, quester consents to the charge. ·Any applications filed before July 15, whichever is later. An amended return does not An organization that has a permanent office, 1987, if the organization did not have a have to be made available if more than 3 years but has no office hours or very limited hours copy of the application on July 15, 1987. have passed from the date it was filed. during certain times of the year, must make itsdocuments available during those periods when An annual information return includes an ex- If there is no prescribed application form, see office hours are limited or not available as act copy of the return (Forms 990, 990-EZ, Regulations section 301.6104(d)-1(b)(3)(ii) for a though it were an organization without a perma- list of the documents that must be made avail- 990-BL, 990-PF, 990-T, or 1065), and amended nent office. able. return if any, and all schedules, attachments,
and supporting documents filed with the IRS. Material required to be withheld from pub- Furnishing copies. An exempt organization lic inspection. Material that is required to be also must provide a copy of all, or any specific An annual information return does not in- withheld from public inspection includes: part or schedule, of its three most recent annual clude: information returns and/or exemption applica- ·Trade secrets, patents, processes, styles ·Schedule A of Form 990-BL, tion to anyone who requests a copy either in of work, or apparatus for which withhold- person or in writing at its principal, regional, or ·Schedule K-1 of Form 1065, or ing was requested and granted; district office during regular business hours. If ·Form 1120-POL. ·National defense material; the individual made the request in person, thecopy must be provided on the same business ·Unfavorable rulings or determination let- In the case of a tax-exempt organization other day the request is made unless there are unu- ters issued in response to applications for than a private foundation, an annual information sual circumstances. Unusual circumstances are tax exemption; return does not include the names and ad- defined in Regulations section dresses of contributors to the organization. ·Rulings or determination letters revoking 301.6104(d)-1(d)(1)(ii). or modifying a favorable determination let- The organization must honor a written re- Form 990-T. All section 501(c)(3) or- ter; quest for a copy of documents or specific parts ganizations that file Form 990-T must or schedules of documents that are required to make the return public, regardless of ·Technical advice memoranda relating to a be disclosed. However, this rule only applies if whether the organization is otherwise subject to disapproved application for tax exemption the request: the disclosure requirements of section 6104. For or the revocation or modification of a example, although churches are not required to favorable determination letter; ·Is addressed to the exempt organization’s file Form 1023 or Form 990 with the IRS, they principal, regional, or district office; ·Any letter or document filed with or issued must file the Form 990-T with the IRS to report by the IRS relating to whether a proposed ·Is sent to that address by mail, electronic unrelated business taxable income. Thus, or accomplished transaction is a prohib- mail (e-mail), facsimile (fax), or a private churches must disclose Form 990-T to the pub- ited transaction under section 503; delivery service approved by the IRS; and lic. ·Any letter or document filed with or issued ·Gives the address to where the copy of State colleges and universities have been by the IRS relating to an organization’s the document should be sent. recognized by the IRS as exempt under section status as an organization described in 501(a) as organizations described in section section 509(a) or 4942(j)(3), unless the let- The organization must mail the copy within 30 501(c)(3) must disclose Form 990-T to the pub- ter or document relates to the organiza- days from the date it receives the request. The lic. However, state colleges and universities that tion’s application for tax exemption; and organization can request payment in advance are subject to tax under section 511(a) solely by and must then provide the copies within 30 days ·Any other letter or document filed with or virtue of section 511(a)(2)(B) and that have not from the date it receives payment. issued by the IRS which, although it re- been recognized by the IRS as exempt under lates to an organization’s tax-exempt sta- Fees for copies. The organization can section 501(a) as organizations described in tus as an organization described in section charge a reasonable fee for providing copies. It section 501(c)(3) are not required to make their 501(c) or 501(d), does not relate to that can charge no more for the copies than the per Forms 990-T public. organization’s application for tax exemp- page rate the IRS charges for providing copies. tion. The IRS cannot charge more for copies than the Public Inspection of fees listed in the Freedom of Information Act(FOIA) fee schedule. Although the IRS charges Exemption Application Time, place, and manner restrictions. The no fee for the first 100 pages, the organization annual returns and exemption application must An exempt organization must also make avail- can charge a fee for all copies. For noncommer- be made available for inspection, without cial requesters, the FOIA schedule currently able for public inspection without charge its ap- charge, at the organization’s principal, regional, provides a rate of $.20 per page. The organiza- plication for tax-exempt status. An application and district offices during regular business tion can also charge the actual postage costs it for tax exemption includes the application form hours. The organization can have an employee pays to provide the copies. (such as Forms 1023 or 1024), all documents present during inspection, but must allow the and statements the IRS requires the organiza- individual to take notes freely and to photocopy Regional and district offices. Generally, the tion to file with the form, any statement or other at no charge if the individual provides the photo- same rules regarding public inspection and pro- copying equipment. Generally, regional and dis- supporting document submitted by an organiza- viding copies of applications and annual infor- trict offices are those that have paid employees tion in support of its application, and any letter or mation returns that apply to a principal office of who together are normally paid for at least 120 other document issued by the IRS concerning an exempt organization also apply to its regional hours a week. and district offices. However, a regional or dis- the application. If the organization does not maintain a per- trict office is not required to make its annual The application for exemption does not in- manent office, it must make its application for tax information return available for inspection or to clude: exemption and its annual information returns provide copies until 30 days after the date the ·Any application from an organization that available for inspection at a reasonable location return is required to be filed (including any ex- is not yet recognized as exempt; of its choice. It must permit public inspection tensions) or is actually filed, whichever is later.
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Local and subordinate organizations. A lo- receiving a request made in person for public copy of these materials available for public in- cal or subordinate organization is an exempt inspection or copies and at a reasonable time of spection during regular business hours at the organization that did not file its own application day. organization’s principal office and at each of its for tax exemption because it is covered by a regional or district offices having at least three In lieu of allowing an inspection, the local or group exemption letter. Generally, a local or paid employees. subordinate organization can mail a copy of the subordinate organization of an exempt organi- applicable documents to the person requesting Form 8872. Form 8872 (including Sched- zation must, upon request, make available for inspection within the same time period. In this ules A and B) is open to public inspection. Cop- public inspection, or provide copies of: case, the organization can charge the requester ies of Form 8872 that are required to be filed for copying and actual postage costs only if the electronically will be made available on the In- 1. The application submitted to the IRS by requester consents to the charge. If the local or ternet website, www.IRS.gov/polorgs , within 48 the central or parent organization to obtain subordinate organization receives a written re- hours after they have been filed. the group exemption letter, and quest for a copy of its annual information return, In addition, the organization is required to it must fulfill the request by providing a copy of 2. Those documents which were submitted make a copy of this form available for public the group return in the time and manner speci- by the central or parent organization to in- inspection during regular business hours at the fied earlier. The requester has the option of clude the local or subordinate organization organization’s principal office and at each of its requesting from the central or parent organiza- in the group exemption letter. regional or district offices having at least three tion, at its principal office, inspection or copies of paid employees. However, if the central or parent organization group returns filed by the central or parent or- submits to the IRS a list or directory of local or ganization. The central or parent organization subordinate organizations covered by the group must fulfill such requests in the time and manner Penalties exemption letter, the local or subordinate organi- specified earlier. zation is required to provide only the application If an organization fails to comply, it may be The penalty for failure to allow public inspection for the group exemption ruling and the pages of liable for a penalty. See Penalties , later. of annual returns is $20 for each day the failure the list or directory that specifically refer to it. continues. The maximum penalty on all persons The local or subordinate organization must Making applications and annual information for failures involving any one return is $10,000. permit public inspection or comply with a re- returns widely available. An exempt organi- The penalty for failure to allow public inspec- quest for copies made in person, within a rea- zation does not have to comply with requests for tion of exemption applications is $20 for each sonable amount of time (normally not more than copies of its annual information returns or ex- day the failure continues. 2 weeks) after receiving a request made in per- emption application if it makes them widely The penalty for willful failure to allow public son for public inspection or copies and at a available. However, making these documents inspection of a return or exemption application is reasonable time of day. In lieu of allowing an widely available does not relieve the organiza- $5,000 for each return or application. The pen- inspection, the local or subordinate organization tion from making its documents available for alty also applies to a willful failure to provide can mail a copy of the applicable documents to public inspection. copies. the person requesting inspection within the The organization can make its application The penalty for failure to allow public inspec- same time period. In that case, the organization and annual information returns widely available tion of a political organization’s section 527 no- can charge the requester for copying and actual by posting the application and annual informa- tice (Form 8871) is $20 for each day the failure postage costs only if the requester consents to tion returns on the Internet. For the rules to continues. the charge. If the local or subordinate organiza- follow so that the Internet posting will be consid- tion receives a written request for a copy of its The penalty for failure to allow public inspec- ered widely available, see Regulations section application for exemption, it must fulfill the re- tion of a section 527 organization’s contributions 301.6104(d)-2(b). quest in the time and manner specified earlier. and expenditures report (Form 8872) is $20 for If the organization has made its application The requester has the option of requesting each day the failure continues. The maximum for tax exemption and/or annual information re- from the central or parent organization, at its penalty on all persons for failures involving any turns widely available, it must inform any individ- principal office, inspection or copies of the appli- one report is $10,000. ual requesting a copy where the documents are cation for group exemption and the material sub- available, including the website address on the mitted by the central or parent organization to Internet, if applicable. If the request is made in include a local or subordinate organization in the person, the notice must be provided immedi- group ruling. If the central or parent organization ately. If the request is made in writing, the notice Required Disclosures submits to the IRS a list or directory of local or must be provided within 7 days. subordinate organizations covered by the group Certain exempt organizations must disclose to exemption letter, it must make the list or direc- Harassment campaign. If the tax-exempt or- the IRS or the public certain information about tory available for public inspection, but it is re- ganization is the subject of a harassment cam- their activities. Generally, an organization dis- quired to provide copies only of those pages of paign, the organization may not have to fulfill closes this information by entering it on the ap- the list or directory that refer to particular local or requests for information. For more information, propriate lines of its annual return. In addition, subordinate organizations specified by the re- see Regulations section 301.6104(d)-3. there are disclosure requirements for: quester. The central or parent organization must ·Solicitation of nondeductible contributions, fulfill such requests in the time and manner Political Organization specified earlier. ·Sales of information or services that are Reporting Forms A local or subordinate organization that does available free from the government, not file its own annual information return (be- Forms 8871 and 8872 (discussed earlier under ·Dues paid to the organization that are not cause it is affiliated with a central or parent Reporting Requirements for a Political Organi- deductible because they are used for lob- organization that files a group return) must, on zation ) are open to public inspection. bying or political activities, and request, make available for public inspection, or Form 8871. Form 8871 (including any sup- provide copies of, the group returns filed by the ·Prohibited tax shelter transactions. porting papers) and any letter or other document central or parent organization. However, if the the IRS issues with regard to Form 8871 is open group return includes separate schedules for to public inspection at the IRS in Washington, Solicitation of Nondeductible each local or subordinate organization included DC. in the group return, the local or subordinate Contributions organization receiving the request can omit any Copies of Form 8871 that have been filed will schedules relating only to other organizations be made available on the IRS website, www. Solicitations for contributions or other payments included in the group return. The local or IRS.gov/polorgs , 48 hours after the notice has by certain exempt organizations (including lob- subordinate organization must permit public in- been filed and are considered widely available bying groups and political action committees) spection, or comply with a request for copies as long as the organization provides the IRS must include a statement that payments to those made in person, within a reasonable amount of website address to the person making the re- organizations are not deductible as charitable time (normally not more than 2 weeks) after quest. In addition, the organization must make a contributions for federal income tax purposes.
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The statement must be included in the fundrais- be made in a conspicuous and easily recog- 1. Facilitates a prohibited tax shelter transac- ing solicitation and be conspicuous and easily tion by reason of its tax-exempt, nized format when the organization makes an recognizable. tax-indifferent, or tax-favored status; or offer or solicitation to sell the information orservice. Organizations affected are those ex- 2. Is identified in published guidance by type, Organizations subject to requirements. An empt under section 501(c) or 501(d) and political class, or role as a party to a prohibited tax organization must follow these disclosure re- organizations defined in section 527(e). shelter transaction. quirements if it is exempt under section 501(c),other than section 501(c)(1), or under section See Prohibited Tax Shelter Transactions Penalty. A penalty is provided for failure to 501(d), unless the organization is eligible to re- later for further information. comply with this requirement if the failure is due ceive tax deductible charitable contributions to intentional disregard of the requirement. The under section 170(c). These requirements must Disclosure. A single disclosure is made by penalty is the greater of $1,000 for each day the be followed by, among others: the organization for each prohibited tax shelter failure occurred, or 50% of the total cost of all transaction. The disclosure is made on Form offers and solicitations that were made by the 1. Social welfare organizations (section 8886-T. organization the same day that it fails to meet 501(c)(4)), the requirement. Due date. Generally, for exempt organiza- 2. Labor unions (section 501(c)(5)), tions described in 1 above, the disclosure is dueon or before May 15 of the calendar year follow- 3. Trade associations (section 501(c)(6)), Dues Used for Lobbying ing the close of the calendar year that the ex- or Political Activities 4. Social clubs (section 501(c)(7)), empt organization entered into the prohibited taxshelter transaction. However, the disclosure for 5. Fraternal organizations (section 501(c)(8) Certain exempt organizations must notify any- subsequently listed transactions (as defined in and 501(c)(10)) (however, fraternal organi- one paying dues to the organization whether section 4965(e)(2)) is due on or before May 15 zations described in section 170(c)(4) must any part of the dues is not deductible because it of the calendar year following the close of the follow these requirements only for solicita- is related to lobbying or political activities. calendar year that the transaction was identified tions for funds that are to be used for non- An organization must provide the notice if it is by the Secretary as a listed transaction. charitable purposes not described in exempt from tax under section 501(a) and is one The disclosure for exempt organizations de- section 170(c)(4)), of the following. scribed in 2 above is due on or before the date 6. Any political organization described in sec- the first tax return (whether original or amended 1. A social welfare organization described in tion 527(e), including political campaign return) is filed that reflects a reduction or elimi- section 501(c)(4) that is not a veterans’ committees and political action commit- nation of the exempt organization’s liability for organization. tees, and applicable federal employment, excise, or unre- 2. An agricultural or horticultural organization lated business income taxes that is derived di- 7. Any organization not eligible to receive described in section 501(c)(5). rectly or indirectly from tax consequences or tax tax-deductible contributions if the organiza- strategy described in the published guidance tion or a predecessor organization was, at 3. A business league, chamber of commerce, that lists the transaction. any time during the 5-year period ending real estate board, or other organization de- on the date of the fundraising solicitation, scribed in section 501(c)(6). Penalty. Exempt organizations that fail to file an organization of the type to which this the required disclosure are subject to a nondis- However, an organization described in (1), (2), disclosure requirement applies. closure penalty of $100 for each day the failure or (3) does not have to provide the notice if it continues with a maximum penalty for any one establishes that substantially all the dues paid to Fundraising solicitation. This disclosure re- disclosure of $50,000. it are not deductible anyway or if certain other quirement applies to a fundraising solicitation if Also, if the IRS makes a written demand on conditions are met. For more information, see all of the following are true. any exempt organization subject to this penalty, Revenue Procedure 98-19 in Cumulative Bulle- giving the organization a reasonable date to tin 1998-1 or later update. 1. The organization soliciting the funds nor- make the disclosure, and the organization fails If the organization does not provide the mally has gross receipts over $100,000 to make the disclosure by that date, the organi- required notice, it may have to pay a tax that is per year. zation is subject to a penalty of $100 for each reported on Form 990-T. But the tax does not 2. The solicitation is part of a coordinated day after the date specified by the IRS until apply to any amount on which the section 527 fundraising campaign that is soliciting disclosure is made (with a maximum penalty for tax has been paid on Form 1120-POL. See more than 10 persons during the year. any one disclosure of $10,000). Political Organization Income Tax Return , ear- lier. 3. The solicitation is made in written orprinted form, by television or radio, or by For more information about nondeductible telephone. dues, see Deduction not allowed for dues used Miscellaneous Rules for political or legislative activities under 501(c)(6) ±Business Leagues, etc. Penalties. Failure by an organization to make the required statement will result in a penalty of$1,000 for each day the failure occurred, up to a Prohibited Tax Shelter maximum penalty of $10,000 for a calendar Transactions Organizational Changes and year. No penalty will be imposed if it is shown Exempt Status that the failure was due to reasonable cause. If Every exempt organization (as defined in sec- the failure was due to intentional disregard of the tion 4965(c)) that is a party to a prohibited tax If your exempt organization changes its legal requirements, the penalty may be higher and is shelter transaction is required to disclose to the structure, such as from a trust to a corporation, not subject to a maximum amount. IRS the following information: you must file a new exemption application toestablish that the new legal entity qualifies for ·Whether such organization is a party to Sales of Information or exemption. If your organization becomes inac- the prohibited tax shelter transaction (as Services Available Free From tive for a period of time but does not cease being defined in section 4965(e); and an entity under the laws of the state in which it Government ·The identity of any other party to the trans- was formed, its exemption will not be termi- action that is known to the exempt organi- Certain organizations that offer to sell to individ- nated. However, unless you are covered by one zation. uals (or solicit money for) information or routine of the filing exceptions, you will have to continue services that could be readily obtained free (or to file an annual information return during the Party to a prohibited tax shelter transaction. for a nominal fee) from the Federal Government period of inactivity. If your organization has been An exempt organization is a party to a prohibited must include a statement that the information or liquidated, dissolved, terminated, or substan- tax shelter transaction if the organization: service can be so obtained. The statement must tially contracted, you should file your annual
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return of information by the 15th day of the 5th possesses governmental powers, it does not month after the change and follow the applicable qualify for exemption. A state or municipality instructions to the form. itself does not qualify for exemption. 3. If your organization amends its articles of organization or its internal regulations (bylaws), Topics then follow the instructions to Form 990, Form This chapter discusses: 990-EZ, or Form 990-PF for reporting these Section changes. Regardless of whether your organiza- ·Contributions to 501(c)(3) organizations tion files an annual information return, you may ·Applications for recognition of exemption also report these changes to the EO Determina- 501(c)(3) tions office; however, such reporting does not ·Articles of Organization relieve your organization from reporting the ·Educational organizations and private Organizations changes on its annual information return. For schools information about informing the IRS of a termi-nation or merger, see Pub. 4779, Facts about ·Organizations providing insurance Terminating or Merging Your Exempt Organiza- Introduction ·Other section 501(c)(3) organizations tion. An organization may qualify for exemption from ·Private foundations and public charities federal income tax if it is organized and operated ·Lobbying expenditures exclusively for one or more of the following pur- Change in Accounting Period poses. The procedures that an organization must follow ·Religious. Useful Items to change its accounting period differ for an You may want to see: ·Charitable. individual organization and for a central organi-zation that seeks a group change for its ·Scientific. Forms (and Instructions) subordinate organizations. ·Testing for public safety. o 1023 Application for Recognition of Individual organizations. If an organization Exemption Under Section 501(c)(3) ·Literary. is not required to file an annual information re- of the Internal Revenue Code turn, but files a Form 990-T, it can change its ·Educational. annual accounting period by timely filing the See chapter 6 for information about getting ·Fostering national or international amateur Form 990-T. If neither an information return nor publications and forms. sports competition (but only if none of its a Form 990-T is required to be filed, an organi- activities involve providing athletic facilities zation must notify the IRS by letter that it has or equipment; however, see Amateur Ath- changed its fiscal period. letic Organizations , later in this chapter). If an organization changed its annual ac- Contributions to counting period at any time within the previous ·The prevention of cruelty to children or 10 years and within that time it had a filing animals. 501(c)(3) Organizations requirement, the organization must file a Form1128, Application to Adopt, Change, or Retain a To qualify, the organization must be a corpo- Contributions to domestic organizations de- Tax Year, with its timely filed annual information ration, community chest, fund, or foundation. A scribed in this chapter, except organizations return or Form 990-T, as appropriate, whether or trust is a fund or foundation and will qualify. testing for public safety, are deductible as chari- not the filing of the information return or Form However, an individual or a partnership will not table contributions on the donor’s federal in- 990-T would have otherwise been required for qualify. come tax return. that year.
Examples. Qualifying organizations include: Fundraising events. If the donor receives Central organizations. A central organization something of value in return for the contribution, can obtain approval for a group change in an ·Nonprofit old-age homes, a common occurrence with fundraising efforts, annual accounting period for its subordinate or- ·Parent-teacher associations, part or all of the contribution may not be deducti- ganizations on a group basis only by filing Form ble. This may apply to fundraising activities such 1128 with the Service Center where it files its ·Charitable hospitals or other charitable or- as charity balls, bazaars, banquets, auctions, annual information return. For more information, ganizations, concerts, athletic events, and solicitations for see Revenue Procedure 76-10, as modified by ·Alumni associations, membership or contributions when merchandise Revenue Procedure 79-3 or any later updates. or benefits are given in return for payment of a ·Schools, Due date. Form 1128 must be filed by the 15th specified minimum contribution. day of the 5th month following the close of the ·Chapters of the Red Cross, If the donor receives or expects to receive short period. goods or services in return for a contribution to ·Boys’ or Girls’ Clubs, and your organization, the donor cannot deduct any ·Churches. part of the contribution unless the donor intendsto, and does, make a payment greater than the Child care organizations. The term educa- fair market value of the goods or services. If a tional purposes includes providing for care of deduction is allowed, the donor can deduct only children away from their homes if substantially the part of the contribution, if any, that is more all the care provided is to enable individuals (the than the fair market value of the goods or serv- parents) to be gainfully employed and the serv- ices received. You should determine in advance ices are available to the general public. the fair market value of any goods or services tobe given to contributors and tell them, when you Instrumentalities. A state or municipal instru- publicize the fundraising event or solicit their mentality may qualify under section 501(c)(3) if it contributions, how much is deductible and how is organized as a separate entity from the gov- much is for the goods or services. See Disclo- ernmental unit that created it and if it otherwise sure of Quid Pro Quo Contributions in chapter 2. meets the organizational and operational testsof section 501(c)(3). Examples of a qualifying Exemption application not filed. Donors instrumentality might include state schools, uni- cannot deduct any charitable contribution to an versities, or hospitals. However, if an organiza- organization that is required to apply for recogni- tion is an integral part of the local government or tion of exemption but has not done so.
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Separate fund Ðcontributions to which are indirect beneficiaries under the contract are or- Whether your organization is participating or deductible. An organization that is exempt intervening, directly or indirectly, in any political ganizations. from federal income tax other than as an organi- campaign on behalf of (or in opposition to) any A charitable organization liable for excise zation described in section 501(c)(3) can, if it candidate for public office depends upon all of taxes must file Form 4720, Return of Certain desires, establish a fund, separate and apart the facts and circumstances of each case. Cer- Excise Taxes Under Chapters 41 and 42 of the from its other funds, exclusively for religious, tain voter education activities or public forums Internal Revenue Code. Generally, the due date conducted in a nonpartisan manner may not be charitable, scientific, literary, or educational pur- for filing Form 4720 occurs on the fifteenth day prohibited political activity under section poses, fostering national or international ama- of the fifth month following the close of the or- 501(c)(3), while other so-called voter education teur sports competition, or for the prevention of ganization’s tax year. activities may be prohibited. cruelty to children or animals.
If the fund is organized and operated exclu- Effective date of exemption. Most organiza- sively for these purposes, it may qualify for ex- tions described in this chapter that were organ- emption as an organization described in section Application for ized after October 9, 1969, will not be treated as 501(c)(3), and contributions made to it will be tax exempt unless they apply for recognition of deductible as provided by section 170. A fund Recognition of exemption by filing Form 1023. These organiza- with these characteristics must be organized in tions will not be treated as tax exempt for any such a manner as to prohibit the use of its funds Exemption period before they file Form 1023, unless they upon dissolution, or otherwise, for the general file the form within 15 months from the end of the purposes of the organization creating it. This discussion describes certain information to month in which they were organized. If the or- be provided upon application for recognition of ganization files the application within this Personal benefit contracts. Generally, no exemption by all organizations created for any of 15-month period, the organization’s exemption charitable deduction will be allowed for a trans- the purposes described earlier in this chapter. will be recognized retroactively to the date it was fer to, or for the use of, a section 501(c)(3) or For example, the application must include a con- organized. Otherwise, exemption will be recog- (c)(4) organization if in connection with the formed copy of the organization’s articles of in- nized only from the date of receipt. The date of transfer: corporation, as discussed under Articles of receipt is the date of the U.S. postmark on the Organization , later in this chapter. See the or- ·The organization directly or indirectly cover in which an exemption application is ganization headings that follow for specific infor- pays, or previously paid, a premium on a mailed or, if no postmark appears on the cover, mation your organization may need to provide. personal benefit contract for the transferor, the date the application is stamped as received or by the IRS. Form 1023. Your organization must file its ap- ·There is an understanding or expectation Private delivery service. If a private deliv- plication for recognition of exemption on Form that anyone will directly or indirectly pay a ery service designated by the IRS, rather than 1023. See chapter 1 and the instructions accom- premium on a personal benefit contract for the U.S. Postal Service, is used to deliver the panying Form 1023 for the procedures to follow the transferor. application, the date of receipt is the date re- in applying. Some organizations are not re- corded or marked by the private delivery serv- quired to file Form 1023. These are discussed A personal benefit contract with respect to the ice. The following private delivery services have later in this section. transferor is any life insurance, annuity, or en- been designated by the IRS. Form 1023 and accompanying statements dowment contract, if any direct or indirect bene- ·DHL Express (DHL): DHL ªSame Dayº must show that all of the following are true. ficiary under the contract is the transferor, any Service. member of the transferor’s family, or any other 1. The organization is organized exclusively person designated by the transferor. ·Federal Express (FedEx): FedEx Priority for, and will be operated exclusively for, Overnight, FedEx Standard Overnight, Certain annuity contracts. If an organiza- one or more of the purposes (religious, FedEx 2Day, FedEx International Priority, tion incurs an obligation to pay a charitable gift charitable, etc.) specified in the introduc- and FedEx International First. annuity, and the organization purchases an an- tion to this chapter. nuity contract to fund the obligation, individuals ·United Parcel Service (UPS): UPS Next 2. No part of the organization’s net earnings receiving payments under the charitable gift an- Day Air, UPS Next Day Air Saver, UPS will inure to the benefit of private share- nuity will not be treated as indirect beneficiaries 2nd Day Air, UPS 2nd Day Air A.M., UPS holders or individuals. You must establish if the organization owns all of the incidents of Worldwide Express Plus, and UPS World- that your organization will not be organized ownership under the contract, is entitled to all wide Express. or operated for the benefit of private inter- payments under the contract, and the timing and ests, such as the creator or the creator’s Amendments to enabling instrument re- amount of the payments are substantially the family, shareholders of the organization, quired. If an organization is required to alter same as the timing and amount of payments to other designated individuals, or persons its activities or to make substantive amend- each person under the obligation ( as such obli- controlled directly or indirectly by such pri- ments to its enabling instrument, the ruling or gation is in effect at the time of the transfer). vate interests. determination letter recognizing its exempt sta- Certain contracts held by a charitable re- tus will be effective as of the date the changes 3. The organization will not, as a substantial mainder trust. An individual will not be con- are made. If only a nonsubstantive amendment part of its activities, attempt to influence sidered an indirect beneficiary under a life is made, exempt status will be effective as of the legislation (unless it elects to come under insurance, annuity, or endowment contract held date it was organized, if the application was filed the provisions allowing certain lobbying ex- by a charitable remainder annuity trust or a char- within the 15-month period, or the date the appli- penditures) or participate to any extent in a itable remainder unitrust solely by reason of cation was filed. political campaign for or against any candi- being entitled to the payment if the trust owns all date for public office. See Political activity , of the incidents of ownership under the contract, Extensions of time for filing. There are two next, and Lobbying Expenditures , near the and the trust is entitled to all payments under the ways organizations seeking exemption can re- end of this chapter. contract. ceive an extension of time for filing Form 1023.
Political activity. If any of the activities Excise tax. If the premiums are paid in con- 1. Automatic 12-month extension. Organiza- (whether or not substantial) of your organization nection with a transfer for which a deduction is tions will receive an automatic 12-month consist of participating in, or intervening in, any not allowable under the deduction denial rule, extension if they file an application for rec- political campaign on behalf of (or in opposition without regard to when the transfer to the chari- ognition of exemption with the IRS within to) any candidate for public office, your organi- table organization was made, an excise tax will 12 months of the original deadline. To get zation will not qualify for tax-exempt status be applied that is equal to the amount of the this extension, an organization must add under section 501(c)(3). Such participation or premiums paid by the organization on any life the following statement at the top of its intervention includes the publishing or distribut- insurance, annuity, or endowment contract. The application: ªFiled Pursuant to Section excise tax does not apply if all of the direct and ing of statements. 301.9100-2.º
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2. Discretionary extensions. An organization grant of relief on the organization providing the A request for this relief in connection with an that fails to file a Form 1023 within the application for exemption does not require pay- IRS with a statement from an independent audi- extended 12-month period will be granted ment of an additional user fee. Also, a request tor certifying that the interests of the Govern- an extension to file if it submits evidence for relief under the automatic 12-month exten- ment are not prejudiced. (including affidavits) to establish that: sion does not require payment of a user fee. Procedure for requesting extension. To More information. For more information request a discretionary extension, an organiza- a. It acted reasonably and in good faith, about these procedures, see Regulations sec- tion must submit (to the IRS address shown on and tions 301.9100-1, 301.9100-2, 301.9100-3, and Form 1023 and Notice 1382) the following. b. Granting a discretionary extension will Rev. Proc. 2010-4, section 6.04 and Rev. Proc. ·A statement showing the date Form 1023 not prejudice the interests of the gov- 2010-8, sec. 6.08. was required to have been filed and the ernment. Notification from IRS. Organizations filing date it was actually filed. Form 1023 and satisfying all requirements of ·Any documents relevant to the application. How to show reasonable action and good section 501(c)(3) will be notified of their exempt faith. An organization acted reasonably and status in writing. ·An affidavit describing in detail the events showed good faith if at least one of the following that led to the failure to apply and to the is true. discovery of that failure. If the organization Organizations Not Required relied on a tax professional’s advice, the 1. The organization requests relief before its To File Form 1023 affidavit must describe the engagement failure to file is discovered by the IRS. and responsibilities of the professional and Some organizations are not required to file Form 2. The organization failed to file because of the extent to which the organization relied 1023. These include: intervening events beyond its control. on him or her. ·Churches, interchurch organizations of lo- 3. The organization exercised reasonable dili- ·This affidavit must be accompanied by a cal units of a church, conventions or as- gence (taking into account the complexity dated declaration, signed by an individual sociations of churches, or integrated of the return or issue and the organiza- who has personal knowledge of the facts auxiliaries of a church, such as a men’s or tion’s experience in these matters) but was and circumstances, who is authorized to women’s organization, religious school, not aware of the filing requirement. act for the organization, which states, mission society, or youth group. ªUnder penalties of perjury, I declare that I 4. The organization reasonably relied upon ·Any organization (other than a private have examined this request, including ac- the written advice of the IRS. foundation) normally having annual gross companying documents, and, to the best receipts of not more than $5,000 (see 5. The organization reasonably relied upon of my knowledge and belief, the request Gross receipts test, later). the advice of a qualified tax professional contains all the relevant facts relating to who failed to file or advise the organization the request, and such facts are true, cor- These organizations are exempt automati- to file Form 1023. An organization cannot rect, and complete.º cally if they meet the requirements of section rely on the advice of a tax professional if it ·Detailed affidavits from individuals having 501(c)(3). knows or should know that he or she is not knowledge or information about the events competent to render advice on filing ex- Filing Form 1023 to establish exemption. If that led to the failure to make the applica- emption applications or is not aware of all the organization wants to establish its exemp- tion and to the discovery of that failure. the relevant facts. tion with the IRS and receive a ruling or determi- This includes the organization’s return nation letter recognizing its exempt status, it preparer, and any accountant or attorney, Not acting reasonably and in good faith. should file Form 1023. By establishing its ex- knowledgeable in tax matters, who ad- An organization has not acted reasonably and in emption, potential contributors are assured by good faith under the following circumstances. vised the taxpayer on the application. The the IRS that contributions will be deductible. A affidavits must describe the engagement subordinate organization (other than a private 1. It seeks to change a return position for and responsibilities of the individual and foundation) covered by a group exemption letter which an accuracy-related penalty has the advice that he or she provided. does not have to submit a Form 1023 for itself. been or could be imposed at the time the ·These affidavits must include the name, relief is requested. Private foundations. See Private Founda- current address, and taxpayer identifica- tions and Public Charities, later in this chapter, 2. It was informed of the requirement to file tion number of the individual, and be ac- for more information about the additional notice and related tax consequences, but chose companied by a dated declaration, signed required from an organization in order for it not not to file. by the individual, which states: ªUnder to be presumed to be a private foundation and penalties of perjury, I declare that I have 3. It uses hindsight in requesting relief. The for the additional information required from a examined this request, including accom- IRS will not ordinarily grant an extension if private foundation claiming to be an operating panying documents, and, to the best of my specific facts have changed since the due foundation. knowledge and belief, the request con- date that makes filing an application ad- Gross receipts test. For purposes of the tains all the relevant facts relating to the vantageous to an organization. gross receipts test, an organization normally request, and such facts are true, correct, does not have more than $5,000 annually in and complete.º Prejudicing the interest of the Govern- gross receipts if: ment. Prejudice to the interest of the Govern- ·The organization must state whether the ment results if granting an extension of time to returns for the tax year in which the appli- 1. During its first tax year the organization file to an organization results in a lower total tax cation should have been filed or any tax received gross receipts of $7,500 or less, liability for the years to which the filing applies years that would have been affected by than would have been the case if the organiza- 2. During its first 2 years the organization had the application had it been timely made tion had filed on time. Before granting an exten- a total of $12,000 or less in gross receipts, are being examined by the IRS, an ap- sion, the IRS can require the organization and peals office, or a federal court. The organi- requesting it to submit a statement from an inde- zation must notify the IRS office 3. In the case of an organization that has pendent auditor certifying that no prejudice will considering the request for relief if the IRS been in existence for at least 3 years, the result if the extension is granted. starts an examination of any such return total gross receipts received by the organi- The interests of the Government are ordinar- while the organization’s request for relief is zation during the immediately preceding 2 ily prejudiced if the tax year in which the applica- pending. years, plus the current year, are $15,000 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- timely) are closed by the statute of limitations mit copies of its tax returns, and copies of An organization with gross receipts more before relief is granted. The IRS can condition a the returns of other affected taxpayers. than the amounts in the gross receipts test,
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unless otherwise exempt from filing Form 1023, Section 501(c)(3) is the provision of law that foster the best interests of the people, or to must file a Form 1023 within 90 days after the grants exemption to the organizations described further the common welfare and well-being of end of the period in which the amounts are in this chapter. Therefore, the organizational test the community, without any limitation or provi- exceeded. For example, an organization’s gross may be met if the purposes stated in the articles sion restricting such purposes to accomplish- receipts for its first tax year were less than of organization are limited in some way by refer- ment only in a charitable manner, the purposes $7,500, but at the end of its second tax year its ence to section 501(c)(3). will not be sufficiently limited. Such purposes are gross receipts for the 2-year period were more vague and may be accomplished other than in The requirement that your organization’s than $12,000. The organization must file Form an exempt manner. purposes and powers must be limited by the 1023 within 90 days after the end of its second articles of organization is not satisfied if the limit tax year. Example 7. A stated purpose to operate a is contained only in the bylaws or other rules or If the organization had existed for at least 3 hospital does not meet the organizational test regulations. Moreover, the organizational test is tax years and had met the gross receipts test for since it is not necessarily charitable. A hospital not satisfied by statements of your organiza- all prior tax years but fails to meet the require- may or may not be exempt depending on the tion’s officers that you intend to operate only for ment for the current tax year, its tax-exempt manner in which it is operated. exempt purposes. Also, the test is not satisfied status for the prior years will not be lost even if by the fact that your actual operations are for Form 1023 is not filed within 90 days after the Example 8. An organization that is ex- exempt purposes. close of the current tax year. However, the or- pressly empowered by its articles to carry on ganization will not be treated as a section In interpreting an organization’s articles, the social activities will not be sufficiently limited as 501(c)(3) organization for the period beginning law of the state where the organization was to its power, even if its articles state that it is with the current tax year and ending with the created is controlling. If an organization con- organized and will be operated exclusively for filing of Form 1023. tends that the terms of its articles have a differ- charitable purposes. ent meaning under state law than their generally Example. An organization is organized and accepted meaning, such meaning must be es- operated exclusively for charitable purposes Dedication and tablished by a clear and convincing reference to and is not a private foundation. It was incorpo- Distribution of Assets relevant court decisions, opinions of the state rated on January 1, 2007, and files returns on a attorney general, or other appropriate state au- calendar-year basis. It did not file a Form 1023. Assets of an organization must be permanently thorities. The organization’s gross receipts during the dedicated to an exempt purpose. This means years 2007 through 2010 were as follows: The following are examples illustrating the that should an organization dissolve, its assets organizational test. must be distributed for an exempt purpose de- 2007 ………………… . $3,600 scribed in this chapter, or to the Federal Govern- 2008 ………………… . 2,900 Example 1. Articles of organization state 2009 ………………… . 400 ment or to a state or local government for a that an organization is formed exclusively for 2010 ………………… . 12,600 public purpose. If the assets could be distributed literary and scientific purposes within the mean- to members or private individuals or for any ing of section 501(c)(3). These articles appropri- The organization’s total gross receipts for other purpose, the organizational test is not met. 2007, 2008, and 2009 were $6,900. Therefore, it ately limit the organization’s purposes. The did not have to file Form 1023 and is exempt for organization meets the organizational test. Dedication. To establish that your organi- those years. However, for 2008, 2009, and 2010 zation’s assets will be permanently dedicated to the total gross receipts were $15,900. There- Example 2. An organization, by the terms of an exempt purpose, the articles of organization fore, the organization must file Form 1023 within its articles, is formed to engage in research should contain a provision ensuring their distri- 90 days after the end of its 2010 tax year. If it without any further description or limitation. The bution for an exempt purpose in the event of does not file within this time period, it will not be organization will not be properly limited as to its dissolution. Although reliance can be placed exempt under section 501(c)(3) for the period purposes since all research is not scientific. The upon state law to establish permanent dedica- beginning with tax year 2010 ending when the organization does not meet the organizational tion of assets for exempt purposes, your organi- Form 1023 is received by the IRS. The organiza- test. zation’s application probably can be processed tion, however, will not lose its exempt status for much more rapidly if its articles of organization the tax years ending before January 1, 2010. Example 3. An organization’s articles state include a provision ensuring permanent dedica- The IRS will consider applying the Commis- that its purpose is to receive contributions and tion of assets for exempt purposes. sioner’s discretionary authority to extend the pay them over to organizations that are de- time for filing Form 1023. See the procedures for Distribution. Revenue Procedure 82-2, scribed in section 501(c)(3) and exempt from this extension discussed earlier. 1982-1 C.B. 367, identifies the states and cir- taxation under section 501(a). The organization cumstances in which the IRS will not require an meets the organizational test. express provision for the distribution of assetsupon dissolution in the articles of organization. Example 4. If a stated purpose in the arti- Articles of The procedure also provides a sample of an cles is the conduct of a school of adult education acceptable dissolution provision for organiza- and its manner of operation is described in de- Organization tions required to have one. tail, such a purpose will be satisfactorily limited.
If a named beneficiary is to be the distribu- Your organization must include a conformed Example 5. If the articles state the organiza- tee, it must be one that would qualify and would copy of its articles of organization with the appli- tion is formed for charitable purposes, without be exempt within the meaning of section cation for recognition of exemption. This may be any further description, such language ordinarily its trust instrument, corporate charter, articles of 501(c)(3) at the time the dissolution takes place. will be sufficient since the term charitable has a association, or any other written instrument by Since the named beneficiary at the time of disso- generally accepted legal meaning. On the other which it is created. lution may not be qualified, may not be in exis- hand, if the purposes are stated to be charitable, tence, or may be unwilling or unable to accept philanthropic, and benevolent, the organiza- the assets of the dissolving organization, a pro- Organizational Test tional requirement will not be met since the vision should be made for distribution of the terms philanthropic and benevolent have no The articles of organization must limit the organ- assets for one or more of the purposes specified generally accepted legal meaning and, there- ization’s purposes to one or more of those de- in this chapter in the event of any such contin- fore, the stated purposes may, under the laws of scribed at the beginning of this chapter and must gency. the state, permit activities that are broader than not expressly empower it to engage, other than those intended by the exemption law. as an insubstantial part of its activities, in activi- Sample articles of organization. See sam- ties that do not further one or more of those Example 6. If the articles state an organiza- ple articles of organization in the Appendix in the purposes. These conditions for exemption are tion is formed to promote American ideals, or to back of this publication. referred to as the organizational test .
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Qualifying organizations. The following 2. The amount of scholarship and loan funds,if any, awarded to students enrolled and types of organizations may qualify as educa- Educational the racial composition of students who tional: have received the awards. Organizations 1. An organization, such as a primary or sec- 3. A list of the school’s incorporators, foun- ondary school, a college, or a professional and Private Schools ders, board members, and donors of land or trade school, that has a regularly sched- or buildings, whether individuals or organi- uled curriculum, a regular faculty, and a If your organization wants to obtain recognition zations. regularly enrolled student body in attend- of exemption as an educational organization, ance at a place where the educational ac- you must submit complete information as to how 4. A statement indicating whether any of the tivities are regularly carried on, your organization carries on or plans to carry on organizations described in item (3) above its educational activities, such as by conducting have an objective of maintaining segre- 2. An organization whose activities consist of a school, by panels, discussions, lectures, fo- gated public or private school education at conducting public discussion groups, fo- rums, radio and television programs, or through the time the application is filed and, if so, rums, panels, lectures, or other similar pro- various cultural media such as museums, sym- whether any of the individuals described in grams, phony orchestras, or art exhibits. In each in- item (3) are officers or active members of stance, you must explain by whom and where 3. An organization that presents a course of those organizations at the time the applica- these activities are or will be conducted and the instruction by correspondence or through tion is filed. amount of admission fees, if any. You must the use of television or radio, 5. The public school district and county in submit a copy of the pertinent contracts, agree- 4. A museum, zoo, planetarium, symphony which the school is located. ments, publications, programs, etc. orchestra, or other similar organization, If you are organized to conduct a school, you must submit full information regarding your tui- 5. A nonprofit children’s day-care center, and How to determine racial composition. The tion charges, number of faculty members, num- racial composition of the student body, faculty, 6. A credit counseling organization. ber of full-time and part-time students enrolled, and administrative staff can be an estimate courses of study and degrees conferred, to- based on the best information readily available College book stores, cafeterias, restau- gether with a copy of your school catalog. See to the school, without requiring student appli- rants, etc. These and other on-campus orga- also Private Schools , discussed later. cants, students, faculty, or administrative staff to nizations should submit information to show that submit to the school information that the school they are controlled by and operated for the con- Educational Organizations otherwise does not require. Nevertheless, a venience of the faculty and student body or by statement of the method by which the racial whom they are controlled and whom they serve. The term educational relates to: composition was determined must be supplied. Alumni association. An alumni association The identity of individual students or members of 1. The instruction or training of individuals for should establish that it is organized to promote the faculty and administrative staff should not be the purpose of improving or developing included with this information. the welfare of the university with which it is their capabilities, or affiliated, is subject to the control of the univer- A school that is a state or municipal instru- 2. The instruction of the public on subjects sity as to its policies and destination of funds, mentality (see Instrumentalities , near the begin- useful to individuals and beneficial to the and is operated as an integral part of the univer- ning of this chapter), whether or not it qualifies community. sity or is otherwise organized to promote the for exemption under section 501(c)(3), is notconsidered to be a private school for purposes of welfare of the college or university. If your asso- the following discussion. ciation does not have these characteristics, it Advocacy of a position. Advocacy of a par- may still be exempt as a social club if it meets ticular position or viewpoint may be educationalif there is a sufficiently full and fair exposition of the requirements described in chapter 4, under Racially Nondiscriminatory Policy pertinent facts to permit an individual or the 501(c)(7) – Social and Recreation Clubs . public to form an independent opinion or conclu- Athletic organization. This type of organi- To qualify as an organization exempt from fed- sion. The mere presentation of unsupported zation must submit evidence that it is engaged in eral income tax, a private school must include a opinion is not educational. statement in its charter, bylaws, or other govern- activities such as directing and controlling inter- Method not educational. The method used ing instrument, or in a resolution of its governing scholastic athletic competitions, conducting by an organization to develop and present its body, that it has a racially nondiscriminatory tournaments, and prescribing eligibility rules for views is a factor in determining if an organization policy as to students and that it does not discrim- contestants. If it is not so engaged, your organi- qualifies as educational within the meaning of inate against applicants and students on the zation may be exempt as a social club described section 501(c)(3). The following factors may in- basis of race, color, or national or ethnic origin. in chapter 4. Raising funds to be used for travel dicate that the method is not educational. Also, the school must circulate information that and other activities to interview and persuade clearly states the school’s admission policies. A prospective students with outstanding athletic 1. The presentation of viewpoints unsup- racially nondiscriminatory policy toward stu- ability to attend a particular university does not ported by facts is a significant part of the dents means that the school admits the students show an exempt purpose. If your organization is organization’s communications. of any race to all the rights, privileges, programs, not exempt as an educational organization, see 2. The facts that purport to support the view- and activities generally accorded or made avail- Amateur Athletic Organizations , later in this point are distorted. able to students at that school and that the chapter. school does not discriminate on the basis of race 3. The organization’s presentations make in administering its educational policies, admis- substantial use of inflammatory and dispar- Private Schools sion policies, scholarship and loan programs, aging terms and express conclusions more and athletic and other school-administered pro- on the basis of emotion than of objective Every private school filing an application for rec- grams. evaluations. ognition of tax-exempt status must supply the The IRS considers discrimination on the ba- IRS (on Schedule B, Form 1023) with the follow- 4. The approach used is not aimed at devel- sis of race to include discrimination on the basis ing information. oping an understanding on the part of the of color or national or ethnic origin. audience because it does not consider 1. The racial composition of the student body, The existence of a racially discriminatory pol- their background or training. and of the faculty and administrative staff, icy with respect to the employment of faculty and as of the current academic year. (This in- administrative staff is indicative of a racially dis- Exceptional circumstances, however, may formation also must be projected, so far as criminatory policy as to students. Conversely, exist where an organization’s advocacy may be may be feasible, for the next academic the absence of racial discrimination in the em- educational even if one or more of the factors ployment of faculty and administrative staff is listed above are present. year.)
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indicative of a racially nondiscriminatory policy Method two. The school can use the broad- basis of the facts and circumstances of each as to students. case. cast media to publicize its racially nondiscrimi- A policy of a school that favors racial minority natory policy if this use makes the policy known The IRS recognizes that the failure by a groups with respect to admissions, facilities and to all segments of the general community the school drawing its students from local communi- programs, and financial assistance is not dis- school serves. If the school uses this method, it ties to enroll racial minority group students may crimination on the basis of race when the pur- must provide documentation showing that the not necessarily indicate the absence of a racially pose and effect of this policy is to promote nondiscriminatory policy when there are rela- means by which this policy was communicated establishing and maintaining the school’s non- tively few or no such students in these communi- to all segments of the general community was discriminatory policy. ties. Actual enrollment is, however, a meaningful reasonably expected to be effective. In this A school that selects students on the basis of indication of a racially nondiscriminatory policy case, appropriate documentation would include membership in a religious denomination or unit in a community in which a public school or copies of the tapes or scripts used and records is not discriminating if membership in the de- schools became subject to a desegregation or- showing that there was an adequate number of nomination or unit is open to all on a racially der of a federal court or are otherwise expressly announcements. The documentation also would nondiscriminatory basis. obligated to implement a desegregation plan include proof that these announcements were under the terms of any written contract or other made during hours when they were likely to be Policy statement. The school must include a commitment to which any federal agency was a communicated to all segments of the general statement of its racially nondiscriminatory policy party. community, that they were long enough to con- in all its brochures and catalogs dealing with The IRS encourages schools to satisfy the vey the message clearly, and that they were student admissions, programs, and scholar- publicity requirement by using either of the broadcast on radio or television stations likely to ships. Also, the school must include a reference methods described earlier, even though a be listened to by substantial numbers of mem- to its racially nondiscriminatory policy in other school considers itself to be within one of the bers of all racial segments of the general com- written advertising that it uses to inform prospec- Exceptions. The IRS believes that these public- munity. Announcements must be made during tive students of its programs. ity requirements are the most effective methods the period of the school’s solicitation for stu- to make known a school’s racially nondiscrimi- dents or, in the absence of a solicitation pro- Publicity requirement. The school must natory policy. In this regard, it is each school’s gram, during the school’s registration period. make its racially nondiscriminatory policy known responsibility to determine whether either of the to all segments of the general community served Exceptions. The publicity requirements will exceptions applies. Such responsibility will pre- by the school. Selective communication of a not apply in the following situations. pare the school, if it is audited by the IRS, to racially nondiscriminatory policy that a school demonstrate that the failure to publish its racially provides solely to leaders of racial groups will First , if for the preceding 3 years the nondiscriminatory policy in accordance with ei- not be considered an effective means of com- enrollment of a parochial or other ther one of the publicity requirements was justi- munication to make the policy known to all seg- church-related school consists of students fied by one of the exceptions. Also, a school ments of the community. To satisfy this at least 75% of whom are members of the must be prepared to demonstrate that it has requirement, the school must use one of the sponsoring religious denomination or unit, publicly disavowed or repudiated any state- following two methods. the school can make known its racially non- ments purported to have been made on its be- discriminatory policy in whatever newspa- Method one. The school can publish a no- half (after November 6, 1975) that are contrary pers or circulars the religious denomination tice of its racially nondiscriminatory policy in a to its publicity of a racially nondiscriminatory or unit uses in the communities from which newspaper of general circulation that serves all policy as to students, to the extent that the the students are drawn. These newspapers racial segments of the community. Such publi- school or its principal official was aware of these and circulars can be distributed by a partic- cation must be repeated at least once annually statements. ular religious denomination or unit or by an during the period of the school’s solicitation for association that represents a number of re- students or, in the absence of a solicitation pro- Facilities and programs. A school must be ligious organizations of the same denomi- gram, during the school’s registration period. able to show that all of its programs and facilities nation. If, however, the school advertises in When more than one community is served by a are operated in a racially nondiscriminatory newspapers of general circulation in the school, the school can publish the notice in manner. those newspapers that are reasonably likely to community or communities from which its Scholarship and loan programs. As a gen- be read by all racial segments in the communi- students are drawn and the second excep- eral rule, all scholarship or other comparable ties that the school serves. tion (discussed next) does not apply to the benefits obtainable at the school must be of- If this method is used, the notice must meet school, then it must comply with either of fered on a racially nondiscriminatory basis. This the following printing requirements. the publicity requirements explained earlier. must be known throughout the general commu- Second , if a school customarily draws a 1. It must appear in a section of the newspa- nity being served by the school and should be substantial percentage of its students na- per likely to be read by prospective stu- referred to in its publicity. Financial assistance tionwide, worldwide, from a large geo- dents and their families. programs, as well as scholarships and loans graphic section or sections of the United made under financial assistance programs, that 2. It must occupy at least 3 column inches. States, or from local communities, and if the favor members of one or more racial minority school follows a racially nondiscriminatory 3. It must have its title printed in at least 12 groups and that do not significantly detract from policy as to its students, the school may point bold face type. or are designed to promote a school’s racially satisfy the publicity requirement by comply- nondiscriminatory policy will not adversely affect 4. It must have the remaining text printed in ing with the instructions explained earlier the school’s exempt status. at least 8 point type. under Policy statement . The following is an acceptable example of Certification. An individual authorized to take the notice: The school can demonstrate that it follows a official action on behalf of a school that claims to racially nondiscriminatory policy either by show- be racially nondiscriminatory as to students NOTICE OF ing that it currently enrolls students of racial must certify annually, under penalties of perjury, NONDISCRIMINATORY POLICY minority groups in meaningful numbers or, ex- on Schedule E (Form 990 or 990-EZ) or Form AS TO STUDENTS 5578, Annual Certification of Racial Nondiscrim- cept for local community schools, when minority The M School admits students of any race, color,national and ethnic origin to all the rights, ination for a Private School Exempt From Fed- students are not enrolled in meaningful num- privileges, programs, and activities generally eral Income Tax, whichever applies, that to the bers, that its promotional activities and recruiting accorded or made available to students at the best of his or her knowledge and belief the efforts in each geographic area were reasonably school. It does not discriminate on the basis of school has satisfied all requirements that apply, designed to inform students of all racial seg- race, color, national and ethnic origin in as previously explained. ments in the general communities within the administration of its educational policies,admissions policies, scholarship and loan area of the availability of the school. The ques- Failure to comply with the guidelines ordinar- programs, and athletic and other tion as to whether a school demonstrates such a ily will result in the proposed revocation of the school-administered programs. policy satisfactorily will be determined on the exempt status of a school.
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Recordkeeping requirements. With Some examples of this type of organization are certain exceptions, given later, each those organized for: Organizations exempt private school must maintain ·Relief of the poor, the distressed, or the the following records for a minimum period of 3 Providing Insurance underprivileged, years, beginning with the year after the year ofcompilation or acquisition. ·Advancement of religion, An organization described in sections 501(c)(3)or 501(c)(4) may be exempt from tax only if no 1. Records indicating the racial composition ·Advancement of education or science, substantial part of its activities consists of pro- of the student body, faculty, and adminis- ·Erection or maintenance of public build- viding commercial-type insurance. trative staff for each academic year. ings, monuments, or works, However, this rule does not apply to 2. Records sufficient to document that schol- state-sponsored organizations described in sec- ·Lessening the burdens of government, arship and other financial assistance is tions 501(c)(26) or 501(c)(27), which are dis- awarded on a racially nondiscriminatory ·Lessening of neighborhood tensions, cussed in chapter 4 , or to charitable risk pools, basis. discussed next. ·Elimination of prejudice and discrimina- 3. Copies of all materials used by or on be- tion, half of the school to solicit contributions. Charitable Risk Pools ·Defense of human and civil rights secured 4. Copies of all brochures, catalogs, and ad- by law, and A charitable risk pool is treated as organized and vertising dealing with student admissions, operated exclusively for charitable purposes if it: ·Combating community deterioration and programs, and scholarships. (Schools ad- juvenile delinquency. vertising nationally or in a large geographic 1. Is organized and operated only to pool in- segment or segments of the United States The rest of this section contains a description of surable risks of its members (not including need only maintain a record sufficient to the information to be provided by certain specific risks related to medical malpractice) and to indicate when and in what publications organizations. This information is in addition to provide information to its members about their advertisements were placed.) the required inclusions described in chapter 1, loss control and risk management, and other statements requested on Form 1023. The racial composition of the student body, 2. Consists only of members that are section Each of the following organizations must submit faculty, and administrative staff can be deter- 501(c)(3) organizations exempt from tax the information described. mined in the same manner as that described at under section 501(a), the beginning of this section. However, a school Charitable organization supporting educa- 3. Is organized under state law authorizing cannot discontinue maintaining a system of rec- tion. Submit information showing how your or- this type of risk pooling, ords that reflect the racial composition of its ganization supports education Ð for example, students, faculty, and administrative staff used 4. Is exempt from state income tax (or will be contributes to an existing educational institution, on November 6, 1975, unless it substitutes a after qualifying as a section 501(c)(3) or- endows a professorial chair, contributes toward different system that compiles substantially the ganization), paying teachers’ salaries, or contributes to an same information, without advance approval of educational institution to enable it to carry on 5. Has obtained at least $1,000,000 in startup the IRS. research. capital from nonmember charitable organi- The IRS does not require that a school release zations, any personally identifiable records or personal Scholarships. If the organization awards or information except in accordance with the re- plans to award scholarships, complete Sched- 6. Is controlled by a board of directors quirements of the Family Educational Rights ule H of Form 1023. Submit the following also. elected by its members, and and Privacy Act of 1974. Similarly, the IRS does 7. Is organized under documents requiring 1. Criteria used for selecting recipients, in- not require a school to keep records prohibited that: cluding the rules of eligibility. under state or federal law.
2. How and by whom the recipients are or will a. Each member be a section 501(c)(3) Exceptions. The school does not have to be selected. organization exempt from tax under independently maintain these records for IRS section 501(a), use if both of the following are true. 3. If awards are or will be made directly toindividuals, whether information is required b. Each member that receives a final de- 1. Substantially the same information has assuring that the student remains in termination that it no longer qualifies been included in a report or reports filed school. under section 501(c)(3) notify the pool with an agency or agencies of federal, immediately, and 4. If awards are or will be made to recipients state, or local governments, and this infor- of a particular class, for example, children c. Each insurance policy issued by the mation is current within 1 year. of employees of a particular employer Ð pool provide that it will not cover events 2. The school maintains copies of these re- occurring after a final determination de- ports from which this information is readily a. Whether any preference is or will be scribed in (b). obtainable. accorded an applicant by reason of theparent’s position, length of employment, If these reports do not include all of the informa- or salary, tion required, as discussed earlier, records pro-viding such remaining information must be b. Whether as a condition of the award the maintained by the school for IRS use. recipient must upon graduation accept Other Section 501(c)(3) employment with the company, and Failure to maintain records. Failure to Organizations maintain or to produce the required records and c. Whether the award will be continued information, upon proper request, will create a even if the parent’s employment ends. In addition to the information required for all presumption that the organization has failed to organizations, as described earlier, you should comply with these guidelines. 5. A copy of the scholarship application form include any other information described in this and any brochures or literature describing section. the scholarship program.
Charitable Organizations Hospital. If you are organized to operate a charitable hospital, complete and attach Section If your organization is applying for recognition of I of Schedule C, Form 1023. exemption as a charitable organization, it must If your hospital was transferred to you from show that it is organized and operated for pur- proprietary ownership, complete and attach poses that are beneficial to the public interest.
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Schedule G of Form 1023. You must attach a list poor), such as in the area of protection of the creed are not illegal or contrary to clearly showing: environment, you should submit the following defined public policy. information. Therefore, your group (or organization) may not 1. The names of the active and courtesy staff qualify for treatment as an exempt religious or- members of the proprietary hospital, as 1. How the litigation can reasonably be said ganization for tax purposes if its actions, as well as the names of your medical staff to be representative of a broad public inter- contrasted with its beliefs, are contrary to well members after the transfer to nonprofit est rather than a private one. established and clearly defined public policy. If ownership, and 2. Whether the organization will accept fees there is a clear showing that the beliefs (or 2. The names of any doctors who continued for its services. doctrines) are sincerely held by those professing to lease office space in the hospital after them, the IRS will not question the religious 3. A description of the cases litigated or to be its transfer to nonprofit ownership and the nature of those beliefs. litigated and how they benefit the public amount of rent paid. Submit also an ap- generally. praisal showing the fair rental value of the Churches. Although a church, its integrated rented space. 4. Whether the policies and program of the auxiliaries, or a convention or association of organization are the responsibility of a churches is not required to file Form 1023 to be Clinic. If you are organized to operate a clinic, board or committee representative of the exempt from federal income tax or to receive tax attach a statement including: public interest, which is neither controlled deductible contributions, the organization may by employees or persons who litigate on find it advantageous to obtain recognition of 1. A description of the facilities and services, behalf of the organization nor by any or- exemption. In this event, you should submit in- 2. To whom the services are offered, such as ganization that is not itself an organization formation showing that your organization is a the public at large or a specific group, described in this chapter. church, synagogue, association or convention 3. How charges are determined, such as on a of churches, religious order, or religious organi- 5. Whether the organization is operated, profit basis, to recover costs, or at less zation that is an integral part of a church, and through sharing of office space or other- than cost, that it is engaged in carrying out the function of a wise, in a way to create identification or church. confusion with a particular private law firm. 4. By whom administered and controlled, In determining whether an admittedly relig- 6. Whether there is an arrangement to pro- 5. Whether any of the professional staff (that ious organization is also a church, the IRS does vide, directly or indirectly, a deduction for is, those who perform or will perform the not accept every assertion that the organization the cost of litigation that is for the private clinical services) also serve or will serve in is a church. Because beliefs and practices vary benefit of the donor. an administrative capacity, and so widely, there is no single definition of theword church for tax purposes. The IRS consid- 6. How compensation paid the professional Acceptance of attorneys’ fees. A nonprofit ers the facts and circumstances of each organi- staff is or will be determined. public-interest law firm can accept attorneys’ zation applying for church status. fees in public-interest cases if the fees are paid Home for the aged. If you are organized to directly by its clients and the fees are not more Convention or association of churches. operate a home for the aged, complete and than the actual costs incurred in the case. Upon Any organization that is otherwise a convention attach Schedule F of Form 1023 and required undertaking a representation, the organization or association of churches will not fail to qualify attachments. cannot withdraw from the case because the liti- as a church merely because the membership of gant is unable to pay the fee. the organization includes individuals as well as Community nursing bureau. If you provide a churches or because the individuals have voting nursing register or community nursing bureau, Firms can accept fees awarded or approved rights in the organization. provide information showing that your organiza- by a court or an administrative agency and paid tion will be operated as a community project and by an opposing party if the firms do not use the Integrated auxiliaries. An organization is will receive its primary support from public con- likelihood or probability of fee awards as a con- an integrated auxiliary of a church if all the fol- tributions to maintain a nonprofit register of qual- sideration in the selection of cases. All fee lowing are true. ified nursing personnel, including graduate awards must be paid to the organization and not nurses, unregistered nursing school graduates, to its individual staff attorneys. Instead, a pub- 1. The organization is described both in sec- licensed attendants and practical nurses for the lic-interest law firm can reasonably compensate tions 501(c)(3) and 509(a)(1), 509(a)(2), or benefit of hospitals, health agencies, doctors, its staff attorneys, but only on a straight salary 509(a)(3). and individuals. basis. Private attorneys, whose services are re- 2. It is affiliated with a church or a convention tained by the firm to assist it in particular cases, Organization providing loans. If you make, or association of churches. can be compensated by the firm, but only on a or will make, loans for charitable and educa- 3. It is internally supported. An organization is fixed fee or salary basis. tional purposes, submit the following informa- internally supported unless both of the fol- The total amount of all attorneys’ fees (court tion. lowing are true. awarded and those received from clients) must 1. An explanation of the circumstances under not be more than 50% of the total cost of opera- a. It offers admissions, goods, services, or which such loans are, or will be, made. tions of the organization’s legal functions, calcu- facilities for sale, other than on an inci- lated over a 5-year period. 2. Criteria for selection, including the rules of dental basis, to the general public (ex- If, in order to carry out its program, an organi- eligibility. cept goods, services, or facilities sold at zation violates applicable canons of ethics, dis- a nominal charge or for a small part of 3. How and by whom the recipients are or will rupts the judicial system, or engages in any the cost). be selected. illegal action, the organization will jeopardize its b. It normally gets more than 50% of its 4. Manner of repayment of the loan. exemption. support from a combination of govern- 5. Security required, if any. mental sources, public solicitation of Religious Organizations contributions, and receipts from the sale 6. Interest charged, if any, and when pay- of admissions, goods, performance of able. To determine whether an organization meets services, or furnishing of facilities in ac- the religious purposes test of section 501(c)(3), 7. Copies in duplicate of the loan application tivities that are not unrelated trades or the IRS maintains two basic guidelines. and any brochures or literature describing businesses. the loan program. 1. That the particular religious beliefs of theorganization are truly and sincerely held. Special rule. Men’s and women’s organiza- Public-interest law firms. If your organiza- tions, seminaries, mission societies, and youth 2. That the practices and rituals associated tion was formed to litigate in the public interest groups that satisfy (1) and (2) shown earlier are (as opposed to providing legal services to the with the organization’s religious belief or
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integrated auxiliaries of a church even if they are Only reports of your research activities or not internally supported. those conducted on your behalf, as distin- Private Foundations guished from those of your creators or In order for an organization (including a members conducted in their individual ca- church and religious organization) to qualify for and Public Charities pacities, should be submitted. tax exemption, no part of its net earnings caninure to any individual. It is important that you determine if your organi-zation is a private foundation. Most organiza- Although an individual is entitled to a charita- Literary Organizations tions exempt from income tax (as organizations ble deduction for contributions to a church, the described in section 501(c)(3)) are presumed to assignment or similar transfer of compensation If your organization is established to operate a be private foundations unless they notify the IRS for personal services to a church generally does book store or engage in publishing activities of within a specified period of time that they meet not relieve a taxpayer of federal income tax any nature (printing, publication, or distribution the requirements of section 509(a) to be liability on the compensation, regardless of the of your own material or that printed or published treated as other than a private foundation. motivation behind the transfer. by others and distributed by you), explain fully This notice requirement applies to most section the nature of the operations, including whether 501(c)(3) organizations regardless of when they sales are or will be made to the general public, Scientific Organizations were formed. the type of literature involved, and how these You must show that your organization’s re- activities are related to your stated purposes. search will be carried on in the public interest. Private Foundations Scientific research will be considered to be in the Amateur Athletic public interest if the results of the research (in- Every organization that qualifies for tax exemp- Organizations cluding any patents, copyrights, processes, or tion as an organization described in section formulas) are made available to the public on a 501(c)(3) is a private foundation unless it falls There are two types of amateur athletic organi- nondiscriminatory basis; if the research is per- into one of the categories specifically excluded zations that can qualify for tax-exempt status. formed for the United States or a state, county, from the definition of that term (referred to in The first type is an organization that fosters or municipal government; or if the research is sections 509(a)(1), 509(a)(2), 509(a)(3), or national or international amateur sports compe- carried on for one of the following purposes. 509(a)(4)). In effect, the definition divides these tition but only if none of its activities involve organizations into two classes, namely private providing athletic facilities or equipment. The 1. Aiding in the scientific education of college foundations and public charities. Public charities second type is a Qualified amateur sports or- or university students. are discussed later. ganization. (discussed below). The difference is 2. Obtaining scientific information that is pub- Organizations that fall into the excluded cat- that a qualified amateur sports organization can lished in a treatise, thesis, trade publica- egories are generally those that either have provide athletic facilities and equipment. tion, or in any other form that is available broad public support or actively function in a Donations to either type of amateur athletic to the interested public. supporting relationship to those organizations. organization are deductible as charitable contri- Organizations that test for public safety also are butions on the donor’s federal income tax return. 3. Discovering a cure for a disease. excluded. However, no deduction is allowed if there is a 4. Aiding a community or geographical area direct personal benefit to the donor or any other by attracting new industry to the commu- Notice to IRS. Even if an organization falls person other than the organization. nity or area, or by encouraging the devel- within one of the categories excluded from the Qualified amateur sports organization. An opment or retention of an industry in the definition of private foundation, it will be pre- organization will be a qualified amateur sports community or area. sumed to be a private foundation, with some organization if it is organized and operated: exceptions, unless it gives timely notice to the Scientific research, for exemption purposes, IRS that it is not a private foundation. This notice 1. Exclusively to foster national or interna- does not include activities of a type ordinarily requirement applies to an organization regard- tional amateur sports competition, and incidental to commercial or industrial operations less of when it was organized. The only excep- such as the ordinary inspection or testing of 2. Primarily to conduct national or interna- tions to this requirement are those organizations materials or products, or the designing or con- tional competition in sports or to support that are excepted from the requirement of filing structing of equipment, buildings, etc. and develop amateur athletes for that com- Form 1023 as discussed, earlier, under Organi- If you engage or plan to engage in research, petition. zations Not Required To File Form 1023 . submit all of the following. The organization’s membership can be local or When to file notice. If an organization has 1. An explanation of the nature of the re- regional in nature. to file the notice, it must do so within 15 months search. from the end of the month in which it was organ- Prevention of Cruelty ized. 2. A brief description of research projectscompleted or presently being engaged in. to Children or Animals If your organization is newly applying for rec- ognition of exemption as an organization de- 3. How and by whom research projects are Examples of activities that may qualify this type scribed in this chapter (a section 501(c)(3) determined and selected. of organization for exempt status are: organization) and you wish to establish that your 4. Whether you have contracted or spon- organization is a public charity rather than a 1. Preventing children from working in haz- sored research, or contemplated doing so, private foundation, you must complete the appli- ardous trades or occupations, and, if so, names of past sponsors or cable lines of Part X of Form 1023 (however, see grantors, terms of grants or contracts, to- 2. Promoting high standards of care for labo- Notice 1382 about changes to Part X). An exten- gether with copies of any executed con- ratory animals, and sion of time for filing this application may be tracts or grants. granted by the IRS if your request is timely and 3. Providing funds to pet owners to have their you demonstrate that additional time is needed. 5. Disposition made or to be made of the pets spayed or neutered to prevent over- See Application for Recognition of Exemption , results of your research, including whether breeding. earlier in this chapter, for more information. preference has been or will be given to any In determining the date on which a corpora- organization or individual either as to re- tion is organized for purposes of applying for sults or time of release. recognition of section 501(c)(3) status, the IRS 6. Who will retain ownership or control of any looks to the date the corporation came into exis- patents, copyrights, processes, or formulas tence under the law of the state in which it is resulting from your research. incorporated. For example, where state law pro-vides that existence of a corporation begins on 7. A copy of publications or other mediashowing reports of your research activities. the date its articles are filed by a certain state
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official in the appropriate state office, the corpo- 5. The corporation will not make any taxable pattern. Thus, in the following discussions, when expenditures as defined in section 4945(d) the one-third support test (see Qualifying as ration is considered organized on that date. of the Internal Revenue Code, or the corre- Publicly Supported , later) is referred to, it means Later nonsubstantive amendments to the ena- sponding section of any future federal tax the following fraction normally must equal at bling instrument will not change the date of or- code. least one-third. ganization, for purposes of the noticerequirement. Qualifying support Notice filed late. An organization that Total support Draft B states it is a private foundation when it files itsapplication for recognition of exemption after the Including items of support in qualifying Any other provisions of this instrument notwith- 15-month period will be treated as a section support (the numerator of the fraction) standing, the trustees shall distribute its income 501(c)(3) organization and as a private founda- or excluding items of support from total for each tax year at a time and in a manner as tion only from the date it files its application. support (the denominator of the fraction) may not to become subject to the tax on undistributed An organization that states it is a publicly decide whether an organization is excluded from income imposed by section 4942 of the Internal supported charity when it files its application for the definition of a private foundation, and thus Revenue Code, or the corresponding section of recognition of exemption after the 15-month pe- from the liability for certain excise taxes. So it is any future federal tax code. riod cannot be treated as a section 501(c)(3) very important to classify items of support cor- Any other provisions of this instrument not- organization before the date it files the applica- rectly. withstanding, the trustees will not engage in any tion. Financial support received before that date act of self-dealing as defined in section 4941(d) cannot be used for purposes of determining of the Internal Revenue Code, or the corre- whether the organization is publicly supported. Section 509(a)(1) Organizations sponding section of any future federal tax code; However, an organization that can reasonably nor retain any excess business holdings as de- be expected to meet the support requirements Section 509(a)(1) organizations include: fined in section 4943(c) of the Internal Revenue (discussed later under Public Charities ) when it Code, or the corresponding section of any future 1. A church or a convention or association of applies for tax-exempt status will be classified federal tax code; nor make any investments in a churches, as a publicly supported charity and not a private manner as to incur tax liability under section foundation. 2. An educational organization such as a 4944 of the Internal Revenue Code, or the corre- school or college, sponding section of any future federal tax code; Excise taxes on private foundations. There nor make any taxable expenditures as defined in 3. A hospital or medical research organiza- is an excise tax on the net investment income of section 4945 (d) of the Internal Revenue Code, tion operated in conjunction with a hospi- most domestic private foundations. See Chapter or the corresponding section of any future fed- tal, 5 for more information on excise taxes. eral tax code. 4. Endowment funds operated for the benefit Governing instrument. A private foundation Effect of state law. A private foundation’s of certain state and municipal colleges and governing instrument will be considered to meet cannot be tax exempt nor will contributions to it universities, these charter requirements if valid provisions of be deductible as charitable contributions unless 5. A governmental unit, and state law have been enacted that: its governing instrument contains special provi-sions in addition to those that apply to all organi- 6. A publicly supported organization. 1. Require it to act or refrain from acting so zations described in section 501(c)(3). as not to subject the foundation to the Sample governing instruments. The fol- Church. The characteristics of a church are taxes imposed on prohibited transactions, lowing samples of governing instrument provi- discussed earlier in this chapter under Religious or sions illustrate the special charter requirements Organizations. 2. Treat the required provisions as contained that apply to private foundations. Draft A is a in the foundation’s governing instrument. sample of provisions in articles of incorporation, Educational organizations. An educational Draft B, a trust indenture. The IRS has published a list of states with organization is one whose primary function is to this type of law. The list is in Revenue Ruling present formal instruction that normally main- 75-38, 1975-1 C.B. 161 (or later update). tains a regular faculty and curriculum and that Draft A normally has a regularly enrolled body of pupilsor students in attendance at the place where it Public Charities General regularly carries on its educational activities.The term includes institutions such as primary, A private foundation is any organization de- 1. The corporation will distribute its income secondary, preparatory, or high schools, and scribed in section 501(c)(3) , unless it falls into for each tax year at a time and in a manner colleges and universities. It includes federal, one of the categories specifically excluded from as not to become subject to the tax on state, and other publicly supported schools that the definition of that term in section 509(a), undistributed income imposed by section otherwise come within the definition. It does not which lists four basic categories of exclusions. 4942 of the Internal Revenue Code, or the include organizations engaged in both educa- These categories are discussed under the Sec- corresponding section of any future federal tional and noneducational activities, unless the tion 509(a) heading that follow this introduction. tax code. latter are merely incidental to the educational If your organization falls into one of these activities. A recognized university that inciden- categories, it is not a private foundation and you 2. The corporation will not engage in any act tally operates a museum or sponsors concerts is should state this in Part X of your application for of self-dealing as defined in section an educational organization. However, the oper- recognition of exemption (Form 1023). 4941(d) of the Internal Revenue Code, or ation of a school by a museum does not neces- If your organization does not fall into one of the corresponding section of any future sarily qualify the museum as an educational these categories, it is a private foundation and is federal tax code. organization. subject to the applicable rules and restrictions 3. The corporation will not retain any excess until it terminates its private foundation status. An exempt organization that operates a business holdings as defined in section Some private foundations also qualify as private tutoring service for students on a one-to-one 4943(c) of the Internal Revenue Code, or operating foundations; these are discussed near basis in their homes, maintains a small center to the corresponding section of any future the end of this chapter. test students to determine their need for tutor- federal tax code. Generally speaking, a large class of organi- ing, and employs tutors on a part-time basis is 4. The corporation will not make any invest- zations excluded under section 509(a)(1) and all not an educational organization for these pur- ments in a manner as to subject it to tax organizations excluded under section 509(a)(2) poses. Nor is an exempt organization that con- under section 4944 of the Internal Reve- depend upon a support test. This test is used to ducts an internship program by placing college nue Code, or the corresponding section of assure a minimum percentage of broad-based and university students with cooperating gov- any future federal tax code. public support in the organization’s total support ernment agencies an educational organization.
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Hospitals and medical research organiza- b. An agency or instrumentality of one or Qualifying as Publicly Supported tions. A hospital is an organization whose more states or political subdivisions. An organization will qualify as publicly supported principal purpose or function is to provide hospi- if it passes the one-third support test. If it fails The phrase ªexpenditures to or for the bene- tal or medical care or either medical education or that test, it may qualify under the facts and fit of a college or universityº includes expendi- medical research. A rehabilitation institution, circumstances test. tures made for any one or more of the normal outpatient clinic, or community mental health or functions of a college or university. These ex- drug treatment center may qualify as a hospital if One-third support test. An organization will penditures include those for: its principal purpose or function is providing hos- qualify as publicly supported if it normally re- pital or medical care. If the accommodations of ceives at least one-third of its total support from 1. Acquiring and maintaining real property an organization qualify as being part of a skilled governmental units, from contributions made di- comprising part of the campus area, nursing facility, that organization may qualify as rectly or indirectly by the general public, or from a hospital if its principal purpose or function is 2. Erecting (or participating in erecting) col- a combination of these sources. For a definition providing hospital or medical care. A coopera- lege or university buildings, of support, see Support, later. tive hospital service organization that meets the 3. Acquiring and maintaining equipment and Definition of normally for one-third sup- requirements of section 501(e) will qualify as a furnishings used for, or in conjunction with, port test. An organization will be considered hospital. normal functions of colleges and universi- as normally meeting the one-third support test Exceptions. The term hospital does not in- ties, for its current tax year and the next tax year if, for clude convalescent homes, homes for children the current tax year and the 4 tax years immedi- 4. Libraries, or the aged, or institutions whose principal pur- ately before the current tax year, the organiza- pose or function is to train handicapped individu- 5. Scholarships, and tion meets the one-third support test on an als to pursue a vocation. An organization that aggregate basis. See also Special computation 6. Student loans. mainly provides medical education or medical period for new organizations, later, in this dis- The organization must normally receive a research will not be considered a hospital, un- cussion. substantial part of its support from the United less it is also actively engaged in providing medi- States or any state or political subdivision, or cal or hospital care to patients on its premises or Facts and circumstances test. The facts and from direct or indirect contributions from the in its facilities, on an in-patient or out-patient circumstances test is for organizations failing to general public, or from a combination of these meet the one-third support test. If your organiza- basis, as an integral part of its medical education sources. tion fails to meet the one-third support test, it or medical research functions. may still be treated as a publicly supported or- Hospitals participating in pro- Support. Support does not include income ganization if it normally receives a substantial vider-sponsored organizations. An organi- received in the exercise or performance by the part of its support from governmental units, from zation can be treated as organized and operated organization of its charitable, educational, or direct or indirect contributions from the general exclusively for a charitable purpose even if it other purpose or function constituting the basis public, or from a combination of these sources. owns and operates a hospital that participates in for exemption. To qualify, an organization must meet the a provider-sponsored organization, whether or In determining the amount of support re- ten-percent-of-support requirement and the at- not the provider-sponsored organization is tax ceived by an organization for a contribution of traction of public support requirement. These exempt. For section 501(c)(3) purposes, any property when the value of the contribution by requirements establish, under all the facts and person with a material financial interest in the the donor is subject to reduction for certain ordi- circumstances, that an organization normally re- provider-sponsored organization is treated as a nary income and capital gain property, the fair ceives a substantial part of its support from gov- private shareholder or individual with respect to market value of the property is taken into ac- ernmental units or from direct or indirect the hospital. count. contributions from the general public. The or-ganization also must be in the nature of a pub- Medical research organization. A medical Indirect contribution. An example of an in- licly supported organization, taking into account research organization must be directly engaged direct contribution from the public is the receipt five different factors. See Additional require- in the continuous active conduct of medical re- by the organization of its share of the proceeds ments (the five public support factors) , later. search in conjunction with a hospital, and that of an annual collection campaign of a commu- activity must be the organization’s principal pur- Ten-percent-of-support requirement. nity chest, community fund, or united fund. pose or function. The percentage of support normally received byan organization from governmental units, from Governmental units. A governmental unit in- Publicly supported. A hospital or medical contributions made directly or indirectly by the cludes a state, a possession of the United research organization that wants the additional general public, or from a combination of these States, or a political subdivision of either of the classification of a publicly supported organiza- sources must be substantial. An organization foregoing, or the United States or the District of tion (described later in this chapter under Quali- will not be treated as normally receiving a sub- Columbia. fying As Publicly Supported ) can specifically stantial amount of governmental or public sup- request that classification. The organization port unless the total amount of governmental must establish that it meets the public support Publicly supported organizations. An or- and public support normally received is at least requirements of section 170(b)(1)(A)(vi). ganization is a publicly supported organization if 10% of the total support normally received by it is one that normally receives a substantial part that organization. of its support from a governmental unit or from Endowment funds. Organizations operated Attraction of public support requirement. the general public. for the benefit of certain state and municipal An organization must be organized and oper- colleges and universities are endowment funds. Types of organizations that generally qualify ated in a manner to attract new and additional They are organized and operated exclusively to: are: public or governmental support on a continuous ·Museums of history, art, or science, 1. Receive, hold, invest, and administer prop- basis. An organization will meet this requirement erty for a college or university, and if it maintains a continuous and bona fide pro- ·Libraries, gram for solicitation of funds from the general 2. Make expenditures to or for the benefit of a ·Community centers to promote the arts, public, community, or membership group in- college or university. volved, or if it carries on activities designed to ·Organizations providing facilities for the The college or university must be: attract support from governmental units or other support of an opera, symphony orchestra, charitable organizations described in section ballet, or repertory drama, or for some 1. An agency or instrumentality of a state or 509(a)(1). In determining whether an organiza- other direct service to the general public, political subdivision, or tion maintains a continuous and bona fide pro- and gram for solicitation of funds from the general 2. Owned or operated by: ·Organizations such as the American Red public or community, consideration will be given a. A state or political subdivision, or Cross or the United Way. to whether the scope of its fundraising activities
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is reasonable in light of its charitable activities. be considered in determining whether the or- clearance or developing employment op- Consideration also will be given to the fact that ganization is publicly supported. In determining portunities. an organization may, in its early years of exis- what is a representative number of persons, 3. Receiving a significant part of its funds tence, limit the scope of its solicitation to per- consideration will be given to the type of organi- from a public charity or governmental sons who would be most likely to provide seed zation involved, the length of time it has existed, agency to which it is in some way held money sufficient to enable it to begin its charita- and whether it limits its activities to a particular accountable as a condition of the grant, ble activities and expand its solicitation program. community or region or to a special field that can contract, or contribution. be expected to appeal to a limited number of Definition of normally for facts and circum- persons. Facts pertinent to years before the 4 stances test. An organization will normally 5. Additional factors pertinent to member- tax years immediately before the current tax meet the requirements of the facts and circum- ship organizations. The following are addi- year also may be considered. stances test for its current tax year and the next tional factors in determining whether a tax year if, for the current tax year and the 4 tax 3. Representative governing body factor. membership organization is publicly supported. years immediately before the current tax year, The fact that an organization has a governing 1. Whether the solicitation for dues-paying the organization meets the body that represents the broad interests of the members is designed to enroll a substan- ten-percent-of-support and the attraction of pub- public rather than the personal or private interest tial number of persons in the community or lic support requirements on an aggregate basis of a limited number of donors will be considered area, or in a particular profession or field of and satisfies a sufficient combination of the fac- in determining whether the organization is pub- special interest (taking into account the tors discussed later. The combination of factors licly supported. size of the area and the nature of the or- that an organization normally must meet does An organization will meet this requirement if ganization’s activities). not have to be the same for each 4-year period it has a governing body composed of: as long as a sufficient combination of factors 2. Whether membership dues for individual 1. Public officials acting in their public capaci- exists to show compliance. (rather than institutional) members have ties, been fixed at rates designed to make Additional requirements (the five public membership available to a broad cross support factors). In addition to the two re- 2. Individuals selected by public officials act- section of the interested public, rather than quirements of the facts and circumstances test, ing in their public capacities, to restrict membership to a limited number the following five public support factors will be 3. Persons having special knowledge or ex- of persons. considered in determining whether an organiza- pertise in the particular field or discipline in tion is publicly supported. However, an organi- 3. Whether the activities of the organization which the organization is operating, and zation generally does not have to satisfy all of will be likely to appeal to persons having the factors. The factors relevant to each case 4. Community leaders, such as elected or ap- some broad common interest or purpose, and the weight accorded to any one of them may pointed officials, members of the clergy, such as educational activities in the case differ depending upon the nature and purpose of educators, civic leaders, or other such per- of alumni associations, musical activities in the organization and the length of time it has sons representing a broad cross-section of the case of symphony societies, or civic existed. The combination of factors that an or- the views and interests of the community. affairs in the case of parent-teacher as- ganization normally must meet does not have to In a membership organization, the governing sociations. be the same for each 4-year period as long as a body also should include individuals elected by sufficient combination of factors exists to show a broadly based membership according to the Special rule. The fact that an organization that the organization is publicly supported. organization’s governing instrument or bylaws. has normally met the one-third support test re- 1. Percentage of financial support factor. quirements for a current tax year, but is unable 4. Availability of public facilities or serv- When an organization normally receives at least normally to meet the requirements for a later tax ices factor. The fact that an organization gen- 10% but less than one-third of its total support year, will not in itself prevent the organization erally provides facilities or services directly for from public or governmental sources, the per- from meeting the requirements of the facts and the benefit of the general public on a continuing centage of support received from those sources circumstances test for the later tax year. basis is evidence that the organization is pub- will be considered in determining whether the licly supported. Examples are: organization is publicly supported. As the per- Example. X is recognized as an organiza- centage of support from public or governmental ·A museum or library that is open to the tion described in section 501(c)(3). On the basis sources increases, the burden of establishing public, of support received during tax years 2008, 2009, the publicly supported nature of the organization 2010, 2011, and 2012, it meets the one-third ·A symphony orchestra that gives public through other factors decreases, while the lower support test for tax year 2012 (the current tax performances, the percentage, the greater the burden. year). X also meets the one-third support test for ·A conservation organization that provides 2013, as the immediately succeeding tax year. If the percentage of the organization’s sup- educational services to the public through port from the general public or governmental In tax years 2009, 2010, 2011, 2012, and the distribution of educational materials, or sources is low because it receives a high per- 2013, in the aggregate, X does not receive at centage of its total support from investment in- least one-third of its support from governmental ·An old-age home that provides domiciliary come on its endowment funds, the organization units referred to in section 170(c)(1), from contri- or nursing services for members of the will be treated as complying with this factor if the butions made directly or indirectly by the general general public. endowment fund was originally contributed by a public, or from a combination of these sources. The fact that an educational or research institu- governmental unit or by the general public. How- X still meets the one-third support test for tax tion regularly publishes scholarly studies widely ever, if the endowment funds were originally year 2013 based on the aggregate support re- used by colleges and universities or by mem- contributed by a few individuals or members of ceived for tax years 2008 through 2012. bers of the general public is also evidence that their families, this fact will increase the burden In tax years 2010, 2011, 2012, 2013, and the organization is publicly supported. on the organization of establishing compliance 2014, in the aggregate, X does not receive at with other factors. Facts pertinent to years Similarly, the following factors are also evi- least one-third of its support from governmental before the 4 tax years immediately before the dence that an organization is publicly supported. units referred to in section 170(c)(1), from contri- current tax year also may be considered. butions made directly or indirectly by the general 1. Participating in, or sponsoring, the pro- public, or from a combination of these sources. 2. Sources of support factor. If an organi- grams of the organization by members of X does not meet the one-third support test for zation normally receives at least 10% but less the public having special knowledge or ex- tax year 2014. than one-third of its total support from public or pertise, public officials, or civic or commu- Based on the aggregate support and other governmental sources, the fact that it receives nity leaders. factors listed in Regulations section the support from governmental units or directly 1.170A-9T(f)(3)(iii)(A) through (E) for tax years or indirectly from a representative number of 2. Maintaining a definitive program by the or- 2009, 2010, 2011, 2012, and 2013, X meets the persons, rather than receiving almost all of its ganization to accomplish its charitable facts and circumstances test for tax year 2013 support from the members of a single family, will work in the community, such as slum
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and for tax year 2014 (as the immediately suc- met the requirements. The IRS may also revoke items included in support) and contribu- ceeding tax year). Therefore, X is still an organi- tions made directly or indirectly by the gen- the section 170(b)(1)(A)(vi) ruling or determina- zation described in section 170(b)(1)(A)(vi) for eral public. tion letter if the organization’s application for a tax year 2014, even though X did not meet the ruling or determination contained a material mis- one-third support test for that year. statement of fact. Example. X, an organization described in section 501(c)(3), is controlled by Thomas Blue, Reliance by grantors or contributors. Computation period for public support. If, its president. X received $500,000 during the Grantors or contributors may rely on a determi- at the time of applying for tax-exempt status, an current tax year and the 4 tax years immediately nation or ruling letter that an organization is organization can reasonably be expected to before its current tax year under a contract with described in section 170(b)(1)(A)(vi) until notice meet the one-third support test or the facts and the Department of Transportation, under which of change of status of the organization is made circumstances test during its first 5 tax years, the X engaged in research to improve a particular to the public (such as by publication in the Inter- organization will qualify as publicly supported for vehicle used primarily by the Federal Govern- nal Revenue Bulletin, or Publication 78, Cumu- its first 5 years. The organization will be classi- ment. During the same period, the only other lative List of Organizations descried in Section fied as a public charity for its first 5 years, re- support received by X was $5,000 in small con- 170(c) of the Internal Revenue Code of 1986, gardless of the public support actually received tributions primarily from X’s employees and either of which can be searched at IRS.gov). during this period. Beginning with the organiza- business associates. The $500,000 is support However, this will not apply if the grantor or tion’s sixth tax year, the organization will qualify under (1) above. Under these circumstances, X contributor was responsible for, or aware of, the as publicly supported if it meets the one-third meets the conditions of (1) and (2) above and so act or failure to act that resulted in the organiza- support test or the facts and circumstances test does not meet the one-third support test or the tion’s loss of classification as a publicly sup- for its sixth year (based on support received in ten-percent-of-support requirement. ported organization. its second through sixth tax years), or as a For the rules that apply to organizations that carryover for its fifth tax year (based on support fail to qualify as section 509(a)(1) publicly sup- received in its first through fifth tax years). If the Support. For purposes of publicly supported ported organizations because of these provi- organization is required to file Form 990 or organizations, the term support includes (but is sions, see Section 509(a)(2) Organizations , 990-EZ, it must establish that it meets the public not limited to): later. See also Gross receipts from a related support test each year on Schedule A (Form 990 activity in the discussion on section 509(a)(2) 1. Gifts, grants, contributions, or membership or 990-EZ). organizations. fees, Reasonable expectation of public support. Membership fees. Membership fees are in- 2. Net income from unrelated business activi- An organization that can reasonably be ex- cluded in the term support if they are paid to ties, whether or not those activities are car- pected to meet the one-third support test or the provide support for the organization rather than ried on regularly as a trade or business, facts and circumstances test during its first 5 to buy admissions, merchandise, services, or years is one that can show that its organizational 3. Gross investment income, the use of facilities. structure, current or proposed programs and 4. Tax revenues levied for the benefit of an activities, and actual or intended method of op- Support from a governmental unit. For pur- organization and either paid to or spent on eration can reasonably be expected to attract poses of the one-third support test and the behalf of the organization, and the type of broadly based support from the gen- ten-percent-of-support requirement, the term eral public, public charities, and governmental 5. The value of services or facilities furnished support from a governmental unit includes any units that is necessary to meet the public sup- by a governmental unit to an organization amounts received from a governmental unit, in- port requirements discussed earlier under Qual- without charge (except services or facilities cluding donations or contributions and amounts ifying As Publicly Supported . generally furnished to the public without received on a contract entered into with a gov- charge). Example. Organization Y was formed in ernmental unit for the performance of services, January 2008 and uses a December 31 tax year. or from a government research grant. However, Amounts that are not support. The term After September 9, 2008, and before December these amounts are not support from a govern- support does not include: 31, 2008, Organization Y filed a Form 1023 mental unit for these purposes if they constitute requesting recognition of exemption as an or- amounts received from the exercise or perform- 1. Any amount received from the exercise or ganization described in section 501(c)(3) and in ance of the organization’s exempt functions. performance by an organization of the pur- sections 170(b)(1)(A)(vi) and 509(a)(1). In its Any amount paid by a governmental unit to pose or function constituting the basis for application, Organization Y established that it an organization will not be treated as received its exemption (in general, these amounts can reasonably be expected to meet the from the exercise or performance of its exempt include amounts received from any activity one-third support test. Organization Y receives a function if the purpose of the payment is prima- the conduct of which is substantially re- determination letter that it is an organization rily to enable the organization to provide a serv- lated to the furtherance of the exempt pur- described in section 501(c)(3) and sections ice to, or maintain a facility for, the direct benefit pose or function, other than through the 170(b)(1)(A)(vi) and 509(a)(1) effective as of the of the public (regardless of whether part of the production of income), or date of formation. expense of providing the service or facility is Organization Y is described in sections paid for by the public), rather than to serve the 2. Contributions of services for which a de- 170(b)(1)(A)(vi) and 509(a)(1) for its first 5 tax direct and immediate needs of the payor. This duction is not allowed. years (tax years ending December 31, 2008, includes: These amounts are excluded from both the nu- through December 31, 2012). Organization Y merator and the denominator of the fractions in 1. Amounts paid to maintain library facilities can qualify as a public charity beginning with the determining compliance with the one-third sup- that are open to the public, tax year ending December 31, 2013, if Organi- port test and ten-percent-of-support require- zation Y meets the one-third support test or facts 2. Amounts paid under government programs ment. The following discusses an exception to and circumstances test for the tax years ending to nursing homes or homes for the aged to this general rule. December 31, 2009, through December 31, provide health care or domiciliary services 2013, or for the tax years ending December 31, Organizations dependent primarily on to residents of these facilities, and 2008, through December 31, 2012. gross receipts from related activities. Orga- 3. Amounts paid to child placement or child nizations will not satisfy the one-third support Rulings or determinations of public sup- guidance organizations under government test or the ten-percent-of-support requirement if port status. An organization may request a programs for services rendered to children they receive: ruling or determination letter that it is described in the community. in section 170(b)(1)(A)(vi). This request is made 1. Almost all support from gross receipts from on Form 1023, or at such other time as the These payments are mainly to enable the recipi- related activities, and organization believes it is described in section ent organization to provide a service or maintain 2. An insignificant amount of support from 170(b)(1)(A)(vi). The IRS may revoke the sec- a facility for the direct benefit of the public, rather governmental units (without regard to tion 170(b)(1)(A)(vi) ruling or determination let- than to serve the direct and immediate needs of amounts referred to in (3) in the list of ter if, on examination, the organization has not the payor. Furthermore, any amount received
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from a governmental unit under circumstances a donation of $5,000 without imposing any re- gross investment income (defined under Sec- in which the amount would be treated as a grant strictions or conditions upon the gift. M later tion 509(a)(2) Organizations , later) may be ex- will generally constitute support from a govern- makes a $5,000 grant to X, an organization cluded under this rule. mental unit. See the discussion of Grants , later, devoted to giving public performances of cham- Characteristics of an unusual grant. A under Section 509(a)(2) Organizations . ber music. Since the grant to X is treated as grant or contribution will be considered an unu- being received from M, it is fully includible in the Medicare and Medicaid payments. Medi- sual grant if the above three factors apply and if numerator of X’s support fraction for the tax year care and Medicaid payments are received from it has all of the following characteristics. If these of receipt. contracts entered into with state and federal factors and characteristics apply, then even governmental units. However, payments are without the benefit of an advance ruling, grant- Example 2. Assume M is the same organi- made for services already provided to eligible ors or contributors have assurance that they will zation described in Example 1. Tom Grove gives individuals, rather than to encourage or enable not be considered responsible for substantial M a donation of $10,000, but requires that M an organization to provide services to the public. and material changes in the organization’s spend the money to support organizations de- The individual patient, not a governmental unit, sources of support. voted to the advancement of contemporary actually controls the ultimate recipient of these American music. M has complete discretion as 1. The grant or contribution is not made by a payments by selecting the health care organiza- to the organizations of the type described to person (or related person) who created the tion. As a result, these payments are not consid- which it will make a grant. M decides to make organization or was a substantial contribu- ered support from a governmental unit. grants of $5,000 each to Y and Z, both being tor to the organization before the grant or Medicare and Medicaid payments are gross re- organizations described in section 501(c)(3) and contribution. ceipts derived from the exercise or performance devoted to furthering contemporary American of exempt activities and, therefore, are not in- 2. The grant or contribution is not made by a music. Since the grants to Y and Z are treated as cluded in the term support. person (or related person) who is in a posi- having been received from M, Y and Z each may tion of authority, such as a foundation include one of the $5,000 grants in the numera- Support from the general public. In deter- manager, or who otherwise has the ability tor of its support fraction. Although the donation mining whether the one-third support test or the to exercise control over the organization. to M was conditioned upon the use of the funds ten-percent-of-support requirement is met, in- Similarly, the grant or contribution is not for a particular purpose, M was free to select the clude in your computation support from direct or made by a person (or related person) who, ultimate recipient. indirect contributions from the general public. because of the grant or contribution, ob- This includes contributions from an individual, tains a position of authority or the ability to Example 3. N is a national foundation for trust, or corporation but only to the extent that otherwise exercise control over the organi- the encouragement of art and is a publicly sup- the total contributions from the individual, trust, zation. ported organization. Grants to N are permitted to or corporation, during the current tax year and be earmarked for particular purposes. O, which the 4-year period immediately before the current 3. The grant or contribution is in the form of is an art workshop devoted to training young tax year, are not more than 2% of the organiza- cash, readily marketable securities, or as- artists and which is claiming status as a publicly tion’s total support for the same period. sets that directly further the organization’s supported organization, persuades C, a private Thus, a contribution by any one individual exempt purposes, such as a gift of a paint- foundation, to make a grant of $25,000 to N. C is will be included in full in the denominator of the ing to a museum. a disqualified person with respect to O. C makes fraction used in the one-third support test or the 4. The donee organization has received a fi- the grant to N with the understanding that N ten-percent-of-support requirement. However, nal ruling or determination letter classifying would be bound to make a grant to O in the sum the contribution will be included in the numerator it as a publicly supported organization and of $25,000, in addition to a matching grant of N’s only to the extent that it is not more than 2% of the organization is actively engaged in a funds to O in the sum of $25,000. Only the the denominator. In applying the 2% limit, all program of activities in furtherance of its $25,000 received directly from N is considered a contributions made by a donor and by any per- exempt purpose. grant from N. The other $25,000 is an indirect son in a special relationship to the donor (certain contribution from C to O and is to be excluded Disqualified persons discussed under Absence 5. No material restrictions or conditions have from the numerator of O’s support fraction to the of control by disqualified persons ) are consid- been imposed by the grantor or contributor extent it exceeds the 2% limit. ered made by one person. The 2% limit does not upon the organization in connection with apply to support received from governmental the grant or contribution. Unusual grants. In applying the 2% limit to units or to contributions from other publicly sup- determine whether the one-third support test or 6. If the grant or contribution is intended for ported charities, except as provided under the ten-percent-of-support requirement is met, operating expenses, rather than capital Grants from public charities, later. exclude contributions that are considered unu- items, the terms and amount of the grant Indirect contributions. The term indirect sual grants from both the numerator and denom- or contribution are expressly limited to 1 contributions from the general public includes inator of the appropriate percent-of-support year’s operating expenses. contributions received by the organization from fraction. Generally, unusual grants are substan- organizations (such as publicly supported orga- tial contributions or bequests from disinterested Ruling request. Before any grant or contri- nizations) that normally receive a substantial parties if the contributions: bution is made, a potential grantee organization part of their support from direct contributions can request a ruling as to whether the grant or 1. Are attracted by the publicly supported na- from the general public, except as provided contribution may be excluded as an unusual ture of the organization, under Grants from public charities, next. grant . This request can be filed by the grantee organization with the Manager, EO Determina- 2. Are unusual or unexpected in amount, and Grants from public charities. Contribu- tions, for its area. The organization must submit tions received from a governmental unit or from 3. Would adversely affect, because of the all information necessary to make a determina- a publicly supported organization (including a size, the status of the organization as nor- tion, including information relating to the factors church that meets the requirements for being mally being publicly supported. (The or- and characteristics listed in the preceding publicly supported) are not subject to the 2% ganization must otherwise meet the paragraphs. If a favorable ruling is issued, the limit unless the contributions represent amounts support test in that year without benefit of ruling can be relied upon by the grantor or con- either expressly or impliedly earmarked by a the grant or contribution.) tributor of the particular contribution in question. donor to the governmental unit or publicly sup- The issuance of the ruling will be at the sole For a grant (see Grants , later) that meets the ported organization as being for, or for the bene- discretion of the IRS. The potential grantee or- requirements for exclusion, if the terms of the fit of, the particular organization claiming a ganization should follow the procedures set out granting instrument require that the funds be publicly supported status. in Revenue Procedure 2010-4 (or any later up- paid to the recipient organization over a period date) to request a ruling. Example 1. M, a national foundation for the of years, the amount received by the organiza- encouragement of the musical arts, is a publicly tion each year under the terms of the grant may Grants and contributions that fail to qualify supported organization. George Spruce gives M be excluded for that year. However, no item of for exclusion will affect the way the support tests
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are applied. See Exception for material changes public for the 2012 tax year normally exceeds O’s total support. O expends substantially all of one-third of M’s total support ($202,000/ its annual income for its exempt purposes and in sources of support, earlier. $600,000 = 33.67 percent) for the applicable thus depends on the funds it annually solicits If a ruling is requested, in addition to the period (2008 through 2012). M meets the from the public as well as its investment income characteristics listed earlier under Characteris- one-third support test for 2012 and is therefore in order to carry out its activities on a normal and tics of an unusual grant , the following factors publicly supported for the tax years 2012 and continuing basis and to acquire new works of art. may be considered by the IRS in determining if 2013. O has, for the entire period of its existence, been the grant or contribution is an unusual grant. open to the public and more than 300,000 peo- 1. Whether the contribution was a bequest or Example 2. N is recognized as an organiza- ple (from S City and elsewhere) have visited the a transfer while living. A bequest will be tion described in section 501(c)(3). It was cre- museum in the current tax year and the 4 years given more favorable consideration than a ated to maintain public gardens containing immediately preceding the current tax year. transfer while living. botanical specimens and displaying statuary Under these circumstances, O does not and other art objects. The facilities, works of art, meet the one-third support test for its current 2. Whether, before the receipt of the contribu- and a large endowment were all contributed by a year because it has received only 25 percent of tion, the organization has carried on an single contributor. The members of the govern- its total support for the applicable 5-year period active program of public solicitation and ing body of the organization are unrelated to its from the general public. However, under the exempt activities and has been able to at- creator. The gardens are open to the public facts set forth, O has met the 10 percent support tract a significant amount of public support. without charge and attract many visitors each limitation under Temp. Reg. section 3. Whether, before the year of contribution, year. For the current tax year and the 4 tax years 1.170A-9T(f)(3)(i), as well as the requirements the organization met the one-third support preceding the current tax year, 95% of the or- of Temp. Reg. section 1.170A-9T(f)(3)(ii). Under test without benefit of any exclusions of ganization’s total support was received from in- all of the facts set forth, O is considered as unusual grants. vestment income from its original endowment. N meeting the requirements of the facts and cir- also maintains a membership society that is cumstances test on the basis of satisfying 4. Whether the organization may reasonably supported by members of the general public Temp. Reg. section 1.170A-T9(f)(3)(iii)(A) be expected to attract a significant amount who wish to contribute to the upkeep of the through (D). O is therefore publicly supported for of public support after the contribution. gardens by paying a small annual membership its current tax year and the immediately suc- Continued reliance on unusual grants to fee. Over the 5-year period in question, these ceeding tax year. fund an organization’s current operating fees from the general public constituted the re- expenses (as opposed to providing new maining 5% of the organization’s total support. Example 4. In 1960, the P Philharmonic endowment funds) may be evidence that Under these circumstances, N does not meet Orchestra was organized in T City by a local the organization cannot reasonably be ex- the one-third support test for its current tax year. music society and a local women’s club to pres- pected to attract future support from the Furthermore, since only 5% was received from ent to the public a wide variety of musical pro- general public. the general public, N does not satisfy the 10 grams intended to foster music appreciation in 5. Whether the organization has a represen- percent support limitation under Temp. Reg. the community. P is recognized as an organiza- tative governing body. section 1.170A-9T(f)(3)(i), and therefore does tion described in section 501(c)(3). The orches- not qualify as publicly supported under the facts tra is composed of professional musicians who and circumstances test. Because N has failed to are paid by the association. Twelve perform- satisfy the 10 percent support limitation, none of ances, open to the public, are scheduled each Comprehensive Examples the other requirements or factors in Temp. year. A small admission charge is made for each Regs. section 1.170A-9T(f)(3)(iii)(A) through (E) of these performances. In addition, several per- Example 1. M is recognized as an organiza- can be considered in determining whether N formances are staged annually without charge. tion described in section 501(c)(3). For the years qualifies as a publicly supported organization. During the current tax year and the 4 tax 2008 through 2012 (the applicable period for the For its current tax year, N is not an organization years immediately preceding the current tax tax year 2012 under Temp. Regs. section described in section 170(b)(1)(A)(vi). year, P received separate contributions of 1.170A-9T(f)(3)), M received support (as de- $200,000 each from A and B (not members of a fined in paragraphs Temp. Regs. section Example 3. O, an art museum, is recog- single family) and support of $120,000 from the 1.170A-9T(f)(6) through (8) of $600,000 from nized as an organization described in section T Community Chest, a public federated fun- the following sources: 501(c)(3). In 1930, O was founded in S City by draising organization operating in T City. P de- members of a single family to collect, preserve, pends on these funds to carry out its activities Investment Income ……….. .$300,000 interpret, and display to the public important and will continue to depend on contributions of City Y (a governmental unit described 40,000 works of art. O is governed by a Board of Trust- this type to be made in the future. P has also in section 170(c)(1)) ………. . ees that originally consisted almost entirely of begun a fundraising campaign in an attempt to United Way (an organization members of the founding family. However, since expand its activities for the coming years. described in section 170(b)(1)(A)(vi)) 40,000 1945, members of the founding family or per- P is governed by a Board of Directors com- Contributions ………….. . 220,000 sons standing in relationship to the members of posed of five individuals. A faculty member of a Total support …………… .$600,000 that family described in section 4946(a)(1)(C) local college, the president of a local music soci- through (G) have annually constituted less than ety, the head of a local banking institution, a For tax year 2012, M’s public support is com- one-fifth of the Board of Trustees. The remain- prominent doctor, and a member of the govern- puted as follows: ing board members are citizens of S City from a ing body of the local Chamber of Commerce variety of professions and occupations who rep- currently serve on the Board and represent the One-third of total support ……. .$200,000 resent the interests and views of the people of S interests and views of the community in the Support from a governmental unit City in the activities carried on by the organiza- activities carried on by P. described in section 170(c)(1) … . $40,000 tion rather than the personal or private interests For P’s current tax year, its sources of sup- Indirect contributions from the of the founding family. O solicits contributions port are computed on the basis of the current tax general public (United Way) ….. . 40,000 from the general public, and for the current tax year and the 4 immediately preceding tax years, Contributions by various donors (no year and each of the 4 tax years immediately as follows. one having made contributions that preceding the current tax year, O has received total more than $12,000 Ð2% of total Contributions ………….. .$520,000 total contributions (in small sums of less than support) ……………… . 50,000 Receipts from performances …. . 100,000 $100, none of which exceeds 2 percent of O’s Six contributions (each in excess of $620,000 total support for such period) in excess of $12,000 Ð2% of total support) 6 ´ Less: $10,000. These contributions from the general $12,000 ……………… . 72,000 Receipts from performances public represent 25 percent of the organization’s $202,000 (excluded, see Support) ……. . 100,000 total support for that 5-year period. For the same Total support …………. .$520,000 M’s support from governmental units and from period, investment income form several large direct and indirect contributions from the general endowment funds has constituted 75 percent of
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a. To modify any restriction or condition on Community Trusts T Community Chest (indirect support the distribution of funds for any speci- from the general public) ……. .$120,000 Community trusts are often established to at- fied charitable purposes or to specified Two contributions (each over tract large contributions of a capital or endow- organizations if in the sole judgment of $10,400 Ð2% of total support) 2 ´ ment nature for the benefit of a particular the governing body (without the neces- $10,400 ……………… . 20,800 community or area. Often these contributions sity of the approval of any participating Total support from general public ..$140,800 come initially from a small number of donors. trustee, custodian, or agent), the restric- While the community trust generally has a gov- tion or condition becomes, in effect, un- P’s support from the general public, directly and erning body composed of representatives of the necessary, incapable of fulfillment, or indirectly, does not meet the one-third support particular community or area, its contributions inconsistent with the charitable needs of test ($140,800/$520,000 = 27% of total sup- are often received and maintained in the form of the community or area served, port). However, because P receives 27 percent separate trusts or funds that are subject to vary- of its total support from the general public, it b. To replace any participating trustee, ing degrees of control by the governing body. meets the 10 percent support limitation under custodian, or agent for breach of fiduci- To qualify as a publicly supported organiza- Temp. Reg. section 1.170A-T9(f)(3)(i). P also ary duty under state law, and tion, a community trust must meet the one-third meets the requirements of Temp. Reg. section support test, explained earlier under Qualifying c. To replace any participating trustee, 1.170A-T9(f)(3)(ii). As a result of satisfying As Publicly Supported. If it cannot meet that test, etc., for failure to produce a reasonable these requirements and factors, P is considered it must be organized and operated so as to return of net income over a reasonable to meet the facts and circumstances test and attract new and additional public or governmen- period of time. (The governing body will therefore qualifies as a publicly supported or- tal support on a continuous basis sufficient to determine what is reasonable.) ganization for its current tax year and the imme- meet the facts and circumstances test, also ex- diately succeeding tax year. plained earlier. Community trusts are generally 4. The organization must prepare periodic fi- able to satisfy the attraction of public support nancial reports treating all of the funds that Example 5. Q is recognized as an organiza- requirement (as contained in the facts and cir- are held by the community trust, either di- tion described in section 501(c)(3) and it is a cumstances test) if they seek gifts and bequests rectly or in component parts, as funds of philanthropic organization. Q was founded in from a wide range of potential donors in the the organization. 1965 by C for the purpose of making annual community or area served, through banks or contributions to worthy charities. C created Q as A community trust can meet the requirement trust companies, through attorneys or other pro- a charitable trust by transferring $500,000 worth in (3) above even if its exercise of the powers in fessional persons, or in other appropriate ways of appreciated securities to Q. (3)(a), (b), or (c) is reviewable by an appropriate that call attention to the community trust as a Under the trust agreement, C and two other state authority. potential recipient of gifts and bequests made family members are the sole trustees of Q and for the benefit of the community or area served. Component part. To be treated as a com- are vested with the right to appoint successor A community trust, however, does not have to ponent part of a community trust (rather than as trustees. In each of the current tax year and the engage in periodic, community-wide, fundrais- a separate trust or a not-for-profit corporation), a 4 tax years immediately preceding the current ing campaigns directed toward attracting a large trust or fund: tax year, Q received $15,000 in investment in- number of small contributions in a manner simi- come from its original endowment. Each year Q 1. Must be created by gift, bequest, legacy, lar to campaigns conducted by a community solicits funds by operating a charity ball at C’s devise, or other transfer to a community chest or a united fund. residence. Guests are invited and asked to trust that is treated as a single entity (de- make contributions of $100 per couple. During scribed above), and Separate trusts or funds. Any community the 5-year period involved, $15,000 was re- trust may be treated as a single entity, rather ceived from the proceeds of these events. C and 2. May not be directly or indirectly subjected than as an aggregation of separate funds, in his family have also made contributions to Q of by the transferor to any material restriction which case all qualifying funds associated with $25,000 over the 5-year period at issue. Q or condition with respect to the transferred that organization (whether a trust, not-for-profit makes disbursements each year of substantially assets. corporation, unincorporated association, or a all of its net income to the public charities cho- combination thereof) will be treated as compo- sen by the trustees. Grantors and contributors. Grantors, con- nent parts of the organization. Q’s sources of support for the current tax tributors, or distributors to a community trust year and the 4 tax years immediately preceding Single entity. To be treated as a single en- may rely on the public charity status, which the the current tax year are as follows: tity, a community trust must meet all of the fol- organization has claimed in a timely filed notice, lowing requirements. on or before the date the IRS informs the public Investment income ………… .$60,000 (through such means as publication in the Inter- Contributions …………… .$40,000 1. The organization must be commonly nal Revenue Bulletin) that such reliance has Total support ………….. .$100,000 known as a community trust, fund, founda- expired. However, if the grantor, contributor, or tion, or other similar name conveying the Contributions from the general public $15,000 distributor acquires knowledge that the IRS has concept of a capital or endowment fund to notified the community trust that it has failed to One contribution (over $2,000 Ð2% support charitable activities in the commu- establish that it is a public charity, then reliance of total support) 1 ´ $2,000 …… . 2,000 nity or area it serves. on the claimed status expires at the time such Total support from general public .. .$17,000 2. All funds of the organization must be sub- knowledge is acquired. ject to a common governing instrument (or Q’s support from the general public does not a master trust or agency agreement) that meet the one-third support test ($17,000/ may be embodied in a single (or several) Section 509(a)(2) Organizations $100,000 = 17% of total support). Even though it document(s) containing common lan- does meet the ten-percent-of-support require- Section 509(a)(2) excludes certain types of guage. ment, its method of solicitation makes it ques- broadly based, publicly supported organizations 3. The organization must have a common tionable whether Q satisfies Temp. Reg. section from private foundation status. Generally, an governing body (or distribution committee) organization described in section 509(a)(2) may 1.170A-9T(f)(3)(ii). Because of its method of op- that either directs or, in the case of a fund also fit the description of a publicly supported erating, Q also has a greater burden of estab- designated for specified beneficiaries, organization under section 509(a)(1). There are, lishing its publicly supported nature. Based on monitors the distribution of all funds exclu- however, two basic differences. these facts and on Q’s failure to receive sively for charitable purposes. The govern- favorable consideration under the remaining ing body must have the power in the 1. For section 509(a)(2) organizations, the factors of Temp. Reg. section governing instrument, the instrument of term support includes items of support dis- 1.170A-9T(f)(3)(iii), Q does not satisfy the facts transfer, the resolutions or bylaws of the cussed earlier (under Support , in the dis- and circumstances test and therefore does not governing body, a written agreement, or cussion of Section 509(a)(1) qualify as a publicly supported organization. otherwise Ð Organizations ) and income from activities
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directly related to their exempt function. included in computing tax on unrelated business 2. Whether a substantial part of the organiza-tion’s initial funding is to be provided by the This income is not included in meeting the income from trades or businesses. general public, by public charities, or by support test for a publicly supported organ- Definition of normally. Both support tests government grants rather than by a limited ization under section 509(a)(1). are computed on the basis of the nature of the number of grantors or contributors who are 2. Section 509(a)(2) places a limit on the total organization’s normal sources of support. An disqualified persons with respect to the or- gross investment income and unrelated organization will be considered to have normally ganization, business taxable income (in excess of the met both tests for its current tax year and the tax 3. Whether a substantial proportion of the or- unrelated business tax) an organization year immediately following, if it meets those ganization’s initial funds are placed, or will may have, while section 509(a)(1) does tests on the basis of the total support received remain, in an endowment and whether the not. for the current tax year and the 4 tax years investment of those funds is unlikely to re- immediately before the current tax year. To be excluded from private foundation treat- sult in more than one-third of its total sup- ment under section 509(a)(2), an organization Computation period for public support. If at port being received from gross investment must meet two support tests. the time of applying for tax-exempt status, an income and from unrelated business tax-able income in excess of the tax imposed organization can reasonably be expected to 1. The one-third support test. on that income, meet the one-third support test and the 2. The not-more-than-one-third support test. not-more-than-one-third support test during its 4. Whether an organization that carries on first 5 tax years, the organization will qualify for Both these tests are designed to insure that fundraising activities has developed a con- classification as a public charity under section an organization excluded from private founda- crete plan for solicitation of funds on a 509(a)(2) for its first 5 years. Beginning with the tion treatment is responsive to the general pub- community or area-wide basis, organization’s sixth tax year, the organization lic, rather than to the private interests of a limited 5. Whether an organization that carries on will be described in section 509(a)(2) if it meets number of donors or other persons. community service activities has a con- the one-third support test and crete program to carry out its work in the not-more-than-one-third support test for its sixth One-third support test. The one-third sup- community, year (based on support received in its second port test will be met if an organization normally through sixth tax years) or as a carryover for its receives more than one-third of its support in 6. Whether membership dues for individual fifth tax year (based on support received in its each tax year from any combination of: (rather than institutional) members of an first through fifth tax years). If the organization is organization that carries on education or 1. Gifts, grants, contributions, or membership required to file Form 990 or 990-EZ, it must other exempt activities for or on behalf of fees, and establish that it meets the one-third support test members have been fixed at rates de- and not-more-than-one-third support test each 2. Gross receipts from admissions, sales of signed to make membership available to a year on Schedule A (Form 990 or 990-EZ). merchandise, performance of services, or broad cross section of the public rather furnishing facilities in an activity that is not than to restrict membership to a limited Reasonable expectation of public support. an unrelated trade or business, subject to number of persons, and An organization that can reasonably be ex- certain limits, discussed below under Limit pected to meet the one-third support test and 7. Whether an organization that provides on gross receipts . not-more-than-one-third support test under sec- goods, services, or facilities is or will be tion 509(a)(2) during its first 5 years is one that For this purpose, the support must be from required to make its services, facilities, can show that its organizational structure, cur- permitted sources, which include: performances, or products available (re- rent or proposed programs and activities, and gardless of whether a fee is charged) to ·Section 509(a)(1) organizations, described actual or intended method of operation can rea- the general public, public charities, or gov- earlier, sonably be expected to attract the type of ernmental units rather than to a limited broadly based support from the general public, ·Governmental units, described under Sec- number of persons or organizations. public charities, and governmental units that is tion 509(a)(1) Organizations , earlier, and necessary to meet these tests. The facts that are Unusual grants. An unusual grant can be ex- ·Persons other than Disqualified persons relevant to this determination and the weight cluded from the support test computation if it: (defined under Section 509(a)(3) Organi- accorded each fact may differ from case to case. zations ), later. An organization cannot reasonably be expected 1. Was attracted by the publicly supported to meet the one-third support test and the nature of the organization, Limit on gross receipts. In computing the not-more-than-one-third support test when the 2. Was unusual or unexpected in amount, amount of support received from gross receipts facts indicate that an organization is likely during and under (2) above, gross receipts from related its first 5 tax years to receive less than one-third activities received from any person or from any of its support from permitted sources or to re- 3. Would, because of its size, adversely af- bureau or similar agency of a governmental unit ceive more than one-third of its support from fect the status of the organization as nor- are includible in any tax year only to the extent gross investment income and unrelated busi- mally meeting the one-third support test. the gross receipts are not more than the greater ness taxable income. (The organization must otherwise meet the of $5,000 or 1% of the organization’s total sup- All pertinent facts and circumstances are test in that year without benefit of the grant port in that year. taken into account in determining whether the or contribution.) organizational structure, programs, or activities, Not-more-than-one-third support test. This and method of operation of an organization will Characteristics of an unusual grant. A test will be met if an organization normally re- give that organization a reasonable expectation grant or contribution will be considered an unu- ceives no more than one-third of its support in that it will meet the support tests. Some pertinent sual grant if the above three factors apply and it each tax year from the total of: factors considered are: has all of the following characteristics. If thesefactors and characteristics apply, then even 1. Gross investment income, and 1. Whether the organization has or will have without the benefit of an advance ruling, grant- 2. The excess (if any) of unrelated business a governing body that is composed of per- ors or contributors have assurance that they will taxable income from unrelated trades or sons having special knowledge in the par- not be considered responsible for an act that businesses acquired after June 30, 1975, ticular field in which the organization is results in an organization’s change of support over the tax imposed on that income. operating or of community leaders, such status. as elected officials, members of the clergy, Gross investment income. Gross invest- and educators, or, in the case of a mem- 1. The grant or contribution is not made by a ment income means the gross amount of in- bership organization, of individuals elected person (or related person) who created the come from interest, dividends, payments with under the organization’s governing instru- organization or was a substantial contribu- respect to securities loans, rents, and royalties, ment or bylaws by a broadly based mem- tor to the organization before the grant or but it does not include any income that would be bership, contribution.
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2. The grant or contribution is not made by a 4. Whether the organization met the one-third M may submit a request for a private letter ruling support test in the past without the benefit that the $500,000 contribution from Z qualifies person (or related person) who is in a posi- of any exclusions of unusual grants. as an unusual grant. tion of authority, such as a foundation Under the above circumstances, even manager, or who otherwise has the ability 5. Whether the organization has a represen- though Albert was a founder and member of the to exercise control over the organization. tative governing body. governing body of M, M may exclude Z’s contri- Similarly, the grant or contribution is not bution of $500,000 in 2010 as an unusual grant made by a person (or related person) who, Example 1. Y, an organization described in under Temp. Reg. section 1.509(a)-3T(c)(3) for because of the grant or contribution, ob- section 501(c)(3), was created by Marshall Pine, purposes of determining whether M meets the tains a position of authority or the ability to the holder of all the common stock in M corpora- one-third support test under section 509(a)(2) otherwise exercise control over the organi- tion, Lisa, Marshall’s wife, and Edward Forest, for 2014. zation. Marshall’s business associate. The purpose of Y 3. The grant or contribution is in the form of Gifts, contributions, and grants distin- was to sponsor and equip athletic teams com- cash, readily marketable securities, or as- guished from gross receipts. In determining posed of underprivileged children in the commu- sets that directly further the organization’s whether an organization normally receives more nity. Each of the three creators makes small exempt purposes, such as a gift of a paint- than one-third of its support from permitted cash contributions to Y. Marshall, Lisa, and Ed- ing to a museum. sources, include all gifts, contributions, and ward have been active participants in the affairs grants received from permitted sources in the of Y since its creation. Y regularly raises small 4. The donee organization has received ei- numerator of the support fraction in each tax amounts of contributions through fundraising ther an advance or final ruling or determi- year. However, gross receipts from admissions, drives and selling admission to some of the nation letter classifying it as a publicly sales of merchandise, performance of services, sponsored sporting events. The operations of Y supported organization and, except for an or furnishing facilities, in an activity that is not an are carried out on a small scale, usually being organization operating under an advance unrelated trade or business, are includible in the restricted to the sponsorship of two to four base- ruling or determination letter, the organiza- numerator of the support fraction in any tax year ball teams of underprivileged children. tion is actively engaged in a program of only to the extent that the amounts received In 2009, M Corporation recapitalizes and activities in furtherance of its exempt pur- from any person or from any bureau or similar creates a first and second class of 6 percent pose. agency of a governmental unit are not more than nonvoting preferred stock, most of which is held the greater of $5,000 or 1% of support. 5. No material restrictions or conditions have by Marshall and Lisa. In 2010, Marshall contrib- been imposed by the grantor or contributor utes 49 percent of his common stock in M to Y. Rulings or determinations of public sup- upon the organization in connection with Marshall’s contribution of M’s common stock port status. An organization may request a the grant or contribution. was substantial and constitutes 90 percent of ruling or determination letter that it is described Y’s total support for 2010. A combination of the in section 509(a)(2). This request is made on 6. If the grant or contribution is intended for facts and circumstances of the determining fac- Form 1023, or at such other time as the organi- operating expenses, rather than capital tors preclude Marshall’s contribution of M’s com- zation believes it is described in section items, the terms and amount of the grant mon stock in 2010 from being excluded as an 509(a)(2). The IRS may revoke the section or contribution are expressly limited to one unusual grant under Temp. Reg. section 509(a)(2) ruling or determination letter if, upon year’s operating expenses. 1.509(a)-3T(c)(3) for purposes of determining examination, the organization has not met the whether Y meets the one-third support test requirements. The IRS may also revoke the sec- Ruling request. If there is any doubt that a under section 509(a)(2). tion 509(a)(2) ruling or determination letter if the grant or contribution can be excluded as an organization’s application for a ruling or determi- unusual grant, the grantee organization can re- Example 2. M was organized in 2009 to nation contained a material misstatement of quest a ruling, submitting all of the necessary promote the appreciation of ballet in a particular fact. information for making a determination to the region of the United States. Its principal activi- Manager, EO Determinations. The IRS has the Reliance by grantors or contributors. ties consist of erecting a theater for the perform- sole discretion of issuing a ruling, but if a Grantors or contributors may rely on a determi- ance of ballet and the organization and favorable ruling is issued, it can be relied on by nation or ruling letter that an organization is operation of a ballet company. M receives a the grantor or contributor for purposes of a chari- described in section 509(a)(2) until notice of determination letter that it is an organization table contributions deduction and by the organi- change of status of the organization is made to described in section 501(c)(3) and that it is a zation for purposes of the exclusion for unusual the public (such as by publication in the Internal public charity described in section 509(a)(2). grants. The organization should follow the pro- Revenue Bulletin , or Publication 78, Cumulative The governing body of M consists of nine promi- cedures set out in Revenue Procedure 2010-4 List of Organizations described in section 170(c) nent unrelated citizens residing in the region (or later update) to request a ruling on an unu- of the Internal Revenue Code of 1986, either of who have either an expertise in ballet or a strong sual grant. which can be searched at IRS.gov. However, interest in encouraging appreciation of the art In addition to the characteristics listed above, this will not apply if the grantor or contributor was form. the following factors may be considered by the responsible for, or aware of, the act or failure to In 2010, Z, a private foundation, proposes to IRS in determining if the grant or contribution is act that resulted in the organization’s loss of make a grant of $500,000 in cash to M to provide an unusual grant. classification as a publicly supported organiza- sufficient capital for M to commence its activi- tion. ties. Although Albert Cedar, the creator of Z, is 1. Whether the contribution was a bequest or one of the nine members of M’s governing body, Gifts and contributions. Any payment of a transfer while living. A bequest will ordi- was one of M’s original founders, and continues money or transfer of property without adequate narily be given more favorable considera- to lend his prestige to M’s activities and fundrais- consideration is considered a gift or contribution. tion than a transfer while living. ing efforts, Albert does not, directly or indirectly, When payment is made or property is trans- 2. Whether, before the contribution, the or- exercise any control over M. By the close of its ferred as consideration for admissions, sales of ganization carried on an actual program of first tax year, M also has received a significant merchandise, performance of services, or fur- public solicitation and exempt activities amount of support from a number of smaller nishing facilities to the donor, the status of the and was able to attract a significant contributions and pledges from members of the payment or transfer under section 170(c) deter- amount of public support. general public. M charges admission to the bal- mines whether and to what extent the payment let performances to the general public. 3. Whether the organization may reasonably or transfer is a gift or contribution as distin- be expected to attract a significant amount Although the support received in 2010 will guished from gross receipts from related activi- of public support after the contribution. not impact M’s status as a public charity for its ties. Continued reliance on unusual grants to first 5 tax years, it will be relevant to the determi- The amount includible in computing support fund an organization’s current operating nation of whether M meets the one-third support from gifts, grants, or contributions of property or expenses can be evidence that the organi- test under section 509(a)(2) for the 2014 tax use of property is the fair market or rental value zation cannot attract future support from year, using the computation period 2010 of the property at the date of the gift or contribu- the general public. through 2014. Within the appropriate timeframe, tion.
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Example. P is a local agricultural club and is organization uses membership fees as a means public charity’s donors, it will retain its character an organization described in section 501(c)(3). It of selling admissions, merchandise, services, or as a contribution from the donor, and if, for makes awards at its annual fair for outstanding the use of facilities to members of the general example, the donor is a substantial contributor specimens of produce and livestock to en- public who have no common goal or interest to the ultimate recipient, the amount is excluded courage interest and proficiency by young peo- (other than the desire to buy the admissions, from the numerator of the support fraction. If a ple in farming and raising livestock. Most of merchandise, services, or use of facilities), the public charity makes both an indirect contribu- these awards are cash or other property fees are not membership fees but are gross tion from its donor and an additional grant to the donated by local businessmen. When the receipts. ultimate recipient, the indirect contribution is awards are made, the donors are given recogni- treated as made first. On the other hand, to the extent the basic tion for their donations by being identified as the purpose of the payment is to provide support for An indirect contribution is one that is ex- donor of the award. The recognition given to the organization rather than to buy admissions, pressly or impliedly earmarked by the donor as donors is merely incidental to the making of the merchandise, services, or the use of facilities, being for, or for the benefit of, a particular recipi- award to worthy youngsters. For these reasons, the payment is a membership fee. ent rather than for a particular purpose. the donations are contributions. The amount in-cludible in computing support is equal to the Bureau defined. The term bureau or similar Method of accounting. An organization’s cash contributed or the fair market value of other agency of a governmental unit for determining support is determined under the same account- property on the dates contributed. amounts subject to the $5,000 or 1% limit means ing method that it uses in keeping its books and a specialized operating unit of the executive, that it otherwise uses to report on its Form 990 Grants. Grants often contain certain terms judicial, or legislative branch of government in or 990-EZ, if it is required to file Form 990 or and conditions imposed by the grantor. Because which business is conducted under certain rules 990-EZ. For example, if a grantor makes a grant of the imposition of terms and conditions, the and regulations. Since the term bureau refers to to an organization payable over a term of years, frequent similarity of public purposes of grantor a unit functioning at the operating, as distinct the grant will be includible in the support fraction and grantee, and the possibility of benefit to the from the policy-making, level of government, it of the grantee organization under the account- grantor, amounts received as grants for carrying normally means a subdivision of a department of ing method it regularly uses in keeping its books. on exempt activities are sometimes difficult to government. The term would not usually include distinguish from amounts received as gross re- those levels of government that are basically Gross receipts from a related activity. ceipts from carrying on exempt activities. policy-making or administrative, such as the of- When the charitable purpose of an organization In distinguishing the term gross receipts from fice of the Secretary or Assistant Secretary of a described in section 501(c)(3) is accomplished the term grants, the term gross receipts means department, but would consist of the highest through furnishing facilities for a rental fee or amounts received from an activity that is not an operational level under the policy-making or ad- loans to a particular class of persons, such as unrelated trade or business, if a specific service, ministrative levels. aged, sick, or needy persons, the support re- facility, or product is provided to serve the direct Amounts received from a unit functioning at ceived from those persons will be considered and immediate needs of the payor rather than the policy-making or administrative level of gov- gross receipts from a related exempt activity primarily to confer a direct benefit on the general ernment are treated as received from one bu- rather than gross investment income or unre- public. In general, payments made primarily to reau or similar agency of the unit. Units of a lated business taxable income. enable the payor to realize or receive some governmental agency above the operating level However, if the organization also furnishes economic or physical benefit as a result of the are combined and considered a separate bu- facilities or loans to persons who are not mem- service, facility, or product obtained will be reau for this purpose. Thus, an organization that bers of a particular class and furnishing the treated as gross receipts by the payee. has gross receipts from both a policy-making or facilities or funds does not contribute importantly For example, a profit-making organization, administrative unit and an operational unit of a to accomplishing the organization’s exempt pur- primarily for its own betterment, contracts with a department will be treated as having gross re- poses, the support received from furnishing the nonprofit organization for a service from that ceipts from two bureaus. For this purpose, the facilities or funds will be considered rents or organization. Any payments received by the Departments of Air Force, Army, and Navy are interest and will be treated as gross investment nonprofit organization (whether from the separate departments and each has its own income or unrelated business taxable income. profit-making organization or from another non- policy-making, administrative, and operating profit) for similar services are primarily for the units. Example. X, an organization described in benefit of the payor and are therefore gross section 501(c)(3), is organized and operated to receipts, rather than grants. Example 1. The Bureau for Africa and the provide living facilities for needy widows of de- Research leading to the development of tan- Bureau for Latin America are considered sepa- ceased servicemen. X charges the widows a gible products for the use or benefit of a payor rate bureaus. Each is an operating unit under small rental fee for the use of the facilities. Since generally will be treated as a service provided to the Administrator of the Agency for International X is accomplishing its exempt purpose through serve the direct and immediate needs of the Development, a policy-making official. If an or- the rental of the facilities, the support received payor, while basic research or studies carried on ganization had gross receipts from both of these from the widows is considered gross receipts in the physical or social sciences generally will bureaus, the amount of gross receipts from each from a related exempt activity. However, if X be treated as primarily to confer a direct benefit would be subject to the greater of $5,000 or the rents part of its facilities to persons having no upon the general public. 1% limit. relationship to X’s exempt purpose, the support Medicare and Medicaid payments are gross received from these rentals will be considered Example 2. A bureau is an operating unit receipts from the exercise or performance of an gross investment income or unrelated business under the administrative office of the Executive exempt function. The individual patient, not a taxable income. Director. The subdivisions of the bureau are governmental unit, actually controls the ultimate Geographic Areas and Project Development recipient of these payments. Therefore, Medi- Staff. If an organization had gross receipts from care and Medicaid receipts for services provided Section 509(a)(3) Organizations these subdivisions, the total gross receipts from to each patient are included as gross receipts to these subdivisions would be considered gross the extent they are not more than the greater of Section 509(a)(3) excludes from the definition of receipts from the same bureau and would be $5,000 or 1% of the organization’s total support private foundation those organizations that meet subject to the greater of $5,000 or the 1% limit. for the tax year. all of the three following requirements.
Grants from public charities. For purposes 1. The organization must be organized and Membership fees distinguished from gross of the one-third support test, grants received operated exclusively for the benefit of, to receipts. The fact that a membership organi- from a section 509(a)(1) organization (public perform the functions of, or to carry out the zation provides services, admissions, facilities, charity) are generally includible in full in comput- purposes of one or more specified organi- or merchandise to its members as part of its ing the numerator of the support fraction for that zations as described in sections 509(a)(1) overall activities will not, in itself, result in the tax year. or 509(a)(2). These section 509(a)(1) and classification of fees received from members as 509(a)(2) organizations are commonly gross receipts subject to the $5,000 or 1% limit However, if the amount received is consid- called publicly supported organizations. rather than membership fees. However, if an ered an indirect contribution from one of the
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2. The organization has one of three types of performs the functions of or carries out the pur- controlled in connection with one or more sec- relationships with one or more organiza- poses of such supported organization. tion 509(a)(1) or 509(a)(2) organizations is a tions described in sections 509(a)(1) or Type II supporting organization. The control or Organizations controlled by donors. Gen- 509(a)(2). It must be: management of the supporting organization erally, if a Type I or Type III supporting organiza- must be vested in the same persons that control tion supports an organization that is controlled a. Operated, supervised, or controlled by or manage the publicly supported organization. by a donor, the supporting organization is one or more section 509(a)(1) or In order for an organization to be supervised or treated as a private foundation (rather than as a 509(a)(2) organizations (Type I support- controlled in connection with a publicly sup- public charity) for purposes of the relationship ing organization), ported organization, common supervision or test. Type I and Type III organizations will not control by the persons supervising or controlling b. Supervised or controlled in connection satisfy the relationship test if they accept any both organizations must exist to ensure that the with one or more section 509(a)(1) or gifts or contributions from: supporting organization will be responsive to the 509(a)(2) organizations (Type II sup- needs and requirements of the publicly sup- 1. Any person (other than an organization de- porting organization), or ported organization. scribed in section 509(a)(1), (2), or (4)) c. Operated in connection with one or An organization will not be considered super- who controls, directly or indirectly, either more section 509(a)(1) or 509(a)(2) or- vised or controlled in connection with one or alone or together with persons listed in (2) ganizations (Type III supporting organi- more publicly supported organizations if it or (3) below, the governing body of a sup- zation). merely makes payments (mandatory or discre- ported organization; tionary) to the publicly supported organizations. 2. A family member of a person described in 3. The organization must not be controlled This is true even if the obligation to make pay- (1), above; or directly or indirectly by disqualified persons ments is legally enforceable and the organiza- (defined later) other than foundation man- tion’s governing instrument contains provisions 3. A 35-percent controlled entity. agers and other than one or more organi- requiring the distribution. These arrangements zations described in section 509(a)(1) or do not provide a sufficient connection between Category one. This category includes organi- 509(a)(2). the payor organization and the needs and re- zations either operated, supervised, or con- quirements of the publicly supported organiza- trolled by or supervised or controlled in Section 509(a)(3) differs from the other pro- tions to constitute supervision or control in connection with organizations described in sec- visions of section 509 that describe a publicly connection with the organizations. tion 509(a)(1) or 509(a)(2) (which can be either supported organization. Instead of describing an domestic or foreign). organization that conducts a particular kind of Organizational and operational tests. To These kinds of organizations have a govern- activity or that receives financial support from qualify as a section 509(a)(3) organization (sup- ing body that either includes a majority of mem- the general public, section 509(a)(3) describes porting organization), the organization must be bers elected or appointed by one or more organizations that have established certain rela- both organized and operated exclusively for the publicly supported organizations or that consists tionships in support of section 509(a)(1) or purposes set out in requirement (1) at the begin- of the same persons that control or manage the 509(a)(2) organizations. Thus, an organization ning of this section. If an organization fails to publicly supported organizations. If an organiza- can qualify as other than a private foundation meet either the organizational or the operational tion is to qualify under this category, it also must even though it may be funded by a single donor, test, it cannot qualify as a supporting organiza- meet an organizational test, an operational test, family, or corporation (with certain exceptions tion. and not be controlled by disqualified persons. described in Organizations controlled by do- These requirements are covered later in this nors ). This kind of funding ordinarily would indi- Organizational test. An organization is or- discussion. cate private foundation status, but a section ganized exclusively for one or more of the pur- 509(a)(3) organization has limited purposes and poses specified in requirement (1) only if its Operated, supervised, or controlled by. activities and gives up a significant degree of articles of organization: An organization that is operated, supervised, or independence. controlled by one or more section 509(a)(1) or 1. Limit the purposes of the organization to More than one type of relationship may exist 509(a)(2) organizations is a Type I supporting one or more of those purposes, between a supporting organization and a pub- organization. Each of these terms, as used for licly supported organization. Any relationship, 2. Do not expressly empower the organiza- supporting organizations, presupposes a sub- however, must ensure that the supporting or- tion to engage in activities that are not in stantial degree of direction over the policies, ganization will be responsive to the needs or furtherance of those purposes, programs, and activities of a supporting organi- demands of, and will be an integral part of or zation by one or more publicly supported organi- 3. Specify (as explained later under Specified maintain a significant involvement in, the opera- zations. The relationship required under any one organizations ) the publicly supported orga- tions of one or more publicly supported organi- of these terms is comparable to that of a parent nizations on whose behalf the organization zations. and subsidiary, in which the subsidiary is under is operated, and The first two relationships, operated, super- the direction of and is accountable or responsi- vised, or controlled by and supervised or con- 4. Do not expressly empower the organiza- ble to the parent organization. This relationship trolled in connection with, are based on an tion to operate to support or benefit any is established when a majority of the officers, existence of majority control of the governing organization other than the ones specified directors, or trustees of the supporting organiza- body of the supporting organization by the pub- in item (3). tion are appointed or elected by the governing licly supported organization. They have the body, members of the governing body, officers In meeting the organizational test, the organ- same rules for meeting the tests under require- acting in their official capacity, or the member- ization’s purposes as stated in its articles can be ment (1) and are discussed in Category one ship of one or more publicly supported organiza- as broad as, or more specific than, the purposes below. The operated in connection with relation- tions. set forth in requirement (1) at the beginning of ship requires that the supporting organization be A supporting organization can be operated, the discussion of Section 509(a)(3) Organiza- responsive to and have operational relation- supervised, or controlled by one or more publicly tions . Therefore, an organization that by the ships with publicly supported organizations. supported organizations even though its gov- terms of its articles is formed for the benefit of This third relationship has different rules for erning body is not made up of representatives of one or more specified publicly supported organi- meeting the requirement (1) tests and is dis- the specified publicly supported organizations zations will, if it otherwise meets the other re- cussed separately in Category two , later. for whose benefit it is operated. This occurs only quirements, be considered to have met the if it can be demonstrated that the purposes of Supported organizations. Supported organi- organizational test. the publicly supported organizations are carried zation means, with respect to a supporting or- For example, articles stating that an organi- out by benefiting the specified publicly sup- ganization described in section 509(a)(3), an zation is formed to perform the publishing func- ported organizations (discussed later under organization described in section 509(a)(1) or tions of a specified university are enough to Specified organizations ). 509(a)(2) for whose benefit the supporting or- comply with the organizational test. An organi- ganization is organized and operated, or with Supervised or controlled in connection zation operated, supervised, or controlled by, or respect to which the supporting organization with. An organization that is supervised or supervised or controlled in connection with, one
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or more publicly supported organizations to class for another publicly supported organ- Disqualified persons. For the purposes of the rules discussed in this publication, the fol- ization either in the same or a different carry out the purposes of those organizations lowing persons are considered disqualified per- class designated in the articles, will be considered to have met these require- sons: ments if the purposes set forth in its articles are 2. Permit the supporting organization to oper- similar to but no broader than the purposes set ate for the benefit of new or additional pub- 1. All substantial contributors to the founda- forth in the articles of its controlling organiza- licly supported organizations of the same tion. tions. If, however, the organization by which it is or a different class designated in the arti- 2. All foundation managers of the foundation. operated, supervised, or controlled is a publicly cles, or supported section 501(c)(4), 501(c)(5), or 3. An owner of more than 20% of: 3. Permit the supporting organization to vary 501(c)(6) organization, the supporting organiza- the amount of its support among different a. The total combined voting power of a tion will be considered to have met these re- publicly supported organizations within the corporation that is (during such owner- quirements if its articles require it to carry on class or classes of organizations desig- ship) a substantial contributor to the charitable, etc., activities within the meaning of nated by the articles. foundation, section 170(c)(2).
See also the rules considered under the Organi- b. The profits interest of a partnership that Limits. An organization is not organized ex- zational test, in the later discussion for organiza- is (during such ownership) a substantial clusively for the purposes specified in require- tions in Category two . contributor to the foundation, or ment (1) if its articles expressly permit it to Operational test Ð permissible beneficia- operate to support or to benefit any organization c. The beneficial interest of a trust or unin- ries. A supporting organization will be re- other than the specified publicly supported orga- corporated enterprise that is (during garded as operated exclusively to support one nizations. It will not meet the organizational test such ownership) a substantial contribu- or more specified publicly supported organiza- tor to the foundation. even though the actual operations of the organi- tions only if it engages solely in activities that zation have been exclusively for the benefit of support or benefit the specified organizations. 4. A member of the family of any of the indi- the specified publicly supported organizations. viduals just listed. These activities may include making payments Specified organizations. In order to meet to or for the use of, or providing services or 5. A corporation of which more than 35% of requirement (1), an organization must be organ- facilities for, individual members of the charita- the total combined voting power is owned ized and operated exclusively to support or ben- ble class benefited by the specified publicly sup- by persons just listed. efit one or more specified publicly supported ported organization. organizations. The manner in which the publicly 6. A partnership of which more than 35% of For example, a supporting organization may supported organizations must be specified in the the profits interest is owned by persons make a payment indirectly through another un- articles will depend on whether the supporting described in (1), (2), (3), or (4). related organization to a member of a charitable organization is operated, supervised, or con- class benefited by a specified publicly supported 7. A trust, or estate, of which more than 35% trolled by or supervised or controlled in connec- organization, but only if the payment is a grant to of the beneficial interest is owned by per- tion with the organizations or whether it is an individual rather than a grant to an organiza- sons described in (1), (2), (3), or (4). operated in connection with the organizations. tion. Similarly, an organization will be regarded Remember, however, that foundation manag- Generally, the articles of the supporting or- as operated exclusively to support or benefit one ers and publicly supported organizations are ganization must designate each of the specified or more specified publicly supported organiza- not disqualified persons for purposes of the organizations by name, unless: tions even if it supports or benefits a section third requirement under section 509(a)(3). 501(c)(3) organization, other than a private 1. The supporting organization is operated, foundation, that is operated, supervised, or con- If a person who is a disqualified person with supervised, or controlled by or supervised trolled directly by or in connection with a publicly respect to a supporting organization, such as a or controlled in connection with one or substantial contributor, is appointed or desig- supported organization, or an organization that more publicly supported organizations and nated as a foundation manager of the support- is a publicly owned college or university. How- the articles of organization of the support- ing organization by a publicly supported ever, an organization will not be regarded as one ing organization require that it be operated beneficiary organization to serve as the repre- that is operated exclusively to support or benefit to support or benefit one or more benefi- sentative of the publicly supported organization, a publicly supported organization if any part of ciary organizations that are designated by that person is still a disqualified person, rather its activities is in furtherance of a purpose other class or purpose and include: than a representative of the publicly supported than supporting or benefiting one or more speci- organization. fied publicly supported organizations. a. The publicly supported organizations An organization is considered controlled for Operational test Ð permissible activities. referred to above (without designating this purpose if the disqualified persons, by com- A supporting organization does not have to pay the organizations by name), or bining their votes or positions of authority, can its income to the publicly supported organiza- b. publicly supported organizations that require the organization to perform any act that tions to meet the operational test. It can satisfy are closely related in purpose or func- significantly affects its operations or can prevent the test by using its income to carry on an inde- tion to those publicly supported organi- the organization from performing the act. This pendent activity or program that supports or zations, or includes, but is not limited to, the right of any benefits the specified publicly supported organi- substantial contributor or spouse to designate zations. All such support, however, must be lim- 2. A historic and continuing relationship ex- annually the recipients from among the publicly ited to permissible beneficiaries described ists between the supporting organization supported organizations of the income from his earlier. The supporting organization also may and the publicly supported organizations, or her contribution. Except as explained under engage in fundraising activities, such as solicita- and because of this relationship, a sub- Proof of independent control , next, a supporting tions, fundraising dinners, and unrelated trade organization will be considered to be controlled stantial identity of interests has developed or business, to raise funds for the publicly sup- directly or indirectly by one or more disqualified between the organizations. ported organizations or for the permissible ben- persons if the voting power of those persons is eficiaries. If a supporting organization is operated, su- 50% or more of the total voting power of the pervised, or controlled by, or is supervised or organization’s governing body, or if one or more Absence of control by disqualified persons. controlled in connection with, one or more pub- of those persons have the right to exercise veto The third requirement an organization must licly supported organizations, it will not fail the power over the actions of the organization. meet to qualify as a supporting organization test of being organized for the benefit of speci- requires that the organization not be controlled Thus, if the governing body of a foundation is fied organizations solely because its articles: directly or indirectly by one or more disqualified composed of five trustees, none of whom has a 1. Permit the substitution of one publicly sup- persons (other than foundation managers or one veto power over the actions of the foundation, or more publicly supported organizations). ported organization within a designated and no more than two trustees are at any time
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disqualified persons, the foundation is not con- name to satisfy the test. But a supporting organi- way of regulation or otherwise, designed to en- sidered controlled directly or indirectly by one or zation that has one or more specified organiza- sure that the supporting organization remains more disqualified persons by reason of this fact tions designated by name in its articles will not responsive to the needs and demands of the alone. However, all pertinent facts and circum- fail the organizational test solely because its supported organization. stances (including the nature, diversity, and in- articles: come yield of an organization’s holdings, the Integral-part test. The organization will meet 1. Permit a publicly supported organization length of time particular stocks, securities, or this test if it maintains a significant involvement that is designated by class or purpose other assets are retained, and its manner of in the operations of one or more publicly sup- rather than by name to be substituted for exercising its voting rights with respect to stocks ported organizations and these organizations the publicly supported organization or or- in which members of its governing body also are in turn dependent upon the supporting or- ganizations designated by name in the arti- have some interest) are considered in determin- ganization for the type of support that it provides. cles, but only if the substitution is ing whether a disqualified person does in fact To meet this test, either of the following must be conditioned upon the occurrence of an indirectly control an organization. satisfied. event that is beyond the control of the sup- Proof of independent control. An organi- porting organization, such as loss of ex- 1. The activities engaged in for, or on behalf zation is permitted to establish to the satisfaction emption, substantial failure or of, the publicly supported organizations are of the IRS that disqualified persons do not di- abandonment of operations, or dissolution activities to perform the functions of or to rectly or indirectly control it. For example, in the of the organization or organizations desig- carry out the purposes of the organiza- case of a religious organization operated in con- nated in the articles, tions, and, but for the involvement of the nection with a church, the fact that the majority supporting organization, would normally be 2. Permit the supporting organization to oper- of the organization’s governing body is com- engaged in by the publicly supported orga- ate for the benefit of an organization that is posed of lay persons who are substantial con- nizations themselves, or tributors to the organization will not disqualify not a publicly supported organization, but the organization under section 509(a)(3) if a only if the supporting organization is cur- 2. The supporting organization makes pay- representative of the church, such as a bishop or rently operating for the benefit of a publicly ments of substantially all of its income to, other official, has control over the policies and supported organization and the possibility or for the use of, publicly supported organi- decisions of the organization. of its operating for the benefit of other than zations, and the amount of support re- a publicly supported organization is re- ceived by one or more of these publicly Category two. This category includes organi- mote, or supported organizations is enough to en- zations operated in connection with one or more sure the attentiveness of these organiza- 3. Permit the supporting organization to vary organizations described in section 509(a)(1) or tions to the operations of the supporting the amount of its support between different 509(a)(2). These organizations are Type III sup- organization. designated organizations, as long as it porting organizations. They cannot be operated meets the requirements of the integral-part If item (2) is being relied on, a substantial in connection with any supported organization test (discussed later) with respect to at amount of the total support of the supporting that is not organized in the United States. How- least one beneficiary organization. organization also must go to those publicly sup- ever, for a supporting organization that supports ported organizations that meet the attentiveness a foreign organization on August 17, 2006, this If the beneficiary organization referred to in requirement with respect to the supporting or- does not apply until the first day of the organiza- (2) is not a publicly supported organization, the ganization. Except as explained in the next par- tion’s third tax year beginning after August 17, supporting organization will not meet the opera- agraph, the amount of support received by a 2006. tional test. Therefore, if a supporting organiza- publicly supported organization must represent This kind of section 509(a)(3) organization is tion substituted a beneficiary other than a a large enough part of the organization’s total one that has certain types of operational rela- publicly supported organization and operated in support to ensure such attentiveness. In apply- tionships. If an organization is to qualify as a support of that beneficiary, the supporting or- ing this, if the supporting organization makes section 509(a)(3) organization because it is op- ganization would not be one described in sec- payments to, or for the use of, a particular de- erated in connection with one or more publicly tion 509(a)(3). supported organizations, it must not be con- partment or school of a university, hospital, or Method two. If a historic and continuing re- trolled by disqualified persons (as described church, the total support of the department or lationship exists between the supporting organi- earlier) and it must meet an organizational test, school must be substituted for the total support zation and the publicly supported organizations, a responsiveness test, an integral-part test, and of the beneficiary organization. and because of this relationship, a substantial an operational test. Even when the amount of support received identity of interests has developed between the by a publicly supported beneficiary organization organizations, then the articles of organization Organizational test. This test requires that does not represent a large enough part of the will not have to designate the specified organi- the organization, in its governing instrument: beneficiary organization’s total support, the zation by name. amount of support received from a supporting 1. Limit its purposes to supporting one or organization may be large enough to meet the more publicly supported organizations, Responsiveness test. An organization will requirements of item (2) of the integral-part test meet this test if it is responsive to the needs or 2. Designate the organizations operated, su- if it can be demonstrated that, in order to avoid demands of the publicly supported organiza- pervised, or controlled by, and the interruption of a particular function or activ- tions. To meet this test, the publicly supported ity, the beneficiary organization will be suffi- 3. Not have express powers inconsistent with organizations must elect, appoint, or maintain a ciently attentive to the operations of the these purposes. close and continuous working relationship with supporting organization. This may occur when the officers, directors, or trustees of the support- These tests apply to all supporting organiza- either the supporting organization or the benefi- ing organization; consequently, the officers, di- tions. ciary organization earmarks the support re- rectors, or trustees of the publicly supported In the case of an organization that is oper- ceived from the supporting organization for a organizations have a significant voice in the in- ated in connection with one or more publicly particular program or activity, even if the pro- vestment policies of the supporting organiza- supported organizations, however, the designa- gram or activity is not the beneficiary organiza- tion, the timing of grants and the manner of tion requirement under the organizational test tion’s primary program or activity, as long as the making them, the selection of recipients, and can be satisfied using either of the following two program or activity is a substantial one. generally the use of the income or assets of the methods. All factors, including the number of beneficia- supporting organization. ries, the length and nature of the relationship Method one. If an organization is organized Notification requirement. In each tax year, between the beneficiary and supporting organi- and operated to support one or more publicly the Type III supporting organization must notify zation, and the purpose to which the funds are supported organizations and it is operated in each supported organization of its support and put, will be considered in determining whether connection with that type of organization or or- provide each supported organization with any the amount of support received by a publicly ganizations, then its articles of organization information that may be required by the IRS, by supported beneficiary organization is large must designate the specified organizations by
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enough to ensure the attentiveness of the or- chamber of commerce, or other organization under section 509(a)(2). If this type of relation- ganization to the operations of the supporting described in section 501(c)(4), 501(c)(5), or ship is established or used between an organi- organization. 501(c)(6) may qualify as a supporting organiza- zation seeking 509(a)(3) status and two or more Normally, the attentiveness of a beneficiary tion under section 509(a)(3) and therefore not organizations seeking 509(a)(2) status, the organization is motivated by the amounts re- be classified as a private foundation if both the amount and character of support received by the ceived from the supporting organization. Thus, following conditions are met. former organization will be prorated among the the more substantial the amount involved, in latter organizations. 1. The supporting organization must meet all terms of a percentage of the publicly supported In determining whether a relationship exists the requirements previously specified (the organization’s total support, the greater the like- between an organization seeking 509(a)(3) sta- organizational tests, the operational test, lihood that the required degree of attentiveness tus (supporting organization) and one or more and one of the relationship tests and not will be present. However, in determining organizations seeking 509(a)(2) status (benefi- be controlled by disqualified persons). whether the amount received from the support- ciary organizations) for the purpose of avoiding ing organization is large enough to ensure the 2. The section 501(c)(4), 501(c)(5), or private foundation status, all pertinent facts and attentiveness of the beneficiary organization to 501(c)(6) organization would be described circumstances will be taken into account. The the operations of the supporting organization in section 509(a)(2) if it was a charitable following facts may be used as evidence that (including attentiveness to the nature and yield organization described in section such a relationship was not established or of the supporting organization’s investments), 501(c)(3). This provision allows separate availed of to avoid classification as a private evidence of actual attentiveness by the benefi- charitable funds of certain noncharitable foundation. ciary organization is of almost equal importance. organizations to be described in section Imposing this requirement is merely one of 509(a)(3) if the noncharitable organizations 1. The supporting organization is operated to the factors in determining whether a supporting receive their support and otherwise oper- support or benefit several specified benefi- organization is complying with the attentiveness ate in the manner specified by section ciary organizations. test. The absence of this requirement will not 509(a)(2). preclude an organization from classification as a 2. The beneficiary organization has a sub- supporting organization if it complies with the stantial number of dues-paying members Special rules of attribution. To determine other factors. who have an effective voice in the man- whether an organization meets the However, when none of the beneficiary orga- agement of both the supporting and the not-more-than-one-third support test in section nizations are dependent upon the supporting beneficiary organizations. 509(a)(2), amounts received by the organization organization for a large enough amount of their from an organization that seeks to be a section 3. The beneficiary organization is composed support, the requirements of item (2) of the inte- 509(a)(3) organization because of its support of of several membership organizations, each gral-part test will not be satisfied, even though the organization are gross investment income the beneficiary organizations have enforceable of which has a substantial number of mem- (rather than gifts or contributions) to the extent rights against the supporting organization under bers, and the membership organizations they are gross investment income of the distrib- state law. have an effective voice in the management uting organization. (This rule also applies to If an organization cannot meet the require- of the supporting and beneficiary organiza- amounts received from a charitable trust, corpo- ments of item (2) of the integral-part test for its tions. ration, fund, association, or similar organization current tax year solely because the amount re- 4. The beneficiary organization receives a that is required by its governing instrument or ceived by one or more of the beneficiaries from substantial amount of support from the otherwise to distribute, or that normally does the supporting organization is no longer large general public, public charities, or govern- distribute, at least 25% of its adjusted net in- enough, it can still qualify under the integral-part mental grants. come to the organization, and whose distribution test if it can establish that it has met the require- normally comprises at least 5% of its adjusted ments of item (2) of the integral-part test for any 5. The supporting organization uses its funds net income.) All income that is gross investment 5-year period and that there has been an historic to carry on a meaningful program of activi- income of the distributing organization will be and continuing relationship of support between ties to support or benefit the beneficiary considered distributed first by that organization. the organizations between the end of the 5-year organization and, if the supporting organi- If the supporting organization makes distribu- period and the tax year in question. zation were a private foundation, this use tions to more than one organization, the amount would be sufficient to avoid the imposition of gross investment income considered distrib- Operational test. The requirements for meet- of the tax on failure to distribute income. uted will be prorated among the distributees. ing the operational test for organizations oper-ated, supervised, or controlled by publicly 6. The operations of the beneficiary and sup- Also, treat amounts paid by an organization supported organizations (discussed earlier, porting organizations are managed by dif- to provide goods, services, or facilities for the under Qualifying as Publicly Supported ) have direct benefit of an organization seeking section ferent persons, and each organization limited applicability to organizations operated in 509(a)(2) status (rather than for the direct bene- performs a different function. connection with one or more publicly supported fit of the general public) in the same manner as 7. The supporting organization is not able to organizations. This is because the operational amounts received by the latter organization. exercise substantial control or influence requirements of the integral-part test, just dis- These amounts will be treated as gross invest- over the beneficiary organization because cussed, generally are more specific than the ment income to the extent they are gross invest- the beneficiary organization receives sup- general rules found for the operational test in the ment income of the organization spending the port or holds assets that are disproportion- preceding category. However, a supporting or- amounts. An organization seeking section ately large in comparison with the support ganization can fail both the integral-part test and 509(a)(2) status must file a separate statement received or assets held by the supporting the operational test if it conducts activities of its with its annual information return, Form 990 or organization. own that do not constitute activities or programs 990-EZ, listing all amounts received from sup- that would, but for the supporting organization, porting organizations. have been conducted by any publicly supported Effect on 509(a)(3) organizations. If a bene- Relationships created for avoidance pur- organization named in the supporting organiza- ficiary organization fails to meet either of the poses. If a relationship between an organiza- tion’s governing instrument. A similar result oc- support tests of section 509(a)(2) due to these tion seeking section 509(a)(3) status and an curs for such activities or programs that would provisions, and the beneficiary organization is organization seeking section 509(a)(2) status is not have been conducted by an organization one for whose support the organization seeking established or used to avoid classification as a with which the supporting organization has es- section 509(a)(3) status is operated, then the private foundation with respect to either organi- tablished an historic and continuing relationship. supporting organization will not be considered to zation, then the character and amount of sup- be operated exclusively to support or benefit port received by the section 509(a)(3) Supporting other than section 501(c)(3) or- one or more section 509(a)(1) or 509(a)(2) orga- organization will be attributed to the section ganizations. An organization operated in con- nizations and therefore would not qualify for 509(a)(2) organization for purposes of determin- junction with a social welfare organization, labor ing whether the latter meets the support tests section 509(a)(3) status. or agricultural organization, business league,
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Request change in public charity classifica- by publication in the Internal Revenue Bulletin) conduct of its activities for which it was organ- tion. A section 501(c)(3) tax-exempt organiza- or another applicable date, if any, specified in ized, of substantially all (85% or more) of the tion seeking to change its public charity the public notice. In appropriate cases, however, lesser of its: classification from a section 509(a)(3) support- the treatment of grants and contributions and 1. Adjusted net income, or ing organization to a section 509(a)(1) or the status of grantors and contributors to an 509(a)(2) organization has to submit a written organization described in Section 509(a)(1) , 2. Minimum investment return. request for a determination as to public charity Section 509(a)(2) , or Section 509(a)(3) may be status under Revenue Procedure 2010-4, affected pending verification of the continued Assets test. A private foundation will meet 2010-1 I.R.B. 122 available at www.IRS.gov/ classification of the organization. Notice to this the assets test if substantially more than half pub/irs-tege/rp2010-4.pdf. This request has to effect will be made in a public announcement by (65% or more) of its assets are: include the following: the IRS. In these cases, the effect of grants andcontributions made after the date of the an- 1. Devoted directly to the active conduct of its 1. A subject line or other indicator on the first nouncement will depend on the statutory qualifi- exempt activity, to a functionally related page of the request in bold, underlined, or cation of the organization as an organization business, or to a combination of the two, all capitals font indicating ªREQUEST FOR described in section Section 509(a)(1) , Section 2. Stock of a corporation that is controlled by DETERMINATION AS TO PUBLIC CHAR- 509(a)(2) , or Section 509(a)(3) . the foundation (by ownership of at least ITY STATUSº; The preceding paragraph shall not ap- 80% of the total voting power of all classes 2. A statement requesting reclassification ply if the grantor or contributor: of stock entitled to vote and at least 80% of from section 509(a)(3) to another public the total shares of all other classes of charity classification under sections stock) and substantially all (at least 85%) 509(a)(1) and 170(b)(1)(A)(vi) or section 1. Had knowledge of the revocation of the the assets of which are devoted as pro- 509(a)(2); and ruling or determination letter classifying the vided above, or organization as an organization described 3. Either 3. Any combination of (1) and (2). in section 509(a)(1), 509(a)(2), or509(a)(3), or a. A copy of the organization’s signed This test is intended to apply to organizations Form 990, Parts I through XI of Form such as museums and libraries. 2. Was in part responsible for, or was aware 990-EZ, Parts I through VI, with the of, the act, the failure to act, or the sub- Support test. A private foundation will meet completed Schedule A (Form 990 or stantial and material change on the part of the support test if: 990-EZ), Public Charity Status and the organization that gave rise to the revo- Public Support, as filed with the IRS for cation. 1. Substantially all (at least 85%) of its sup- the tax year immediately before the tax port (other than gross investment income) year in which the request is made; or is normally received from the general pub-lic and five or more unrelated exempt orga- b. The organization’s support information Section 509(a)(4) Organizations nizations, for the past 5 completed tax years, us- Section 509(a)(4) excludes from classification ing the organization’s method of ac- 2. Not more than 25% of its support (other as private foundations those organizations that counting used to complete the Form than gross investment income) is normally qualify under section 501(c)(3) as organized and 990 or Form 990-EZ for such years. received from any one exempt organiza- operated for the purpose of testing products for This information can be provided to the tion, and public safety. Generally, these organizations IRS on a completed Schedule A (Form test consumer products to determine their ac- 3. Not more than 50% of its support is nor- 990 or 990-EZ). ceptability for use by the general public. mally received from gross investment in- The request must be signed under penalties come. of perjury by an authorized official and mailed to: Private Operating This test is intended to apply to special-purpose Foundations IRS-TEGE foundations, such as learned societies and as- Attn: Correspondence Unit, Room 4024 sociations of libraries. Some private foundations qualify as private op- P.O. Box 2508 Endowment test. A foundation will meet erating foundations. These are types of private Cincinnati, OH 45201 the endowment test if it normally makes qualify- foundations that, although lacking general pub- ing distributions directly for the active conduct of lic support, make qualifying distributions directly The organization will receive a determination its exempt function of at least two-thirds of its for the active conduct of their educational, chari- letter indicating whether the change in public minimum investment return. table, and religious purposes, as distinct from charity classification has been made. There is merely making grants to other organizations for The minimum investment return for any pri- no user fee for this determination letter. these purposes. vate foundation for any tax year is 5% of theexcess of the total fair market value of all assets Most of the restrictions and requirements Classification under section 509(a). If an or- that apply to private foundations also apply to of the foundation (other than those used directly ganization is described in section 509(a)(1), and private operating foundations. However, there in the active conduct of its exempt purpose) over is also described in either Section 509(a)(2) or are advantages to being classified as a private the amount of indebtedness incurred to acquire Section 509(a)(3) , it will be treated as a section operating foundation. For example, a private those assets. 509(a)(1) organization. operating foundation (as compared to a private In determining whether the amount of quali- The organization will receive a determination foundation) can be the recipient of grants from a fying distributions is at least two-thirds of the letter indicating whether the change in public private foundation without having to distribute organization’s minimum investment return, the charity classification has been made. There is the funds received currently within 1 year, and organization is not required to trace the source no user fee for this determination letter. the funds nevertheless may be treated as quali- of the expenditures to determine whether they Reliance by grantors and contributors. fying distributions by the donating private foun- were derived from investment income or from Once an organization has received a ruling or dation; charitable contributions to a private contributions. determination letter classifying it as an organiza- operating foundation qualify for a higher charita- This test is intended to apply to organizations tion described in Section 509(a)(1) , Section ble deduction limit on the donor’s tax return; and such as research organizations that actively 509(a)(2) , or Section 509(a)(3) , the treatment of the excise tax on net investment income does conduct charitable activities but whose personal grants and contributions and the status of grant- not apply to an exempt operating foundation. services are so great in relationship to charitable ors and contributors to the organization will gen- assets that the cost of those services cannot be erally not be affected by reason of a later Private operating foundation means any pri- met out of small endowments. revocation by the IRS of the organization’s clas- vate foundation that meets the assets test, the Exempt operating foundations. The ex- sification until the date on which notice of support test, or the endowment test, and makes cise tax on net investment income does not change of status is made to the public (generally qualifying distributions directly, for the active
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apply to an exempt operating foundation. An may participate in the formulation of legis- 1. 20% of the exempt purpose expenditures if exempt operating foundation for the tax year is the exempt purpose expenditures are not lation (direct lobbying). any private foundation that: over $500,000, However, the term attempting to influence legis- 2. $100,000 plus 15% of the excess of the lation does not include the following activities. 1. Is an operating foundation, as described exempt purpose expenditures over previously, 1. Making available the results of nonpartisan $500,000 if the exempt purpose expendi- 2. Has been publicly supported for at least 10 analysis, study, or research. tures are over $500,000 but not over tax years or was an operating foundation $1,000,000, 2. Examining and discussing broad social, on January 1, 1983, or for its last tax year economic, and similar problems. 3. $175,000 plus 10% of the excess of the ending before January 1, 1983, exempt purpose expenditures over 3. Providing technical advice or assistance 3. Has a governing body that, at all times $1,000,000 if the exempt purpose expendi- (where the advice would otherwise consti- during the tax year, is broadly representa- tures are over $1,000,000 but not over tute the influencing of legislation) to a gov- tive of the general public and consists of $1,500,000, or ernmental body or to a committee or other individuals no more than 25% of whom are 4. $225,000 plus 5% of the excess of the subdivision thereof in response to a written disqualified individuals, and exempt purpose expenditures over request by that body or subdivision. 4. Does not have any officer, at any time dur- $1,500,000 if the exempt purpose expendi- 4. Appearing before, or communicating with, ing the tax year, who is a disqualified indi- tures are over $1,500,000. any legislative body about a possible deci- vidual. The term exempt purpose expenditures sion of that body that might affect the exis- The foundation must obtain a ruling letter from means the total of the amounts paid or incurred tence of the organization, its powers and the IRS recognizing this special status. (including depreciation and amortization, but not duties, its tax-exempt status, or the deduc- capital expenditures) by an organization for the tion of contributions to the organization. New organization. If you are applying for rec- tax year to accomplish its exempt purposes. In ognition of exemption as an organization de- 5. Communicating with a government official addition, it includes: scribed in section 501(c)(3) and you wish to or employee, other than: establish that your organization is a private op- 1. Administrative expenses paid or incurred erating foundation, you should complete Part X a. A communication with a member or em- for the organization’s exempt purposes, of your exemption application (Form 1023). ployee of a legislative body (when the and communication would otherwise consti- 2. Amounts paid or incurred for the purpose tute the influencing of legislation), or of influencing legislation, whether or not b. A communication with the principal pur- the legislation promotes the organization’s Lobbying Expenditures pose of influencing legislation. exempt purposes.
In general, if a substantial part of the activities of Exempt purpose expenditures do not include Also excluded are communications between an your organization consists of carrying on propa- amounts paid or incurred to or for: organization and its bona fide members about ganda or otherwise attempting to influence leg- legislation or proposed legislation of direct in- 1. A separate fundraising unit of the organi- islation, your organization’s exemption from terest to the organization and the members, zation, or federal income tax will be denied. However, a unless these communications directly en- public charity (other than a church, an integrated 2. One or more other organizations, if the courage the members to attempt to influence auxiliary of a church or of a convention or asso- amounts are paid or incurred primarily for legislation or directly encourage the members ciation of churches, or a member of an affiliated fundraising. to urge nonmembers to attempt to influence group of organizations that includes a church, legislation, as explained earlier. etc.) may avoid this result. Such a charity can Grass roots nontaxable amount. The elect to replace the substantial part of activities grass roots nontaxable amount for any organi- Lobbying expenditures limits. If a public test with a limit defined in terms of expenditures zation for any tax year is 25% of the lobbying charitable organization makes the election to be for influencing legislation. Private foundations nontaxable amount for the organization for that cannot make this election. subject to the lobbying expenditures limits rules tax year. (instead of the substantial part of activities test), Making the election. Use Form 5768, Elec- Years for which election is effective. Once it will not lose its tax-exempt status under sec- tion/Revocation of Election By an Eligible Sec- an organization elects to come under these pro- tion 501(c)(3), unless it normally makes: tion 501(c)(3) Organization To Make visions, the election will be in effect for all tax ·Lobbying expenditures that are more than Expenditures To Influence Legislation, to make years that end after the date of the election and 150% of the lobbying nontaxable amount the election. The form must be signed and post- begin before the organization revokes this elec- for the organization for each tax year, or marked within the first tax year to which it ap- tion. plies. If the form is used to revoke the election, it ·Grass roots expenditures that are more must be signed and postmarked before the first Note. These elective provisions for lobbying than 150% of the grass roots nontaxable day of the tax year to which it applies. activities by public charities do not apply to a amount for the organization for each tax Eligible section 501(c)(3) organizations that church, an integrated auxiliary of a church or of a year. have made the election to be subject to the limits convention or association of churches, or a on lobbying expenditures must use Part II-A of See Tax on excess expenditures to influence member of an affiliated group of organizations Schedule C (Form 990 or 990-EZ) to figure legislation , later, in this section. that includes a church, etc., or a private founda- these limits. tion. Moreover, these provisions will not apply to Lobbying expenditures. These are any any organization for which an election is not in expenditures that are made for the purpose of Attempting to influence legislation. At- effect. tempting to influence legislation, for this pur- attempting to influence legislation, as discussed pose, means: earlier under Attempting to influence legislation . Expenditures of affiliated organizations. If two or more section 501(c)(3) organizations are Grass roots expenditures. This term re- 1. Any attempt to influence any legislation members of an affiliated group of organizations fers only to those lobbying expenditures that are through an effort to affect the opinions of and at least one of these organizations has made to influence legislation by attempting to the general public or any segment thereof made the election regarding the treatment of affect the opinions of the general public or any (grass roots lobbying), and certain lobbying expenditures, then the determi- segment thereof. 2. Any attempt to influence any legislation nation as to whether excess lobbying expendi- Lobbying nontaxable amount. The lobby- through communication with any member tures have been made and the determination as ing nontaxable amount for any organization for or employee of a legislative body or with to whether the expenditure limits, described ear- any tax year is the lesser of $1,000,000 or: any government official or employee who lier, have been exceeded by more than 150%
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will be made as though the affiliated group is one expenditures. An additional tax may be imposed establishment of safeguards to prevent futurepolitical expenditures. organization. on the managers of those organizations.
If the group has excess lobbying expendi- Tax on organization. Organizations that Status after loss of exemption for lobbying tures, each organization for which the election is lose their exemption under section 501(c)(3) or political activities. As explained earlier, an effective for the year will be treated as an organi- organization can lose its tax-exempt status due to lobbying activities generally will be sub- zation that has excess lobbying expenditures in under section 501(c)(3) because of lobbying ac- ject to an excise tax of 5% of the lobbying expen- an amount that equals the organization’s pro- tivities or participation or intervention in a politi- ditures. The tax does not apply to private portionate share of the group’s excess lobbying cal campaign on behalf of or in opposition to a foundations. Also, the tax does not apply to expenditures. Further, if the expenditure limits, candidate for public office. If this happens to an organizations that have elected the lobbying lim- described in this section, are exceeded by more organization, it cannot later qualify for exemp- its of section 501(h) or to churches or than 150%, each organization for which the tion under section 501(c)(4). church-related organizations that cannot elect election is effective for that year will lose its these limits. This tax must be paid by the organi- tax-exempt status under section 501(c)(3). zation. Two organizations will be considered mem- Tax on managers. Managers may also be bers of an affiliated group of organizations if: liable for a 5% tax on the lobbying expenditures 1. The governing instrument of one of the or- that result in the disqualification of the organiza- ganizations requires it to be bound by deci- tion. For the tax to apply, a manager would have 4. sions of the other organization on to agree to the expenditures knowing that the legislative issues, or expenditures were likely to result in the organi-zation’s not being described in section 2. The governing board of one of the organi- 501(c)(3). No tax will be imposed if the man- Other Section zations includes persons who: ager’s agreement is not willful and is due toreasonable cause. a. Are specifically designated representa- 501(c) tives of the other organization or are Excise taxes on political expenditures. The members of the governing board, of- law imposes an excise tax on the political expen- ficers, or paid executive staff members Organizations ditures of section 501(c)(3) organizations. A of the other organization, and two-tier tax is imposed on both the organizations b. Have enough voting power to cause or and the managers of those organizations. prevent action on legislative issues by Introduction Taxes on organizations. An initial tax of the controlled organization by combin- 10% of certain political expenditures is imposed This chapter contains specific information for ing their votes. on a charitable organization. A second tax of certain organizations described in section 100% of the expenditure is imposed if the politi- 501(c), other than those organizations that are cal expenditure that resulted in the imposition of described in section 501(c)(3). Section Tax on excess expenditures to influence leg- the initial (first-tier) tax is not corrected within a 501(c)(3) organizations are covered in chapter 3 islation. If an election for a tax year is in effect specified period. These taxes must be paid by of this publication. for an organization and that organization ex- the organization. The Table of Contents at the beginning of ceeds the lobbying expenditures limits, an ex- this publication, as well as the Organization Ref- cise tax of 25% of the excess lobbying Taxes on managers. An initial tax of 2 1/2% erence Chart , may help you locate at a glance expenditures for the tax year will be imposed. of the amount of certain political expenditures the type of organization discussed in this chap- Excess lobbying expenditures for a tax year, in (up to $5,000 for each expenditure) is imposed ter. this case, means the greater of: on a manager of an organization who agrees tosuch expenditures knowing that they are politi- 1. The amount by which the lobbying expen- cal expenditures. No tax will be imposed if the ditures made by the organization during manager’s agreement was not willful and was the tax year are more than the lobbying 501(c)(4) – Civic due to reasonable cause. A second tax of 50% nontaxable amount for the organization for of the expenditures (up to $10,000 for each that tax year, or Leagues and Social expenditure) is imposed on a manager if he orshe refuses to agree to a correction of the ex- 2. The amount by which the grass roots ex- Welfare Organizations penditures that resulted in the imposition of the penditures made by the organization dur- initial (first-tier) tax. For purposes of these taxes, ing the tax year are more than the grass If your organization is not organized for profit an organization manager is generally an officer, roots nontaxable amount for the organiza- and will be operated only to promote social wel- director, trustee, or any employee having au- tion for that tax year. fare to benefit the community, you should file thority or responsibility concerning the organiza- Form 1024 to apply for recognition of exemption Eligible organizations that have made the elec- tion’s political expenditures. These taxes must from federal income tax under section 501(c)(4). tion to be subject to the limits on lobbying expen- be paid by the manager of the organization. The discussion that follows describes the infor- ditures and that owe the tax on excess lobbying mation you must provide when applying. For Political expenditures. Generally, political expenditures (as computed in Part VI-A of application procedures, see chapter 1. expenditures that will trigger these taxes are Schedule A (Form 990)) must file Form 4720 to To qualify for exemption under section amounts paid or incurred by a section 501(c)(3) report and pay the tax. 501(c)(4), the organization’s net earnings must organization in any participation or intervention Organization that no longer qualifies. An be devoted only to charitable, educational, or in any political campaign for or against any can- organization that no longer qualifies for exemp- recreational purposes. In addition, no part of the didate for public office. Political expenditures tion under section 501(c)(3) because of sub- organization’s net earnings can inure to the ben- include publication or distribution of statements stantial lobbying activities will not at any time efit of any private shareholder or individual. If the for these purposes. Political expenditures also thereafter be treated as an organization de- organization provides an excess benefit to cer- include certain expenditures by organizations scribed in section 501(c)(4). This provision, tain persons, an excise tax may be imposed. that are formed primarily to promote the candi- however, does not apply to certain organizations See Excise tax on excess benefit transactions , dacy (or prospective candidacy) of an individual (churches, etc.) that cannot make the election under Excess Benefit Transactions in chapter 5 for public office and by organizations that are discussed earlier. for more information about this tax. effectively controlled by a candidate and areused primarily to promote that candidate. Tax on disqualifying lobbying expenditures. Examples. Types of organizations that are The law imposes a tax on certain organizations if Correction of expenditure. A correction of considered to be social welfare organizations they no longer qualify under section 501(c)(3) by a political expenditure is the recovery, if possi- are civic associations and volunteer fire compa- reason of having made disqualifying lobbying ble, of all or part of the expenditure and the nies.
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Nonprofit operation. You must submit evi- 501(c)(6) – Business Leagues, etc. for more in- before the local legislature and administra- dence that your organization is organized and formation. tive agencies in zoning, traffic, and parking will be operated on a nonprofit basis. However, matters, such evidence, including the fact that your or- Specific Organizations ·An organization that tries to encourage in- ganization is organized under a state law relat- dustrial development and relieve unem- ing to nonprofit corporations, will not in itself The following information should be contained in ployment in an area by making loans to establish a social welfare purpose. the application form and accompanying state- businesses so they will relocate to the ments of certain types of civic leagues or social area, and Social welfare. To establish that your organi- welfare organizations. zation is organized exclusively to promote social ·An organization that holds an annual festi- Volunteer fire companies. If your organiza- welfare, you should submit evidence with your val of regional customs and traditions. tion wishes to obtain exemption as a volunteer application showing that your organization will fire company or similar organization, you should operate primarily to further (in some way) the submit evidence that its members are actively common good and general welfare of the people engaged in fire fighting and similar disaster as- of the community (such as by bringing about sistance, whether it actually owns the fire fight- 501(c)(5) – Labor, civic betterment and social improvements). ing equipment, and whether it provides any An organization that restricts the use of its Agricultural and assistance for its members, such as death and facilities to employees of selected corporations medical benefits in case of injury to them. and their guests is primarily benefiting a private Horticultural If your organization does not have an inde- group rather than the community. It therefore pendent social purpose, such as providing rec- does not qualify as a section 501(c)(4) organiza- Organizations reational facilities for members, it may be tion. Similarly, an organization formed to repre- exempt under section 501(c)(3). In this event, sent member-tenants of an apartment complex If you are a member of an organization that your organization should file Form 1023. does not qualify, since its activities benefit the wants to obtain recognition of exemption from member-tenants and not all tenants in the com- Homeowners’ associations. A membership federal income tax as a labor, agricultural, or munity. However, an organization formed to pro- organization formed by a real estate developer horticultural organization, you should submit an mote the legal rights of all tenants in a particular to own and maintain common green areas, application on Form 1024. You must indicate in community may qualify under section 501(c)(4) streets, and sidewalks and to enforce covenants your application for exemption and accompany- as a social welfare organization. to preserve the appearance of the development ing statements that no part of the organization’s should show that it is operated for the benefit of net earnings will inure to the benefit of any mem- Political activity. Promoting social welfare all the residents of the community. The term ber. In addition, you should follow the procedure does not include direct or indirect participation or community generally refers to a geographical for obtaining recognition of exempt status de- intervention in political campaigns on behalf of unit recognizable as a governmental subdivi- scribed in chapter 1. Submit any additional infor- or in opposition to any candidate for public of- sion, unit, or district thereof. Whether a particu- mation that may be required, as described in this fice. However, if you submit proof that your or- lar association meets the requirement of section. ganization is organized exclusively to promote benefiting a community depends on the facts social welfare, it can obtain exemption even if it and circumstances of each case. Even if an area Tax treatment of donations. Contributions to participates legally in some political activity on represented by an association is not a commu- labor, agricultural, and horticultural organiza- behalf of or in opposition to candidates for public nity, the association can still qualify for exemp- tions are not deductible as charitable contribu- office. See the discussion in chapter 2 under tion if its activities benefit a community. tions on the donor’s federal income tax return. Political Organization Income Tax Return . The association should submit evidence that However, such payments may be deductible as areas such as roadways and park land that it business expenses if they are ordinary and nec- Social or recreational activity. If social activ- owns and maintains are open to the general essary in the conduct of the taxpayer’s trade or ities will be the primary purpose of your organi- public and not just its own members. It also must business. For more information about certain zation, you should not file an application for show that it does not engage in exterior mainte- limits affecting the deductibility of these busi- exemption as a social welfare organization but nance of private homes. ness expenses, see Deduction not allowed for should file for exemption as a social club de- A homeowners’ association that is not ex- dues used for political or legislative activities , scribed in section 501(c)(7). empt under section 501(c)(4) and that is a con- under 501(c)(6) – Business Leagues, etc. dominium management association, a Retirement benefit program. An organiza- residential real estate management association, tion established by its members that has as its Labor Organizations or a timeshare association generally can elect primary activity providing supplemental retire- under the provisions of section 528 to receive A labor organization is an association of workers ment benefits to its members or death benefits certain tax benefits that, in effect, permit it to who have combined to protect and promote the to their beneficiaries does not qualify as an ex- exclude its exempt function income from its interests of the members by bargaining collec- empt social welfare organization. It may qualify gross income. tively with their employers to secure better work- under another paragraph of section 501(c) de- ing conditions. pending on all the facts. Other organizations. Other nonprofit organi- To show that your organization has the pur- However, a nonprofit association that is es- zations that qualify as social welfare organiza- pose of a labor organization, you should include tablished, maintained, and funded by a local tions include: in the articles of organization or accompanying government to provide the only retirement bene- ·An organization operating an airport that is statements (submitted with your exemption ap- fits to a class of employees may qualify as a on land owned by a local government, plication) information establishing that the or- social welfare organization under section which supervises the airport’s operation, ganization is organized to better the conditions 501(c)(4). and that serves the general public in an of workers, improve the grade of their products, Tax treatment of donations. Donations to area with no other airport, and develop a higher degree of efficiency in their volunteer fire companies are deductible on the respective occupations. In addition, no net earn- ·A community association that works to im- donor’s federal income tax return, but only if ings of the organization can inure to the benefit prove public services, housing, and resi- made for exclusively public purposes. Contribu- of any member. dential parking; publishes a free tions to civic leagues or other section 501(c)(4) community newspaper; sponsors a com- organizations generally are not deductible as Composition of membership. While a labor munity sports league, holiday programs, charitable contributions for federal income tax organization generally is composed of employ- and meetings; and contracts with a private purposes. They may be deductible as trade or ees or representatives of the employees (in the security service to patrol the community, business expenses, if ordinary and necessary in form of collective bargaining agents) and similar the conduct of the taxpayer’s business. How- ·A community association devoted to pre- employee groups, evidence that an organiza- ever, see Deduction not allowed for dues used serving the community’s traditions, archi- tion’s membership consists mainly of workers for political or legislative activities , under tecture, and appearance by representing it does not in itself indicate an exempt purpose.
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You must show in your application that your 5. Encouraging improvements in the produc- Line of business. This term generally re- organization has the purposes described in the tion of fish on privately owned fish farms. fers either to an entire industry or to all compo- preceding paragraph. These purposes can be nents of an industry within a geographic area. It 6. Negotiating with processors for the price to accomplished by a single labor organization act- does not include a group composed of busi- be paid to members for their crops. ing alone or by several organizations acting to- nesses that market a particular brand within an gether through a separate organization. industry.
Benefits to members. The payment by a la- Common business interest. A common bor organization of death, sick, accident, and business interest of all members of the organi- 501(c)(6) – similar benefits to its individual members with zation must be established by the application funds contributed by its members, if made under documents. Business Leagues, etc. a plan to better the conditions of the members, Examples. Activities that would tend to il- does not preclude exemption as a labor organi- If your association wants to apply for recognition lustrate a common business interest are: zation. However, an organization does not qual- of exemption from federal income tax as a non- ify for exemption as a labor organization if it has 1. Promotion of higher business standards profit business league, chamber of commerce, no authority to represent members in job-related and better business methods and encour- real estate board, or board of trade, it should file matters, even if it provides weekly income to its agement of uniformity and cooperation by Form 1024. For a discussion of the procedure to members in the event of a lawful strike by the a retail merchants association, follow, see chapter 1. members’ union, in return for an annual pay- Your organization must indicate in its appli- 2. Education of the public in the use of credit, ment by the member. cation form and attached statements that no part 3. Establishment of uniform casualty rates of its net earnings will inure to the benefit of any Agricultural and and compilation of statistical information by private shareholder or individual and that it is not an insurance rating bureau operated by organized for profit or organized to engage in an Horticultural Organizations casualty insurance companies, activity ordinarily carried on for profit (even if the Agricultural and horticultural organizations are business is operated on a cooperative basis or 4. Establishment and maintenance of the in- connected with raising livestock, forestry, culti- produces only sufficient income to be tegrity of a local commercial market, vating land, raising and harvesting crops or self-sustaining). aquatic resources, cultivating useful or orna- 5. Operation of a trade publication primarily In addition, your organization must be prima- mental plants, and similar pursuits. intended to benefit an entire industry, and rily engaged in activities or functions that are the For the purpose of these provisions, aquatic basis for its exemption. It must be primarily sup- 6. Encouragement of the use of goods and resources include only animal or vegetable life, ported by membership dues and other income services of an entire industry (such as a but not mineral resources. The term harvesting, from activities substantially related to its exempt lawyer referral service whose main pur- in this case, includes fishing and related pur- purpose. pose is to introduce individuals to the use suits. A business league, in general, is an associa- of the legal profession in the hope that Agricultural organizations can be tion of persons having some common business they will enter into lawyer-client relation- quasi-public in character and are often designed interest, the purpose of which is to promote that ships on a paying basis as a result). to encourage the development of better agricul- common interest and not to engage in a regular tural and horticultural products through a system business of a kind ordinarily carried on for profit. Improvement of business conditions. of awards, using income from entry fees, gate Trade associations and professional associa- Generally, this must be shown to be the purpose receipts, and donations to meet the necessary tions are considered business leagues. of the organization. This is not established by expenses of upkeep and operation. When the evidence of particular services that provide a Chamber of commerce. A chamber of com- activities are directed toward the improvement convenience or economy to individual members merce usually is composed of the merchants of marketing or other business conditions in one in their businesses, such as advertising that and traders of a city. or more lines of business, rather than the im- carries the name of members, interest-free provement of production techniques or the bet- loans, assigning exclusive franchise areas, op- Board of trade. A board of trade often con- terment of the conditions of persons engaged in eration of a real estate multiple listing system, or sists of persons engaged in similar lines of busi- agriculture, the organization must qualify for ex- operation of a credit reporting agency. ness. For example, a nonprofit organization emption as a business league, board of trade, or formed to regulate the sale of a specified agricul- other organization, as discussed next in the sec- Stock or commodity exchange. A stock or tural commodity to assure equal treatment of tion on 501(c)(6) organizations. commodity exchange is not a business league, producers, warehouse workers, and buyers is a The primary purpose of exempt agricultural chamber of commerce, real estate board, or board of trade. and horticultural organizations must be to better board of trade and is not exempt under section Chambers of commerce and boards of trade the conditions of those engaged in agriculture or 501(c)(6). usually promote the common economic inter- horticulture, develop more efficiency in agricul- ests of all the commercial enterprises in a given Legislative activity. An organization that is ture or horticulture, or improve the products. trade community. exempt under section 501(c)(6) can work for the The following list contains some examples of enactment of laws to advance the common busi- activities that show an agricultural or horticul- Real estate board. A real estate board con- ness interests of the organization’s members. tural purpose. sists of members interested in improving thebusiness conditions in the real estate field. It is Deduction not allowed for dues used for po- 1. Promoting various cooperative agricultural, not organized for profit and no part of the net litical or legislative activities. A taxpayer horticultural, and civic activities among ru- earnings inures to the benefit of any private cannot deduct the part of dues or other pay- ral residents by a state and county farm shareholder or individual. ments to a business league, trade association, and home bureau. labor union, or similar organization that is for any General purpose. You must indicate in the 2. Exhibiting livestock, farm products, and of the following activities. material submitted with your application that other characteristic features of agriculture your organization will be devoted to the improve- and horticulture. 1. Influencing legislation. ment of business conditions of one or more lines 3. Testing soil for members and nonmembers 2. Participating or intervening in a political of business as distinguished from the perform- of the farm bureau on a cost basis, the campaign for, or against, any candidate for ance of particular services for individual per- results of the tests and other recommenda- public office. sons. It must be shown that the conditions of a tions being furnished to the community particular trade or the interests of the community 3. Trying to influence the general public, or members to educate them in soil treat- will be advanced. Merely indicating the name of part of the general public, with respect to ment. the organization or the object of the local statute elections, legislative matters, or referen- 4. Guarding the purity of a specific breed of under which it is created is not enough to dums (also known as grass roots lobby- livestock. demonstrate the required general purpose. ing).
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4. Communicating directly with certain execu- ·College alumni associations that are not of sick and death benefits is not operating exclu- tive branch officials to try to influence their described in chapter 3 under Alumni asso- sively for pleasure, recreation, and other non- official actions or positions. ciation , profitable purposes.
See Dues Used for Lobbying or Political Activi- ·College fraternities or sororities operating Limited membership. The membership in ties under Required Disclosures in chapter 2 for chapter houses for students, a social club must be limited. To show that your more information. organization has a purpose that would charac- ·Country clubs, terize it as a club, you should submit evidence Exception for local legislation. Members ·Amateur hunting, fishing, tennis, swim- with your application that there are limits on can deduct dues (or assessments) to an organi- ming, and other sport clubs, admission to membership consistent with the zation that are for expenses of: character of the club. ·Dinner clubs that provide a meeting place, A social club that issues corporate member- 1. Appearing before, submitting statements library, and dining room for members, ship is dealing with the general public in the form to, or sending communications to mem- ·Hobby clubs, of the corporation’s employees. Corporate bers of a local council or similar governing members of a club are not the kind of members body with respect to legislation or pro- ·Garden clubs, and contemplated by the law. Gross receipts from posed legislation of direct interest to the ·Variety clubs. these members would be a factor in determining member, or whether the club qualifies as a social club. See 2. Communicating information between the Gross receipts from nonmembership sources , Discrimination prohibited. Your organiza- member and the organization with respect later. Bona fide individual memberships paid for tion will not be recognized as tax exempt if its to local legislation or proposed legislation by a corporation would not have an effect on the charter, bylaws, or other governing instrument, of direct interest to the organization or the gross receipts source. or any written policy statement provides for dis- member. The fact that a social club may have an crimination against any person on the basis of associate (nonvoting) class of membership will Legislation or proposed legislation is of direct race, color, or religion. not be, in and of itself, a cause for nonrecogni- interest to a taxpayer if it will, or can reasonably However, a club that in good faith limits its tion of exemption. However, if one membership be expected to, affect the taxpayer’s trade or membership to the members of a particular re- class pays substantially lower dues and fees business. ligion to further the teachings or principles of that than another membership class, although both religion and not to exclude individuals of a partic- De minimis exception. In-house expendi- classes enjoy the same rights and privileges in ular race or color will not be considered as dis- tures of $2,000 or less for the year for activities using the club facilities, there may be an inure- criminating on the basis of religion. Also, the (1) ± (4) listed earlier will not prevent a deduc- ment of income to the benefited class, resulting restriction on religious discrimination does not tion for dues if the dues meet all other tests to be in a denial of the club’s exemption. apply to a club that is an auxiliary of a fraternal deductible as a business expense. beneficiary society (discussed later) if that soci- Support. In general, your club should be Grass roots lobbying. A tax-exempt trade ety is described in section 501(c)(8) and exempt supported solely by membership fees, dues, association, labor union, or similar organization from tax under section 501(a) and limits its and assessments. However, if otherwise enti- is considered to be engaging in grass roots membership to the members of a particular re- tled to exemption, your club will not be disquali- lobbying if it contacts prospective members or ligion. fied because it raises revenue from members calls upon its own members to contact their through the use of club facilities or in connection Private benefit prohibited. No part of the or- employees and customers for the purpose of with club activities. ganization’s net earnings can inure to the benefit urging such persons to communicate with their of any person having a personal and private Business activities. If your club will engage elected state or Congressional representatives interest in the activities of the organization. For in business, such as selling real estate, timber, to support the promotion, defeat, or repeal of purposes of this requirement, it is not necessary or other products or services, it generally will be legislation that is of direct interest to the organi- that net earnings be actually distributed. Even denied exemption. However, evidence submit- zation. Any dues or assessments directly related undistributed earnings can benefit members. ted with your application form that your organi- to such activities are not deductible by the tax- Examples of this include a decrease in member- zation will provide meals, refreshments, or payer, since the individuals being contacted, ship dues or an increase in the services the club services related to its exempt purposes only to who are not members of the organization, are a provides to its members without a correspond- its own members or their dependents or guests segment of the general public. ing increase in dues or other fees paid for club will not cause denial of exemption. support. However, fixed-fee payments to mem- Tax treatment of donations. Contributions to Facilities open to public. Evidence that bers who bring new members into the club are organizations described in this section are not your club’s facilities will be open to the general not an inurement of the club’s net earnings, if the deductible as charitable contributions on the do- public (persons other than members or their payments are reasonable compensation for per- nor’s federal income tax return. They may be dependents or guests) may cause denial of ex- formance of a necessary administrative service. deductible as trade or business expenses if ordi- emption. This does not mean, however, that any nary and necessary in the conduct of the tax- Purposes. To show that your organization dealing with outsiders will automatically deprive payer’s business. possesses the characteristics of a club within a club of exemption. the meaning of the exemption law, you should Gross receipts from nonmembership submit evidence with your application that per- sources. A section 501(c)(7) organization can sonal contact, commingling, and fellowship exist receive up to 35% of its gross receipts, including 501(c)(7) – Social and among members. You must show that members investment income, from sources outside of its are bound together by a common objective of membership without losing its tax-exempt sta- Recreation Clubs pleasure, recreation, and other nonprofitable tus. Of the 35%, up to 15% of the gross receipts purposes. can be derived from the use of the club’s facili- If your club is organized for pleasure, recreation, Fellowship need not be present between ties or services by the general public or from and other similar nonprofitable purposes and each member and every other member of a club other activities not furthering social or recrea- substantially all of its activities are for these if it is a material part in the life of the organiza- tional purposes for members. If an organization purposes, it should file Form 1024 to apply for tion. A statewide or nationwide organization that has outside income that is more than these recognition of exemption from federal income is made up of individual members, but is divided limits, all the facts and circumstances will be tax. into local groups, satisfies this requirement if taken into account in determining whether the In applying for recognition of exemption, you fellowship is a material part of the life of each organization qualifies for exempt status. should submit the information described in this local group. section. Also see chapter 1 for the procedures to The term other nonprofitable purposes Gross receipts. Gross receipts, for this pur- follow. means other purposes similar to pleasure and pose, are receipts from the normal and usual Typical organizations that should file for rec- recreation. For example, a club that, in addition (traditionally conducted) activities of the club. ognition of exemption as social clubs include: to its social activities, has a plan for the payment These receipts include charges, admissions,
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membership fees, dues, assessments, invest- 1. Is a fraternal organization, ment income, and normal recurring capital gains 2. Operates under the lodge system or for the 501(c)(4), 501(c)(9), and on investments. Receipts do not include initia- exclusive benefit of the members of a fra- tion fees and capital contributions. Unusual ternal organization itself operating under 501(c)(17) – amounts of income, such as from the sale of a the lodge system, and clubhouse or similar facility, are not included in Employees’ 3. Provides for the payment of life, sick, acci- gross receipts or in figuring the percentage lim- dent, or other benefits to the members of its. Associations the society, order, or association or their Fraternity foundations. If your organization dependents. This section describes the information to be pro- is a foundation formed for the exclusive purpose vided upon application for recognition of exemp- of acquiring and leasing a chapter house to a Lodge system. Operating under the lodge tion by the following types of employees’ local fraternity chapter or sorority chapter main- system means carrying on activities under a associations: tained at an educational institution and does not form of organization that comprises local engage in any social or recreational activities, it branches, chartered by a parent organization 1. A voluntary employees’ beneficiary associ- may be a title holding corporation (discussed, and largely self-governing, called lodges, chap- ation (including federal employees’ as- later, under section 501(c)(2) organizations and ters, or the like. sociations) organized to pay life, sick, under section 501(c)(25) organizations) rather Payment of benefits. It is not essential that accident, and similar benefits to members than a social club. every member be covered by the society’s pro- or their dependents, or designated benefi- gram of sick, accident, or death benefits. An Tax treatment of donations. Donations to ciaries, if no part of the net earnings of the organization can qualify for exemption if most of exempt social and recreation clubs are not de- association inures to the benefit of any pri- its members are eligible for benefits, and the ductible as charitable contributions on the do- vate shareholder or individual, and benefits are paid from contributions or dues paid nor’s federal income tax return. by those members. 2. A supplemental unemployment benefit The benefits must be limited to members and trust whose primary purpose is providing their dependents. If members will have the abil- for payment of supplemental unemploy- ity to confer benefits to other than themselves ment benefits. 501(c)(8) and 501(c)(10) and their dependents, exemption will not be rec- Both the application form to file and the infor- ognized. – Fraternal Beneficiary mation to provide are discussed later under the Whole-life insurance. Whole-life insurance section that describes your employee associa- Societies and constitutes a life benefit under section 501(c)(8) tion. Chapter 1 describes the procedures to fol- even though the policy may contain investment low in applying for exemption. Domestic Fraternal features such as a cash surrender value or apolicy loan. Societies Tax treatment of donations. Donations to Reinsurance pool. Payments by a fraternal these organizations are not deductible as chari- beneficiary society into a state-sponsored rein- This section describes the information to be pro- surance pool that protects participating insurers table contributions on the donor’s federal in- vided upon application for recognition of exemp- against excessive losses on major medical come tax return. tion by two types of fraternal societies: health and accident insurance will not preclude beneficiary and domestic. The major distinction exemption as a fraternal beneficiary society. is that fraternal beneficiary societies provide for Local Employees’ the payment of life, sick, accident, or other bene- Associations (501(c)(4)) fits to their members or their dependents, while Domestic Fraternal Societies domestic fraternal societies do not provide these (501(c)(10)) A local association of employees whose mem- benefits but rather devote their earnings to fra- bership is limited to employees of a designated ternal, religious, charitable, etc., purposes. The A domestic fraternal society, order, or associa- person or persons in a particular municipality, procedures to follow in applying for recognition tion must file an application for recognition of and whose income will be devoted exclusively to of exemption are described in chapter 1. exemption from federal income tax on Form charitable, educational, or recreational pur- 1024. The application and accompanying state- If your organization is controlled by a central poses. A local employees’ association must ap- ments should establish that the organization: organization, you should check with your con- ply for recognition of exemption by filing Form trolling organization to determine whether your 1. Is a domestic fraternal organization, 1024. The organization must submit evidence unit has been included in a group exemption that: letter or can be added. If so, your organization 2. Operates under the lodge system, need not apply for individual recognition of ex- 1. It is of a purely local character, 3. Devotes its net earnings exclusively to re- emption. For more information see Group Ex- ligious, charitable, scientific, literary, edu- emption Letter in chapter 1 of this publication. 2. Its membership is limited to employees of cational, and fraternal purposes, and a designated person or persons in a partic- Tax treatment of donations. Donations by an 4. Does not provide for the payment of life, ular locality, and individual to a domestic fraternal beneficiary so- sick, accident, or other benefits to its mem- 3. Its net earnings will be devoted exclusively ciety or a domestic fraternal society operating bers. to charitable, educational, or recreational under the lodge system are deductible as chari- The organization can arrange with insurance purposes. table contributions only if used exclusively for companies to provide optional insurance to its religious, charitable, scientific, literary, or educa- A local association of employees that has members without jeopardizing its exempt status. tional purposes or for the prevention of cruelty to established a system of paying retirement or children or animals. death benefits, or both, to its members will not
qualify for exemption since the payment of these Fraternal Beneficiary benefits is not considered as being for charita- Societies (501(c)(8)) ble, educational, or recreational purposes. Simi-
larly, a local association of employees that is A fraternal beneficiary society, order, or associa- operated primarily as a cooperative buying serv- tion must file an application for recognition of ice for its members in order to obtain discount exemption from federal income tax on Form prices on merchandise, services, and activities 1024. The application and accompanying state- does not qualify for exemption. ments should establish that the organization:
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they are or were employees. For example, an gross income, these nondiscrimination require- Voluntary Employees’ individual will qualify as an employee even ments do not apply. The benefit will be consid- Beneficiary Associations though the individual is on a leave of absence or ered nondiscriminatory only if it meets the (501(c)(9)) has been terminated due to retirement, disabil- nondiscrimination provision of the applicable ity, or layoff. Code section. For example, benefits provided An application for recognition of exemption as a Generally, membership is voluntary if an af- under a medical reimbursement plan would voluntary employees’ beneficiary association firmative act is required on the part of an em- meet the nondiscrimination requirements for an must be filed on Form 1024. The material sub- ployee to become a member. Conversely, association, if the benefits meet the nondiscrimi- mitted with the application must show that your membership is involuntary if the designation as nation requirements of Code section 105(h)(3) organization: a member is due to employee status. However, and 105(h)(4). an association will be considered voluntary if 1. Is a voluntary association of employees, Excluded employees. Certain employees employees are required to be members of the who are not covered by a plan can be excluded 2. Will provide for payment of life, sick, acci- organization as a condition of their employment from consideration in applying these require- dent, or other benefits to members or their and they do not incur a detriment (such as a ments. These include employees: dependents or designated beneficiaries payroll deduction) as a result of their member- and substantially all of its operations are ship. An employer has not imposed involuntary 1. Who have not completed 3 years of serv- for this purpose, and membership on the employee if membership is ice, required as the result of a collective bargaining 3. Will not allow any of its net earnings to 2. Who have not attained age 21, agreement or as an incident of membership in a inure to the benefit of any private individual labor organization. 3. Who are seasonal or less than half-time or shareholder except in the form of sched- employees, uled benefit payments. Payment of benefits. The information submit- ted with your application must show that your 4. Who are not in the plan and who are in- To be complete, an application must include a organization will pay life, sick, accident, supple- cluded in a unit of employees covered by a copy of the document (such as the trust instru- mental unemployment, or other similar benefits. collective bargaining agreement if the ment) by which the organization was created; a The benefits can be provided directly by your class of benefits involved was the subject full description of the benefits available to par- association or indirectly by your association of good faith bargaining, or ticipants and the terms and conditions of eligibil- through the payments of premiums to an insur- ity for benefits (usually contained in a plan 5. Who are nonresident aliens and who re- ance company (or fees to a medical clinic). Ben- document); and, if providing benefits pursuant to ceive no earned income from the employer efits can be in the form of medical, clinical, or a collective bargaining agreement, a copy of that that has United States source income. hospital services, transportation furnished for agreement. medical care, or money payments. Highly compensated individual. A highly Note. Under section 4976, the reversion of compensated individual is one who: Nondiscrimination requirements. An organ- funds from a section 501(c)(9) organization to ization that is part of a plan will not be exempt the employer who created the beneficiary asso- 1. Owned 5 percent or more of the employer unless the plan meets certain nondiscrimination ciation may subject the employer to a 100 % at any time during the current year or the requirements. However, if the organization is penalty excise tax on the amount of the rever- preceding year, part of a plan that is a collective bargaining sion. agreement that was the subject of good faith 2. Received more than $110,000 in 2009 (the bargaining between employee organizations amount is adjusted annually for inflation ± Notice requirement. An organization will not and employers, the plan need not meet these in 2010 the amount remains at $110,000) be considered tax exempt under this section requirements for the organization to qualify as in compensation from the employer for the unless the organization gives notice to the IRS tax exempt. preceding year, and that it is applying for recognition of exempt sta- A plan meets the nondiscrimination require- tus. The organization gives notice by filing Form 3. Was among the top 20% of employees by ments only if both of the following statements 1024. If the notice is not given by 15 months compensation for the preceding year. are true. after the end of the month in which the organiza- But the employer can choose not to have (3) tion was created, the organization will not be 1. Each class of benefits under the plan is apply. exempt for any period before notice is given. An provided under a classification of employ- extension of time for filing the notice can be Aggregation rules. The employer can ees that is set forth in the plan and does granted under the same procedures as those choose to treat two or more plans as one plan for not discriminate in favor of employees who described for section 501(c)(3) organizations in purposes of meeting the nondiscrimination re- are highly compensated individuals. chapter 3 under Application for Recognition of quirements. Employees of controlled groups of 2. The benefits provided under each class of Exemption . corporations, trades, or businesses under com- benefits do not discriminate in favor of mon control, or members of an affiliated service Membership. Membership of a section highly compensated individuals. group, are treated as employees of a single 501(c)(9) organization must consist of individu- employer. Leased employees are treated as A life insurance, disability, severance pay, or als who are employees and have an employ- employees of the recipient. supplemental unemployment compensation ment-related common bond. This common bond benefit does not discriminate in favor of highly One employee. A trust created to provide can be a common employer (or affiliated em- compensated individuals merely because the benefits to one employee will not qualify as a ployers), coverage under one or more collective benefits available bear a uniform relationship to voluntary employees’ beneficiary association bargaining agreements, membership in a labor the total compensation, or the basic or regular under section 501(c)(9). union, or membership in one or more locals of a rate of compensation, of employees covered by national or international labor union. the plan. The membership of an association can in- Supplemental For purposes of determining whether a plan clude some individuals who are not employees, Unemployment Benefit meets the nondiscrimination requirements, the provided they have an employment-related employer can elect to exclude all disability or Trusts (501(c)(17)) 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 trust or trusts forming part of a written plan are members of the association can be a mem- not apply to any increase in such payment by (established and maintained by an employer, his ber. An association will be considered com- any plan amendment adopted after June 22, or her employees, or both) providing solely for posed of employees if 90% of its total 1984. the payment of supplemental unemployment membership on one day of each quarter of its If a plan provides a benefit for which there is compensation benefits must file the application tax year consists of employees. a nondiscrimination provision provided under for recognition of exemption on Form 1024. The Employees. Employees include individuals Chapter 1 of the Internal Revenue Code as a trust must be a valid, existing trust under local who became entitled to membership because condition of that benefit being excluded from law and must be evidenced by an executed
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document. A conformed copy of the plan of that it will not knowingly again engage in a pro- any excess of payments over losses and ex- hibited transaction. An authorized principal of- which the trust is a part should be attached to penses, and to share in any assets upon disso- ficer of your organization must make this the application. lution. declaration under the penalties of perjury. To be complete, an application must include The rights and interests of members in the If your organization has satisfied all require- a copy of the document (such as the trust instru- annual savings of the organization must be de- ments as a supplemental unemployment benefit ment) by which the organization was created; a termined in proportion to their business with the trust described in section 501(c)(17), it will be full description of the benefits available to par- organization. Upon dissolution, gains from the notified in writing that it has been recognized as ticipants and the terms and conditions of eligibil- sale of appreciated assets must be distributed to exempt. However, the organization will be ex- ity for benefits (usually contained in a plan all persons who were members during the pe- empt only for those tax years after the tax year in document); and, if providing benefits pursuant to riod the assets were owned by the organization which the claim for exemption (Form 1024) is a collective bargaining agreement, a copy of that in proportion to the amount of business done filed. Tax year in this case means the estab- agreement. during that period. The bylaws must not provide lished annual accounting period of the organiza- for forfeiture of a member’s rights and interest tion or, if the organization has not established an Note. Under Code section 4976, the rever- upon withdrawal or termination. annual accounting period, the calendar year. sion of funds from a section 501(c)(17) organi- Membership. Membership of a mutual or- For more information about the requirements for zation to the employer who created the ganization consists of those who join the organi- reestablishing an exemption previously denied, supplemental unemployment benefit trust may zation to obtain its services, and have a voice in contact the IRS. subject the employer to a 100% penalty excise its management. In a stock company, the stock- tax on the amount of the reversion. holders are members. However, a mutual lifeinsurance organization cannot have policyhold- Notice requirement. An organization will not ers other than its members. be considered tax exempt under this section 501(c)(12) – Local unless the organization gives notice to the IRS Losses and expenses. In furnishing serv- Benevolent Life that it is applying for recognition of exempt sta- ices substantially at cost, an organization must tus. The organization gives notice by filing Form use its income solely for paying losses and ex- Insurance 1024. If the notice is not given by 15 months penses. Any excess income not retained in rea- after the end of the month in which the organiza- sonable reserves for future losses and Associations, Mutual tion was created, the organization will not be expenses belongs to members in proportion to exempt for any period before such notice is their patronage or business done with the organ- Irrigation and given. An extension of time for filing the notice is ization. If such patronage refunds are retained in granted under the same procedures as those Telephone Companies, reasonable amounts for purposes of expanding described for section 501(c)(3) organizations in and improving facilities, retiring capital indebted- chapter 3 under Application for Recognition of and Like Organizations ness, acquiring other assets, and unexpected Exemption . expenses, the organization must maintain rec- Each of the following organizations apply for ords sufficient to reflect the equity of each mem- Types of payments. You must show that the recognition of exemption from federal income ber in the assets acquired with the funds. supplemental unemployment compensation tax by filing Form 1024. benefits will be benefits paid to an employee Distributions of proceeds. The coopera- because of the employee’s involuntary separa- 1. Benevolent life insurance associations of a tive may distribute the unexpended balance of tion from employment (whether or not the sepa- purely local character and like organiza- collections or assessments remaining on hand ration is temporary) resulting directly from a tions. at the end of the year to members or patrons reduction-in-force, discontinuance of a plant or prorated on the basis of their patronage or busi- 2. Mutual ditch or irrigation companies and operation, or other similar conditions. In addi- ness done with the cooperative. Such distribu- like organizations. tion, sickness and accident benefits (but not tion represents a refund in the costs of services 3. Mutual or cooperative telephone compa- vacation, retirement, or death benefits) may be rendered to the member. nies and like organizations. included in the plan if these are subordinate tothe unemployment compensation benefits. The 85% Requirement A like organization is an organization that per-forms a service comparable to that performed by Diversion of funds. It must be impossible All of the organizations listed above must submit any one of the above organizations. under the plan (at any time before the satisfac- evidence with their application that they receive The information to be provided upon appli- tion of all liabilities with respect to employees 85% or more of their gross income from their cation by each of these organizations is de- under the plan) to use or to divert any of the members for the sole purpose of meeting losses scribed in this section. For information as to the corpus or income of the trust to any purpose and expenses. Nevertheless, certain items of procedures to follow in applying for exemption, other than the payment of supplemental unem- income are excluded from the computation of see chapter 1. ployment compensation benefits (or sickness or the 85% requirement if the organization is a accident benefits to the extent just explained). General requirements. These organizations mutual or cooperative telephone or electric com- must use their income solely to cover losses and pany. Discrimination in benefits. Neither the terms expenses, with any excess being returned to of the plan nor the actual payment of benefits members or retained to cover future losses and Mutual or cooperative telephone company. can be discriminatory in favor of the company’s expenses. They must collect at least 85% of A mutual or cooperative telephone company will officers, stockholders, supervisors, or highly their income from members for the sole purpose exclude from the computation of the 85% re- paid employees. However, a plan is not discrimi- of meeting losses and expenses. quirement any income received or accrued from: natory merely because benefits bear a uniform Mutual character. These organizations, other relationship to compensation or the rate of com- 1. A nonmember telephone company for the than benevolent life insurance associations, pensation. performance of communication services in- must be organized and operated on a mutual or volving the completion of long distance Prohibited transactions and exemption. If cooperative basis. They are associations of per- calls to, from, or between members of the your organization is a supplemental unemploy- sons or organizations, or both, banded together mutual or cooperative telephone company, ment benefit trust and has received a denial of to provide themselves a mutually desirable serv- exemption because it engaged in a prohibited 2. Qualified pole rentals, ice approximately at cost and on a mutual basis. transaction, as defined by section 503(b), it can To maintain the mutual characteristic of demo- 3. The sale of display listings in a directory file a claim for exemption in any tax year follow- cratic ownership and control, they must be so furnished to its members, or ing the tax year in which the notice of denial was organized and operated that their members issued. It must file the claim on Form 1024. The 4. The prepayment of a loan created in 1987, have the right to choose the management, to organization must include a written declaration 1988, or 1989, under section 306A, 306B, receive services at cost, to receive a return of
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or 311 of the Rural Electrification Act of has no effect upon exemption for years in which include those that in addition to paying death the 85% requirement is met. benefits also provide for the payment of sick, 1936. Gain from the sale or conversion of the or- accident, or health benefits. However, an organ- ganization’s property is not considered an ization that pays only sick, accident, or health Mutual or cooperative electric company. A amount received from members in determining benefits, but not life insurance benefits, is not an mutual or cooperative electric company will ex- whether the organization’s income consists of organization similar to a benevolent life insur- clude from the computation of the 85% require- amounts collected from members. ance association and should not apply for recog- ment any income received or accrued from: Because the 85% income test is based on nition of exemption as described in this section. gross income, capital losses cannot be used to 1. Qualified pole rentals, Burial and funeral benefit insurance or- reduce capital gains for purposes of this test. ganization. This type of organization can ap- 2. Any provision or sale of electric energy Example. The books of an organization re- ply for recognition of exemption as an transmission services or ancillary service if flect the following for the calendar year. organization similar to a benevolent life insur- the services are provided on a nondiscrimi- ance company if it establishes that the benefits natory open access basis under an open Collections from members ……. . $2,400 are paid in cash and if it is not engaged directly access transmission tariff approved or ac- Short-term capital gains …….. . 600 in the manufacture of funeral supplies or the cepted by the Federal Energy Regulatory Short-term capital losses …….. . 400 performance of funeral services. An organiza- Commission (FERC) or under an indepen- Other income …………… . None tion that provides its benefits in the form of dent transmission provider agreement ap- Gross income ($2,400 + $600 =$3000) 100% supplies and service is not a life insurance com- proved or accepted by FERC (other than Collected from members ($2,400) .. . 80% pany. Such an organization can seek recogni- income received or accrued directly or indi- tion of exemption from federal income tax, Since amounts collected from members do rectly from a member), however, as a mutual insurance company other not constitute at least 85% of gross income, the than life. organization is not entitled to exemption from 3. The provision or sale of electric energy dis- federal income tax for the year. tribution services or ancillary services if the Voluntary contributions in the nature of gifts services are provided on a nondiscrimina- Mutual or Cooperative are not taken into account for purposes of the tory open-access basis to distribute elec- Associations 85% computation. tric energy not owned by the mutual or Other tax-exempt income besides gifts is electric cooperative company: Mutual ditch or irrigation companies, mutual or considered as income received from other than cooperative telephone companies, and like or- a. To end-users who are served by distri- members in applying the 85% test. ganizations need not establish that they are of a bution facilities not owned by the com- If the 85% test is not met, your organization, purely local character. They can serve noncon- pany or any of its members (other than if classifiable under this section, will not qualify tiguous areas. income received or accrued directly or for exemption as any other type of organization Like organization. A like organization is a indirectly from a member), or described in this publication. cooperative or mutual organization that per- b. Generated by a generation facility not Tax treatment of donations. Donations to an forms a service similar to mutual ditch, irrigation, owned or leased by the company or any organization described in this section are not telephone, or electric companies. Examples in- of its members and which is directly deductible as charitable contributions on the do- clude the following: cooperatives that provide connected to distribution facilities nor’s federal income tax return. protection of river banks to prevent erosion, owned by the company or any of its water and sewer services, cable television, sat- members (other than income received Local Life Insurance ellite, television, cellular phone services, or accrued directly or indirectly from a two-way radio service, or natural gas services. Associations member),
A benevolent life insurance association or an 4. Any nuclear decommissioning transaction, organization seeking recognition of exemption or on grounds of similarity to a benevolent life in- 501(c)(13) – Cemetery surance association must submit evidence upon 5. Any asset exchange or conversion trans- applying for recognition of exemption that it will action. Companies be of a purely local character, that its excess An electric cooperative’s sale of excess fuel funds will be refunded to members or retained in If your organization wishes to obtain recognition at cost in the year of purchase is not income for reasonable reserves to meet future losses and of exemption from federal income tax as a cem- purposes of determining compliance with the expenses, and that it meets the 85% income etery company or a corporation chartered solely 85% requirement. requirement. If an organization issues policies for the purpose of the disposal of human bodies for stipulated cash premiums, or if it requires by burial or cremation, it must file an application Qualified pole rental. The term qualified advance deposits to cover the cost of the insur- on Form 1024. For the procedure to follow to file pole rental means any rental of a pole (or other ance and maintains investments from which an application, see Application, Approval, and structure used to support wires) if the pole (or more than 15% of its income is derived, it will not Appeal Procedures in chapter 1. other structure) is used: be entitled to exemption. A nonprofit mutual cemetery company that To establish that your organization is of a 1. By the telephone or electric company to seeks recognition of exemption should submit purely local character, it should show that its support one or more wires that are used by evidence with its application that it is owned and activities will be confined to a particular commu- the company in providing telephone or operated exclusively for the benefit of its lot nity, place, or district irrespective of political sub- electric services to its members, and owners who hold lots for bona fide burial pur- divisions. If the activities of an organization are poses and not for purposes of resale. A mutual 2. Pursuant to the rental to support one or limited only by the borders of a state, it cannot cemetery company that also engages in charita- more wires (in addition to wires described be purely local in character. A benevolent life ble activities, such as the burial of paupers, will in (1)) for use in connection with the trans- insurance association that does not terminate be regarded as operating within this standard. mission by wire of electricity or of tele- membership when a member moves from the The fact that a mutual cemetery company limits phone or other communications. local area in which the association operates will its membership to a particular class of individu- qualify for exemption if it meets the other re- The term rental, for this purpose, includes als, such as members of a family, will not affect quirements. any sale of the right to use the pole (or other its status as mutual so long as all the other A copy of each type of policy issued by your structure). requirements of section 501(c)(13) are met. organization should be included with the appli- The 85% requirement is applied on the basis If your organization is a nonprofit corporation cation for recognition of exemption. of an annual accounting period. Failure of an chartered solely for the purpose of the disposal organization to meet the requirement in a partic- of human bodies by burial or cremation, you Organizations similar to local benevolent life ular year precludes exemption for that year, but should show that it is not permitted by its charter insurance companies. These organizations
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to engage in any business not necessarily inci- perpetual care and maintenance of an aban- dent to that purpose. Operating a mortuary is not doned cemetery as a whole, may qualify for 501(c)(14) – Credit permitted. However, selling monuments, mark- exemption. ers, vaults, and flowers solely for use in the Unions and Other Care of individual plots. When funds are cemetery is permitted if the profits from these received by a cemetery company for the perpet- sales are used to maintain the cemetery as a Mutual Financial ual care of an individual lot or crypt, a trust is whole. created that is subject to federal income tax. Any Organizations How income can be used. You should show trust income that is used or permanently set that your organization’s earnings are or will be aside for the care, maintenance, or beautifica- If your organization wants to obtain recognition used only in one or more of the following ways. of exemption as a credit union without capital tion of a particular family burial lot or mausoleum stock, organized and operated under state law crypt is not deductible in computing the trust’s 1. To pay the ordinary and necessary ex- for mutual purposes and without profit, it must taxable income. penses of operating, maintaining, and im- file an application that includes the facts, infor- proving the cemetery or crematorium. mation, and attachments described in this sec- 2. To buy cemetery property. Common and preferred stock. A cemetery tion. In addition, it should follow the procedures company that issues common stock can qualify 3. To create a fund that will provide a source for filing an application described in Application for exemption only if no dividends may be paid. of income for the perpetual care of the Procedures in chapter 1. The payment of dividends must be legally pro- cemetery or a reasonable reserve for any Federal credit unions organized and oper- hibited either by the corporation’s charter or by ordinary or necessary purpose. ated in accordance with the Federal Credit applicable state law. Union Act, as amended, are instrumentalities of No part of the net earnings of your organiza- Generally, a cemetery company or cremato- the United States and, therefore, are exempt tion can inure to the benefit of any private share- rium is not exempt if it issues preferred stock. under section 501(c)(1). They are included in a holder or individual. Ordinary and necessary expenses in con- group exemption letter issued to the National However, it can still be exempt if the preferred nection with the operation, management, main- Credit Union Administration. They are not dis- stock was issued before November 28, 1978, or tenance, and improvement of the cemetery are cussed in this publication. was issued after that date under a written plan permitted, as are reasonable fees for the serv- State-chartered credit unions and other mu- adopted before that date. The adoption of the ices of a manager. tual financial organizations file applications for plan must be shown by the acts of the responsi- recognition of exemption from federal income Buying cemetery property. Payments can ble officers and appear on the official records of tax under section 501(c)(14). The other mutual be made to amortize debt incurred to buy land, the organization. financial organizations must be corporations or but cannot be in the nature of profit distributions. The preferred stock issued either before No- You must show the method used to finance the associations without capital stock organized vember 28, 1978, or under a plan adopted purchase of the cemetery property and that the before September 1, 1957, and operated for before that date, must meet all the following purchase price of the land at the time of its sale mutual purposes and without profit to provide requirements. to the cemetery was not unreasonable. reserve funds for, and insurance of, shares or Except for holders of preferred stock (dis- deposits in: 1. The preferred stock entitles the holders to cussed later), no person can have any interest in dividends at a fixed rate that is not more 1. Domestic building and loan associations, the net earnings of a tax-exempt cemetery com- than the greater of the legal rate of interest pany or crematorium. Therefore, if property is 2. Cooperative banks (without capital stock) in the state of incorporation or 8% a year transferred to the organization in exchange for organized and operated for mutual pur- on the value of the consideration for which an interest in the organization’s net earnings, poses and without profit, the organization will not be exempt so long as the stock was issued. that interest remains outstanding. 3. Mutual savings banks (not having capital 2. The organization’s articles of incorporation An equity interest in the organization is an stock represented by shares), or require: interest in the net earnings of the organization. 4. Mutual savings banks described in section However, an interest in the organization that is a. That the preferred stock be retired at 591(b). not an equity interest may still be an interest in par as rapidly as funds become avail- the organization’s net earnings. For example, a Similar organizations, formed before September able from operations, and bond issued by a cemetery company that pro- 1, 1957, that provide reserve funds for (but not vides for a fixed rate of interest and also pro- b. That all funds not required for the pay- insurance of shares or deposits in) one of the vides for additional interest payments based on ment of dividends on or for the retire- types of savings institutions described in (1), (2), the income of the organization is considered an ment of preferred stock be used by the or (3) above may be exempt from tax if 85% or interest in the net earnings of the organization. more of the organization’s income is from pro- company for the care and improvement Similarly, a convertible debt obligation issued viding reserve funds and from investments. of the cemetery property. after July 7, 1975, is considered an interest in There is no specific restriction against the issu- the net earnings of the organization. ance of capital stock for these organizations. Perpetual care organization. A perpetual Building and loan associations, savings and Tax treatment of donations. Donations to care organization, including, for example, a trust loan associations, mutual savings banks, and exempt cemetery companies, corporations organized to receive, maintain, and administer cooperative banks, other than those described chartered solely for human burial purposes, and funds that it receives from a nonprofit in this section, are not exempt from tax. How- perpetual care funds (operated in connection tax-exempt cemetery under state law and con- ever, certain corporations organized and oper- tracts, can apply for recognition of exemption on with such exempt organizations) are deductible ated in conjunction with farmers’ cooperatives Form 1024, even though it does not own the as charitable contributions on the donor’s fed- can be exempt under section 521. land used for burial. However, the income from eral income tax return. However, a donor cannot these funds must be devoted exclusively to the deduct a contribution made for the perpetual Application form. The IRS does not provide a perpetual care and maintenance of the nonprofit care of a particular lot or crypt. Payments made printed application form for the use of organiza- cemetery as a whole. Also, no part of the net to a cemetery company or corporation as part of tions described in this section. Any form of writ- earnings can inure to the benefit of any private the purchase price of a burial lot or crypt, ten application is acceptable as long as it shows shareholder or individual. whether irrevocably dedicated to the perpetual the information indicated in this section and in- In addition, a perpetual care organization not care of the cemetery as a whole or earmarked cludes a declaration that it is made under the operated for profit, but established as a civic for the care of a particular lot, are also not penalties of perjury. The application must be enterprise to maintain and administer funds, the submitted in duplicate. deductible. income of which is devoted exclusively to the
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income is from providing reserve funds and from 7. To provide insurance benefits for its mem- State-Chartered bers or dependents of its members or investments. There should be attached a con- Credit Unions both. formed copy of the articles of incorporation orother document setting forth the permitted pow- Your organization must show on its application 8. To provide social and recreational activi- ers or activities of the organization; the bylaws or that it is formed under a state credit union law, ties for its members. other similar code of regulations; and the latest the state and date of incorporation, and that the annual financial statement showing the receipts, state credit union law with respect to loans, Auxiliary unit. An auxiliary unit or society of a disbursements, assets, and liabilities of the or- investments, and dividends, if any, is being com- veterans’ organization can apply for recognition ganization. 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- auxiliary unit or society must also meet all the ments for credit unions, and may be used 501(c)(19) – Veterans’ following additional requirements. instead of the statement form of application justdescribed. The following is a reproduction of that Organizations 1. It is affiliated with, and organized in accor- form. dance with, the bylaws and regulations for- A post or organization of past or present mem- mulated by the parent organization. Claim for Exemption from Federal Income bers of the Armed Forces of the United States 2. At least 75% of its members are either Tax (Date) The must file Form 1024 to apply for recognition of past or present members of the U.S. undersigned (Complete name) exemption from federal income tax. You should Armed Forces, spouses of those mem- Credit Union, Inc., (Complete ad- follow the general procedures outlined in chap- bers, or related to those members within dress, including street and number), a credit ter 1. The organization must also meet the quali- two degrees of kinship (grandparent, union operating under the credit union law of the fications described in this section. brother, sister, and grandchild represent State of , claims exemption from Examples of groups that qualify for exemp- the most distant allowable relationship). federal income tax and supplies the following tion are posts or auxiliaries of the American information relative to its operation. 3. All of its members either are members of Legion, Veterans of Foreign Wars, and similar the parent organization, spouses of a organizations. 1. Date of incorporation . member of the parent organization, or re- To qualify for recognition of exemption, your 2. It was incorporated under the credit union lated to a member of such organization application should show: law of the State of , and is within two degrees of kinship. being operated under uniform bylaws 1. That the post or organization is organized 4. No part of its net earnings inure to the adopted by said state. in the United States or any of its posses- benefit of any private shareholder or indi- sions, 3. In making loans, the state credit union law vidual. requirements, including their purposes, se- 2. That at least 75% of the members are past curity, and rate of interest charged or present members of the U.S. Armed Trusts or foundations. Trusts or foundations thereon, are complied with. for a veterans’ organization also can apply for Forces and that at least 97.5% of all mem- recognition of exemption provided that the par- bers of the organization are past or pres- 4. Its investments are limited to securities ent organization meets the requirements ex- ent members of the U.S. Armed Forces, which are legal investments for credit un- plained earlier. The trust or foundation must also cadets (including only students in college ions under the state credit union law. meet all the following qualifications. or university ROTC programs or at armed 5. Its dividends on shares, if any, are distrib- services academies) or spouses, widows, uted as prescribed by the state credit 1. The trust or foundation is in existence widowers, ancestors, or lineal descendants union law. under local law and, if it is organized for of any of those listed here, and charitable purposes, has a dissolution pro- I, the undersigned, a duly authorized officer of 3. That no part of net earnings inure to the vision similar to charitable organizations. the Credit Union, Inc., declare benefit of any private shareholder or indi- (See Articles of Organization in chapter 3 that the above information is a true statement of vidual. of this publication.) facts concerning the credit union. In addition to these requirements, a veter- 2. The corpus or income cannot be diverted Signature of ans’ organization also must be operated exclu- or used other than for: Officer Title sively for one or more of the following purposes. a. The funding of a veterans’ organization, Other Mutual 1. To promote the social welfare of the com- described in this section, Financial Organizations munity (that is, to promote in some way the b. Religious, charitable, scientific, literary, common good and general welfare of the or educational purposes or for the pre- Every other organization included in this section people of the community). vention of cruelty to children or animals, must show in its application the state in which or 2. To assist disabled and needy war veterans the organization is incorporated and the date of and members of the U.S. Armed Forces incorporation; the character of the organization; c. An insurance set aside. and their dependents and the widows and the purpose for which it was organized; its actual orphans of deceased veterans. activities; the sources of its receipts and the 3. The trust income is not unreasonably ac- disposition thereof; whether any of its income cumulated and, if the trust or foundation is 3. To provide entertainment, care, and assis- may be credited to surplus or may benefit any not an insurance set aside, a substantial tance to hospitalized veterans or members private shareholder or individual; whether the portion of the income is in fact distributed of the U.S. Armed Forces. law relating to loans, investments, and dividends to the parent organization or for the pur- 4. To carry on programs to perpetuate the is being complied with; and, in general, all facts poses described in item 2(b). relating to its operations that affect its right to 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 their survivors. The application must include detailed infor- that are specifically applicable to the par- mation showing either that the organization pro- 5. To conduct programs for religious, charita- ent organization. vides both reserve funds for and insurance of ble, scientific, literary, or educational pur- shares and deposits of its member financial or- poses. ganizations or that the organization provides Tax treatment of donations. Donations to 6. To sponsor or participate in activities of a reserve funds for shares or deposits of its mem- war veterans’ organizations are deductible as bers and 85% or more of the organization’s patriotic nature. charitable contributions on the donor’s federal
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income tax return. At least 90% of the organiza- d. To pay accident and health benefits or must file its application on Form 1024. The infor- tion’s membership must consist of war veterans. insurance premiums and other adminis- mation to submit upon application is described The term war veterans means persons, whether trative expenses for retired coal miners in this section. For a discussion of the proce- or not present members of the U.S. Armed and their spouses. The amount of as- dures for obtaining recognition of exemption, Forces, who have served in the U.S. Armed sets available for such use is generally see chapter 1, Application Procedures . Forces during a period of war (including the limited to 110% of the present value of You must show that your organization is a Korean and Vietnam conflicts, the Persian Gulf the liability for black lung benefits. corporation. If you are in doubt as to whether war, and later declared wars). your organization qualifies as a corporation for 2. No part of its assets can be used for, or this purpose, contact your IRS office. diverted to, any purposes other than: A title-holding corporation will qualify for ex- emption only if there is effective ownership and a. The purposes described in 1, 501(c)(20) – Group control over it by the distributee exempt organi-zation. For example, the distributee organization b. Payments into the Black Lung Disability Legal Services Plan may control the title-holding corporation by own- Trust Fund or into the general fund of ing its voting stock or possessing the power to the U.S. Treasury (other than in satis- Organizations select nominees to hold its voting stock. faction of any tax or other civil or crimi-nal liability of the person who An organization or trust created in the U.S. for Corporate charter. The corporate charter established or contributed to the trust), the exclusive function of forming a part of a must confine the purposes and powers of your c. Investment in public debt securities of qualified group legal services plan or plans can- organization to holding title to property, collect- the U.S., obligations of a state or local not be exempt under section 501(c)(20) after ing income from the property, and turning the government that are not in default as to June 30, 1992. However, an organization that income over to an exempt organization. If the principal or interest, or time or demand has already received a determination or ruling charter authorizes your organization to engage deposits in a bank or an insured credit letter from the IRS recognizing its exemption in activities that go beyond these limits, its ex- union located in the United States. under section 501(c)(2) may, if it otherwise qual- emption may not be recognized even if its actual (These investments are restricted to the ifies, request a ruling or determination modifying operations are so limited. If your organization’s extent that the trustee determines that a its exemption from section 501(c)(2) to section original charter does not limit its powers, you can portion of the assets is not currently 501(c)(9) effective July 1, 1992. amend the charter to conform to the required needed for the purposes described in limits and submit evidence with your application 1.) that the charter has been amended.
Payment of income. You must show that your 501(c)(21) – Black Lung An annual information return is required of corporation is required to turn over the entire exempt trusts described in section 501(c)(21). Benefit Trusts income from the property, less expenses, to one Form 990-BL, Information and Initial Excise Tax or more exempt organizations. Return for Black Lung Benefit Trusts and Cer- If your organization wishes to obtain recognition Actual payment of the income is required. A tain Related Persons, must be used for this of exemption as a black lung benefit trust, it must mere obligation to use the income for the ex- purpose. A trust that normally has gross receipts file its application by letter and include a copy of empt organization’s benefit, or the fact that such in each tax year of no more than $25,000 is its trust instrument. The general procedures to organization has control over the income does excepted from this filing requirement. However, follow for obtaining recognition are discussed in not satisfy this requirement. it must submit an annual electronic notice, Form chapter 1 of this publication. This section de- 990-N ( e-Postcard ). Expenses. Expenses may reduce the scribes the additional (or specific) information to amount of income required to be turned over to be provided upon application. Excise taxes. See Chapter 5 for informa- the tax-exempt organization for which your or- tion on the excise tax that may be imposed on Requirements. A black lung benefit trust that ganization holds property. The term expenses the organization. is established in writing, created or organized in (for this purpose) includes not only ordinary and the United States, and contributed to by any necessary expenses paid or incurred, but also Tax treatment of donations. Contributions person (except an insurance company) will qual- reasonable additions to depreciation reserves by a taxpayer (generally, the coal mine operator) ify for tax-exempt status if it meets both of the and other reserves that would be proper for a to a black lung benefit trust are deductible for following requirements. The trust must be irrevo- business corporation holding title to and main- federal income tax purposes under section 192. cable and there can be no right or possibility or taining property. The deduction is limited, and any excess contri- reversion of the corpus or income of the trust to In addition, the title-holding corporation can butions are subject to an excise tax of 5%. Form the coal mine operator or other creator, except retain part of its income each year to apply to 6069, Return of Excise Tax on Excess Contribu- that the creator may recover excess contribu- debt on property to which it holds title. This tions to Black Lung Benefit Trust Under Section tions. transaction is treated as if the income had been 4953 and Computation of Section 192 Deduc- turned over to the exempt organization and the tion, is used to compute the allowable deduction 1. Its only purpose is: latter had used the income to make a contribu- and any excise tax liability. The form does not tion to the capital of the title-holding corporation have to be filed if there is no excise tax liability. a. To satisfy in whole or in part the liability that in turn applied the contribution to the debt. For more information about these contributions, of that person (generally, the coal mine see Form 6069 and its instructions. operator contributing to the trust) for, or Waiver of payment of income. Generally, with respect to, claims for compensa- there is no payment of rent when the occupant of tion arising under federal or state stat- property held by your title-holding corporation is utes for disability or death due to the exempt organization for which your corpora- pneumoconiosis, tion holds the title. In this situation, the statutory 501(c)(2) – Title-Holding requirement that income be paid over to the b. To pay the premiums for insurance that Corporations for Single exempt organization is satisfied if your corpora- covers only that liability, tion turns over whatever income is available. c. To pay the administrative and other in- Parents cidental expenses of that trust (includ- Application for recognition of exemption. ing legal, accounting, actuarial, and If your organization wants to obtain recognition In addition to the information required by Form trustee expenses) in connection with of exemption from federal income tax as a cor- 1024, the title-holding corporation must furnish the operation of the trust and process- poration organized to hold title to property, col- evidence that the organization for which title is ing of black lung claims against such lect income from that property, and turn over the held has obtained recognition of exempt status. person arising under federal or state entire amount less expenses to a single parent If that organization has not been specifically statutes, and organization that is exempt from income tax, it notified in writing by the IRS that it is exempt, the
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title-holding corporation must submit the neces- 1. By selling or exchanging their stock or sary application and supporting documents to beneficial interest to any organization de- 501(c)(26) – enable the IRS to determine whether the organi- scribed in section 501(c)(25)(C), provided zation for which title is held qualifies for exemp- State-Sponsored that the sale or exchange does not cause tion. A copy of a ruling or determination letter the number of shareholders or beneficia- issued to the organization for which title is held High-Risk Health ries to exceed 35. will be proof that it qualifies for exemption. How- 2. By having their stock or beneficial interest Coverage ever, until the organization for which title is held redeemed by the section 501(c)(25) organ- obtains recognition of exempt status or proof is Organizations submitted to show that it qualifies, the ti- ization upon 90 days notice. tle-holding corporation cannot obtain recogni- If state law prevents a corporation from including A state-sponsored organization established to tion of exemption. in its articles of incorporation the above provi- provide medical care to high-risk individuals sions, such provisions must instead be included should apply by letter for recognition of exemp- Tax treatment of donations. Donations to an in the bylaws of the corporation. tion from federal income tax under section exempt title-holding corporation generally are 501(c)(26). not deductible as charitable contributions on the A 501(c)(25) organization can be organized To qualify for exemption, the organization donor’s federal income tax return. as a nonstock corporation if its articles of incor- must be a membership organization established poration or bylaws provide members with the by a state exclusively to provide coverage for same rights as described above. medical care on a nonprofit basis to high-riskindividuals who are state residents. It can pro- 501(c)(25) – Subsidiaries. A wholly owned subsidiary will vide coverage either by issuing insurance itselfor by entering into an arrangement with a health not be treated as a separate corporation, and all Title-Holding maintenance organization (HMO). assets, liabilities, and items of income, deduc- The state must determine the composition of tion, and credit will be treated as belonging to Corporations or Trusts membership in the organization. No part of the the section 501(c)(25) organization. Subsidiar- net earnings of the organization can inure to the for Multiple Parents ies should not apply separately for recognition of benefit of any private shareholder or individual. exemption. If your organization wants to obtain recognition High-risk individuals. These are individuals, of exemption from federal income tax as an their spouses and qualifying children, who, be- Tax treatment of donations. Donations to an organization organized for the exclusive pur- cause of a pre-existing medical condition: exempt title-holding corporation generally are pose of acquiring, holding title to, and collecting not deductible as charitable contributions on the income from real property, and turning over the 1. Cannot get medical care coverage for that entire amount less expenses to member organi- donor’s federal income tax return. condition through insurance or an HMO, or zations exempt from income tax, it should file its 2. Can get coverage for that condition only at application on Form 1024. For a discussion of Unrelated Business Income a rate that is substantially higher than the the procedures for obtaining recognition of ex- rate for the same coverage from the emption, see chapter 1, Application Procedures . In general, the receipt of unrelated business state-sponsored organization. income by a section 501(c)(25) organization will Who can control the organization. Organi- subject the organization to loss of exempt status zations recognized as exempt under this section since the organization cannot be exempt from can have up to 35 shareholders or beneficiaries, taxation if it engages in any business other than in contrast to title-holding organizations recog- that of holding title to real property and collecting 501(c)(27) – Qualified nized as exempt under section 501(c)(2), which the income from the property. However, exempt can have only one controlling parent organiza- State-Sponsored status generally will not be affected by the re- tion. ceipt of debt-financed income that is treated as Workers’ unrelated business taxable income solely be- Organizational requirements. A 501(c)(25) cause of section 514. organization must be either a corporation or a Compensation trust. Only one class of stock is permitted in the Under section 514(c)(9), certain sharehold- case of a corporation. In the case of a trust, only ers or beneficiaries are not subject to unrelated Organizations one class of beneficial interest is allowed. debt-financed income tax under section 514 on Organizations eligible to acquire or hold in- their investments through the organization. 501(c)(27)(A) — Pre-June 1, 1986, Organiza- terests in this type of title-holding organization These shareholders are generally schools, col- tions. A state-sponsored workers’ compensa- are qualified pension, profit-sharing, or stock leges, universities, or supporting organizations tion reinsurance organization should apply by bonus plans, governmental plans, governments of such educational institutions. Organizations letter for recognition of exemption from federal and their agencies and instrumentalities, and income tax under section 501(c)(27). other than these will take into account as gross charitable organizations. To qualify for exemption, any membership income from an unrelated trade or business their The articles of incorporation or trust instru- organization must meet all the following require- pro rata share of income that is treated as unre- ment must include provisions showing that the ments. lated debt-financed income because section corporation or trust is organized to meet the 514(c)(9) does not apply. These organizations requirements of the statute, including compli- 1. It was established by a state before June will also take their pro rata share of the allowable ance with the limitations on membership and 1, 1986, exclusively to reimburse its mem- deductions from unrelated taxable income. classes of stock or beneficial interest, and com- bers for losses under workers’ compensa- pliance with the income distribution require- tion acts. ments. The organizing document must permit Real property. Real property can include per- 2. The state requires that the membership the organization’s shareholders or beneficiaries sonal property leased in connection with real consist of all persons who issue insurance to dismiss the organization’s investment advi- property, but only if the rent from the personal covering workers’ compensation losses in sor, if any, upon a vote of the shareholders or property is not more than 15% of the total rent the state and all persons and government beneficiaries holding a majority interest in the for both the real property and the personal prop- entities who self-insure against those organization. erty. losses. The organizing document must permit the Real property acquired after June 10, 1987, shareholders or beneficiaries to terminate their 3. It operates as a nonprofit organization by cannot include any interest as a tenant in com- interests by at least one of the following meth- returning surplus income to its members or mon (or similar interest) or any indirect interest. ods. workers’ compensation policyholders on a
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periodic basis and by reducing initial pre- ·Excise taxes on private foundations 2. Religious or apostolic associations or cor- miums in anticipation of investment in- porations described in section 501(d). ·Excise taxes on 501(c)(21) black lung come. 3. Entities described in section 170(c), includ- benefit trusts ing states, possessions of the United 501(c)(27)(B) — Organizations formed after States, the District of Columbia, political Useful Items December 31, 1987. Any organization (includ- subdivisions of states and political subdivi- ing a mutual insurance company) can qualify for You may want to see: sions of possessions of the United States exemption if it meets all of the following require- (but not including the United States). ments. Forms (and Instructions) 4. Indian tribal governments within the mean- 1. It is created by state law and is organized ing of section 7701(a)(40). o 4720 Return of Certain Excise Taxes and operated under state law exclusively Under Chapters 41 and 42 of the to: Internal Revenue Code Entity manager. An entity manager is any person with authority or responsibility similar to a. Provide workmen’s compensation insur- See chapter 6 for more information about get- that exercised by an officer, director, or trustee, ance which is required by state law or ting this form. and, for any act, the person that has authority or state law must provide significant disin- responsibility with respect to the prohibited centives if employers fail to purchase transaction. such insurance, and
b. Provide related coverage which is inci- Prohibited Tax Shelter Prohibited tax shelter transaction. A prohib- dental to workmen’s compensation in- ited tax shelter transaction is any listed transac- surance. Transactions tion, within the meaning of section 6707A(c)(2),and any prohibited reportable transactions. A 2. It provides workmen’s compensation insur- Section 4965 imposes an excise tax on: prohibited reportable transaction is a confiden- ance to any employer in the state (for em- tial transaction within the meaning of Regula- ·Certain tax-exempt entities that are party ployees in the state or temporarily tions section 1.6011-4(b)(3), and a transaction to prohibited tax shelter transactions, and assigned out-of-state) which seeks such with contractual protection within the meaning of insurance and meets other reasonable re- ·Any entity manager who approves or oth- Regulations section 1.6011-4(b)(4). See the In- quirements relating to the insurance. erwise causes the entity to be a party to a structions for Form 8886 for more information on prohibited tax shelter transaction and 3. The state makes a financial commitment to listed transactions and prohibited reportable knows or has reason to know that the such organization either by extending its transactions. transaction is a prohibited tax shelter full faith and credit to the initial debt of the transaction. organization or by providing the initial op- Subsequently listed transaction. Any trans- erating capital of the organization. action to which the tax-exempt entity is a partyand is later determined to be a listed transaction Additionally, section 6033 provides new disclo- 4. The assets of the organization revert to the after the entity has become a party to it, is a sure requirements on a tax-exempt entity that is state upon dissolution or the organization subsequently listed transaction. a party to a prohibited tax shelter transaction. is not permitted to dissolve under statelaw. Tax-exempt entities. Tax-exempt entities 5. The majority of the board of directors or that are subject to section 4965 include: oversight body of such organization are Entity Level Tax appointed by the chief executive officer or 1. Entities described in section 501(c), includ- other executive branch official of the state, ing but not limited to the following common Section 4965(a)(1) imposes an entity level ex- by the state legislature, or by both. types of entities: cise tax on any tax-exempt entity described in 1,2, 3, or 4 above that becomes a party to a a. Instrumentalities of the United States prohibited tax shelter transaction or is a party to described in section 501(c)(1); a subsequently listed transaction (defined ear- b. Churches, hospitals, museums, lier). The excise tax imposed on a tax-exempt schools, scientific research organiza- entity applies to tax years in which the entity tions, and other charities described in becomes a party to the prohibited tax sheltertransaction and any subsequent tax years. The section 501(c)(3); 5. amount of the excise tax depends on whether c. Civic leagues, social welfare organi- the tax-exempt entity knew or had reason to zations, and local associations of em- know that the transaction was a prohibited tax ployees described in section 501(c)(4); Excise Taxes shelter transaction at the time it became a partyto the transaction. d. Labor, agricultural, or horticultural or- To figure and report the excise tax imposed ganizations described in section on a tax-exempt entity for being a party to a 501(c)(5); Introduction prohibited tax shelter transaction, file Form e. Business leagues, chambers of com- An excise tax may be imposed on certain 4720. merce, trade associations, and other or- tax-exempt organizations. For more information about this excise tax, ganizations described in section including information about how it is figured, see 501(c)(6); Topics the Instructions for Form 4720. This chapter discusses: f. Voluntary employees’ beneficiary as-sociations (VEBAs) described in section ·Prohibited tax shelter transactions Manager Level Tax 501(c)(9);
·Excess benefit transactions g. Credit unions described in section Section 4965(a)(2) imposes an excise tax on 501(c)(14); any tax-exempt entity manager who approves or ·Excess business holdings otherwise causes the entity to be a party to a h. Insurance companies described in ·Taxable distributions of sponsoring organi- prohibited tax shelter transaction and knows (or section 501(c)(15); and zations has reason to know) that the transaction is a i. Veterans’ organizations described in ·Taxes on prohibited benefits distributed prohibited tax shelter transaction. The excise section 501(c)(19). from donor advised funds tax, in the amount of $20,000, is assessed for
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each approval or other act causing the organiza- ·The date on which the initial tax on the provided by the organization exceeds the value tion to be a party to the prohibited tax shelter excess benefit transaction for the disquali- of the consideration (including the performance transaction. To report this tax, file Form 4720. fied person is assessed. of services) received for providing such benefit.The excess benefit transaction rules apply to alltransactions with disqualified persons, regard- Tax on Organization less of whether the amount of the benefit pro- Managers vided is determined in whole or in part by the Excess Benefit revenues of one or more activities of the organi- If tax is imposed on a disqualified person for any zation. Transactions excess benefit transaction, an excise tax equalto 10% of the excess benefit is imposed on an Excise tax on excess benefit transactions. To determine whether an excess benefit organization manager who knowingly partici- A disqualified person who benefits from an ex- transaction has occurred, all consideration and pated in an excess benefit transaction, unless cess benefit transaction, such as compensation, benefits exchanged between a disqualified per- such participation was not willful and was due to fringe benefits, or contract payments from cer- son and the applicable tax-exempt organization, reasonable cause. This tax cannot exceed tain section 501(c)(3) or 501(c)(4) organiza- and all entities it controls, are taken into account. $20,000 ($10,000 for transactions entered in a tions, may have to pay an excise tax under For purposes of determining the value of eco- tax year beginning before August 18, 2006), for section 4958. A manager of the organization nomic benefits, the value of property, including each transaction. There is also joint and several may also have to pay an excise tax under sec- the right to use property, is the fair market value. liability for this tax. A person can be liable for tion 4958. These taxes are reported on Form Fair market value is the price at which property, both the tax paid by the disqualified person and 4720. or the right to use property, would change hands the organization manager tax. The excise taxes are imposed if an applica- between a willing buyer and a willing seller, An organization manager is any officer, di- ble tax-exempt organization provides an excess neither being under any compulsion to buy, sell, rector, or trustee of an applicable tax-exempt benefit to a disqualified person and that benefit or transfer property or the right to use property, organization, or any individual having powers or exceeds the value of the benefit an organization and both having reasonable knowledge of rele- responsibilities similar to officers, directors, or received in the exchange. vant facts. trustees of the organization, regardless of title. There are three taxes under section 4958. An organization manager is not considered to Disqualified persons are liable for the first two Donor advised fund transactions occurring have participated in an excess benefit transac- taxes and certain organization managers are after August 17, 2006. For a donor advised tion where the manager has opposed the trans- liable for the third tax. fund, an excess benefit transaction includes a action in a manner consistent with the fulfillment Taxes imposed on excess benefit transac- grant, loan, compensation, or other similar pay- of the manager’s responsibilities to the organi- tions apply to transactions occurring on or after ment from the fund to a: zation. For example, a director who votes September 14, 1995. However, these taxes do against giving an excess benefit would ordinarily ·Donor or donor advisor, not apply to a transaction under a written con- not be subject to the 10% tax. tract that was binding on September 13, 1995, ·Family member of a donor, or donor advi- A person participates in a transaction know- and at all times thereafter before the transaction sor, ingly if the person: occurred. ·35% controlled entity of a donor, or donor ·Has actual knowledge of sufficient facts so advisor, or that, based solely upon those facts, such Tax on Disqualified Persons transaction would be an excess benefit ·35% controlled entity of a family member An excise tax equal to 25% of the excess benefit transaction; of a donor, or donor advisor. is imposed on each excess benefit transaction ·Is aware that such a transaction under between an applicable tax-exempt organization The excess benefit in this transaction is the these circumstances may violate the provi- and a disqualified person. The disqualified per- amount of the grant, loan, compensation, or sions of federal tax law governing excess son who benefited from the transaction is liable other similar payment. For additional informa- benefit transactions; and for the tax. tion see the Instructions for Form 4720. ·Negligently fails to make reasonable at- Additional tax on the disqualified person. If tempts to ascertain whether the transac- Supporting organization transactions occur- the 25% tax is imposed and the excess benefit tion is an excess benefit transaction, or ring after July 25, 2006. For any supporting transaction is not corrected within the taxable the manager is in fact aware that it is such organization, defined in section 509(a)(3), an period, an additional excise tax equal to 200% of a transaction. excess benefit transaction includes grants, the excess benefit is imposed on any disquali- loans, compensation, or other similar payment Knowing does not mean having reason to know. fied person involved. provided by the supporting organization to a: The organization manager ordinarily will not be If a disqualified person makes a payment of considered knowing if, after full disclosure of the less than the full correction amount, the 200% ·Substantial contributor, factual situation to an appropriate professional, tax is imposed only on the unpaid portion of the ·Family member of a substantial contribu- the organization manager relied on the profes- correction amount. If more than one disqualified tor, sional’s reasoned written opinion on matters person received an excess benefit from an ex- within the professional’s expertise or if the man- cess benefit transaction, all such disqualified ·35% controlled entity of a substantial con- ager relied on the fact that the requirements for persons are jointly and severally liable for the tributor, or the rebuttable presumption of reasonableness taxes. ·35% controlled entity of a family member have been satisfied. Participation by an organi- To avoid the 200% tax, a disqualified person of a substantial contributor. zation manager is willful if it is voluntary, con- must correct the excess benefit transaction dur- scious, and intentional. An organization ing the taxable period. The 200% tax is abated Additionally, an excess benefit transaction in- manager’s participation is due to reasonable (refunded if collected) if the excess benefit cludes any loans provided by the supporting cause if the manager has exercised responsibil- transaction is corrected within a 90-day correc- organization to a disqualified person (other than ity on behalf of the organization with ordinary tion period beginning on the date a statutory an organization described in section 509(a)(1), business care and prudence. notice of deficiency is issued. (2), or (4)). Taxable period. The taxable period means The excess benefit for substantial contribu- Excess Benefit Transaction the period beginning with the date on which the tors and parties related to those contributors excess benefit transaction occurs and ending on includes the amount of the grant, loan, compen- An excess benefit transaction is a transaction in the earlier of: sation, or other similar payment. For additional which an economic benefit is provided by an information see the Instructions for Form 4720. ·The date a notice of deficiency was mailed applicable tax-exempt organization, directly or Excess benefit transaction rules generally do to the disqualified person for the initial tax indirectly, to or for the use of any disqualified not apply to transactions between a supporting on the excess benefit transaction, or person, and the value of the economic benefit
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organization and its supported organization that Exception. For a correction of an excess Investment advisor. Investment advisor is described in sections 501(c)(4), (5), or (6). benefit transaction (discussed earlier), no means for any sponsoring organization, any per- amount repaid in a manner prescribed by the son compensated by such organization (but not Secretary can be held in a donor advised fund. an employee of such organization) for managing Date of Occurrence the investment of, or providing investment ad-vice for, assets maintained in donor advised An excess benefit transaction occurs on the Applicable Tax-Exempt funds maintained by such sponsoring organiza- date the disqualified person receives the eco- Organization tion. nomic benefit from the organization for federal Substantial contributor. In general, a sub- income tax purposes. However, when a single An applicable tax-exempt organization is a sec- stantial contributor means any person who con- contractual arrangement provides for a series of tion 501(c)(3) or 501(c)(4) organization that is tributed or bequeathed an aggregate of more compensation or other payments to or for the tax-exempt under section 501(a), or was such than $5,000 to the organization, if that amount is use of a disqualified person during the disquali- an organization at any time during a 5-year pe- more than 2% of the total contributions and fied person’s tax year, any excess benefit trans- riod ending on the day of the excess benefit bequests received by the organization before action with respect to these payments occurs on transaction. the end of the tax year of the organization in the last day of the taxpayer’s tax year. An applicable tax-exempt organization does which the contribution or bequest is received by In the case of benefits provided to a qualified not include: the organization from such person. A substantial pension, profit-sharing, or stock bonus plan, the contributor includes the grantor of a trust. transaction occurs on the date the benefit is 1. A private foundation as defined in section vested. In the case of the transfer of property 509(a), Family members. Family members of a dis- subject to a substantial risk of forfeiture, or in the qualified person include a disqualified person’s 2. A governmental entity that is: case of rights to future compensation or prop- spouse, brothers or sisters (whether by whole or erty, the transaction occurs on the date the prop- a. Exempt from (or not subject to) taxation half-blood), spouses of brothers or sisters erty, or the rights to future compensation or without regard to section 501(a), or (whether by whole or half-blood), ancestors, property, is not subject to a substantial risk of children (including a legally adopted child), b. Not required to file an annual return, forfeiture. Where the disqualified person elects grandchildren, great grandchildren, and to include an amount in gross income in the tax spouses of children, grandchildren, and great 3. A foreign organization, recognized by the year of transfer under section 83(b), the excess grandchildren (whether by whole or half-blood). IRS or by treaty, that receives substantially benefit transaction occurs on the date the dis- all of its support (other than gross invest- qualified person receives the economic benefit 35% controlled entity. The term 35% con- ment income) from sources outside the for federal income tax purposes. trolled entity means: United States. 1. A corporation in which a disqualified per- Correcting the excess benefit. An excess An organization is not treated as a section son owns more than 35% of the total com- benefit transaction is corrected by undoing the 501(c)(3) or 501(c)(4) organization for any pe- bined voting power, excess benefit to the extent possible, and by riod covered by a final determination that the taking any additional measures necessary to 2. A partnership in which such persons own organization was not tax-exempt under section place the organization in a financial position not more than 35% of the profits interest, or 501(a), but only if the determination was not worse than what it would have been if the dis- based on private inurement or one or more ex- 3. A trust or estate in which such persons qualified person were dealing under the highest cess benefit transactions. own more than 35% of the beneficial inter- fiduciary standards. est. A disqualified person corrects an excess benefit by making a payment in cash or cash In determining the holdings of a business Disqualified Person equivalents, excluding payment by a promissory enterprise, any stock or other interest owned A disqualified person is: note, equal to the correction amount to the appli- directly or indirectly shall apply. cable tax-exempt organization. The correction ·Any person (at any time during the 5-year Persons having substantial influence. Per- amount equals the excess benefit plus the inter- period ending on the date of the transac- sons who hold certain powers, responsibilities, est on the excess benefit. The interest rate can tion) in a position to exercise substantial or interests are among those who are in a posi- be no lower than the applicable federal rate, influence over the affairs of the organiza- tion to exercise substantial influence over the compounded annually, for the month the trans- tion, affairs of the organization. This includes, for action occurred. example, voting members of the governing ·A family member of an individual de- A disqualified person can, with the agree- body, and persons holding the power of: scribed in 1, and ment of the applicable tax-exempt organization,make a payment by returning the specific prop- ·Presidents, chief executives, or chief oper- ·A 35% controlled entity. erty previously transferred in the excess trans- ating officers. action. In this case, the disqualified person is ·Treasurers and chief financial officers. For donor advised funds, sponsoring organi- treated as making a payment equal to the lesser zations, and certain supporting organiza- of: ·Persons with a material financial interest tions occurring after August 17, 2006. The in a provider-sponsored organization. ·The fair market value of the property on following persons will be considered disqualified the date the property is returned to the persons along with certain family members and Persons not considered to have substan- organization, or 35% controlled entities associated with them. tial influence. Persons who are not consid- ·The fair market value of the property on ered to be in a position to exercise substantial ·Donors of donor advised funds, the date the excess benefit transaction oc- influence over the affairs of an organization in- ·Investment advisors of sponsoring organi- curred. clude: zations, and ·An employee who receives benefits that If the payment resulting from the return of ·Disqualified persons of a section 509(a)(3) total less than the highly compensated property is less than the correction amount, the supporting organization for the organiza- amount in section 414(q)(1)(B)(i) and who disqualified person must make an additional tions that organization supports. does not hold the executive or voting pow- cash payment to the organization equal to the ers mentioned earlier in the discussion on difference. For certain supporting organization trans- Disqualified Person is not a family mem- If the payment resulting from the return of the actions occurring after July 25, 2006. Sub- ber of a disqualified person, and is not a property exceeds the correction amount de- stantial contributors to supporting organizations substantial contributor, scribed above, the organization can make a will also be considered disqualified persons cash payment to the disqualified person equal to along with their family members and 35% con- ·Tax-exempt organizations described in the difference. trolled entities. section 501(c)(3), and
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·Section 501(c)(4) organizations with re- as compared to the organization as a ·The disqualified person reports the benefit spect to transactions engaged in with whole. as income on the person’s original Form other section 501(c)(4) organizations. 1040, or on an amended form filed before In the case of multiple organizations affiliated starting an IRS examination. Facts and circumstances. The determina- by common control or governing documents, the tion of whether a person has substantial influ- determination of whether a person does or does Exception. If the economic benefit is ex- ence over the affairs of an organization is based cluded from the disqualified person’s gross in- not have substantial influence is made sepa- on all the facts and circumstances. Facts and come for income tax purposes, the applicable rately for each applicable tax-exempt organiza- circumstances that show a person has substan- tax-exempt organization is not required to indi- tion. A person may be a disqualified person with tial influence over the affairs of an organization cate its intent to provide an economic benefit as respect to transactions with more than one or- include, but are not limited to, the following. compensation for services. ganization.
·The person founded the organization. Rebuttable presumption that a transaction Reasonable compensation. Reasonable is not an excess benefit transaction. Pay- compensation is the value that would ordinarily ·The person is a substantial contributor to ments under a compensation arrangement are be paid for like services by like enterprises under the organization under the section presumed to be reasonable and the transfer of like circumstances. The section 162 standard 507(d)(2)(A) definition, only taking into ac- property (or right to use property) is presumed to will apply in determining the reasonableness of count contributions to the organization for be at fair market value, if the following three compensation. The fact that a bonus or reve- the past 5 years. conditions are met. nue-sharing arrangement is subject to a cap is a ·The person’s compensation is primarily relevant factor in determining reasonableness of 1. The transaction is approved in advance by based on revenues derived from activities compensation. an authorized body of the organization (or of the organization that the person con- To determine the reasonableness of com- an entity it controls) which is composed of trols. pensation, all items of compensation provided individuals who do not have a conflict of by an applicable tax-exempt organization in ex- ·The person has or shares authority to con- interest concerning the transaction. change for performance of services are taken trol or determine a substantial portion of 2. Before making its determination, the au- into account in determining the value of com- the organization’s capital expenditures, thorized body obtained and relied upon ap- pensation (except for economic benefits that are operating budget, or compensation for em- propriate data as to comparability. (There disregarded under the discussion Disregarded ployees. is a special safe harbor for small organiza- benefits , later). Items of compensation include: ·The person manages a discrete segment tions. If the organization has gross receipts or activity of the organization that repre- ·All forms of cash and noncash compensa- of less than $1 million, appropriate compa- sents a substantial portion of the activities, tion, including salary, fees, bonuses, sev- rability data includes data on compensa- assets, income, or expenses of the organi- erance payments, and deferred noncash tion paid by three comparable zation, as compared to the organization as compensation. organizations in the same or similar com- a whole. munities for similar services.) ·The payment of liability insurance premi- ·The person owns a controlling interest ums for, or the payment or reimbursement 3. The authorized body adequately docu- (measured by either vote or value) in a by the organization of penalties, taxes, or ments the basis for its determination con- corporation, partnership, or trust that is a certain expenses under section 4958, un- currently with making that determination. disqualified person. less excludable from income as a de The documentation should include: minimis fringe benefit under section ·The person is a nonstock organization 132(a)(4), a. The terms of the approved transaction controlled directly or indirectly by one or and the date approved, more disqualified persons. ·All other compensatory benefits, whetheror not included in gross income for income b. The members of the authorized body Facts and circumstances tending to show that tax purposes, who were present during debate on the a person does not have substantial influence transaction that was approved and ·Taxable and nontaxable fringe benefits, over the affairs of an organization include, but those who voted on it, except fringe benefits described in section are not limited to, the following. 132, and c. The comparability data obtained and re- ·The person has taken a bona fide vow of lied upon by the authorized body and ·Foregone interest on loans. poverty as an employee, agent, or on be- how the data was obtained, half of a religious organization. An economic benefit is not treated as consid- d. Any actions by a member of the author- ·The person is an independent contractor eration for the performance of services unless ized body having conflict of interest, whose sole relationship to the organization the organization providing the benefit clearly in- and is providing professional advice (without dicates its intent to treat the benefit as compen- e. Documentation of the basis of the de- having decision-making authority) with re- sation when the benefit is paid. termination before the later of the next spect to transactions from which the inde- An applicable tax-exempt organization (or meeting of the authorized body or 60 pendent contractor will not economically entity that it controls) is treated as clearly indicat- days after the final actions of the au- benefit either directly or indirectly aside ing its intent to provide an economic benefit as thorized body are taken, and approval from customary fees received for the pro- compensation for services only if the organiza- of records as reasonable, accurate, and fessional advice rendered. tion provides written substantiation that is con- complete within a reasonable time temporaneous with the transfer of the economic ·Any preferential treatment the person re- thereafter. benefits under consideration. Ways to provide ceives based on the size of the person’s contemporaneous written substantiation of its donation is also offered to others making intent to provide an economic benefit as com- Disregarded benefits. The following eco- comparable widely solicited donations. pensation include: nomic benefits are disregarded for section 4958 ·The direct supervisor of the person is not purposes. ·The organization produces a signed writ- a disqualified person. ten employment contract, ·Nontaxable fringe benefits that are ex- ·The person does not participate in any cluded from income under section 132. ·The organization reports the benefit as management decisions affecting the or- compensation on an original Form W-2, ·Benefits provided to a volunteer for the ganization as a whole or a discrete seg- Form 1099, or Form 990, or on an organization if the benefit is provided to ment of the organization that represents a amended form filed before starting an IRS the general public in exchange for a mem- substantial portion of the activities, assets,income, or expenses of the organization, examination, or bership fee or contribution of $75 or less.
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·Benefits provided to a member of an or- donors that is owned and controlled by a spon- The tax on taxable distributions applies to ganization due to the payment of a mem- soring organization and for which the donor has distributions occurring in tax years beginning bership fee or to a donor as a result of a or expects to have advisory privileges concern- after August 17, 2006. deductible contribution, if a significant ing the distribution or investment of the funds. number of disqualified persons make simi- Sponsoring organization. A sponsoring or- lar payments or contributions and are of- Supporting organizations. Only certain sup- ganization is a section170(c) organization that is fered a similar economic benefit. porting organizations are subject to the excess not a government organization (as referred to in business holdings tax under section 4943. section 170(c)(1) and (2)(A)) or a private foun- ·Benefits provided to a person solely as a These include (1) Type III supporting organiza- dation and maintains one or more donor advised member of a charitable class that the ap- tions that are not functionally integrated and (2) funds. plicable tax-exempt organization intends Type II supporting organizations that accept any to benefit as part of the accomplishment of gift or contribution from a person who by himself Donor advised fund. A donor advised fund is its exempt purpose. or in connection with a related party controls the a fund or account: ·A transfer of an economic benefit to or for supported organization that the Type II support- the use of a governmental unit, as defined 1. Which is separately identified by reference ing organization supports. in section 170(c)(1), if exclusively for pub- to contributions of a donor or donors, lic purposes. Taxes. A private foundation that has excess 2. Which is owned and controlled by a spon- holdings in a business enterprise may become soring organization, and Special exception for initial contracts. liable for an excise tax based on the amount of Section 4958 does not apply to any fixed pay- 3. For which the donor (or any person ap- holdings. The initial tax is 10% (5% for tax years ment made to a person under an initial contract. pointed or designated by the donor) has or beginning before August 18, 2006) of the value A fixed payment is an amount of cash or expects to have advisory privileges con- of the excess holdings and is imposed on the other property specified in the contract, or deter- cerning the distribution or investment of last day of each tax year that ends during the mined by a fixed formula that is specified in the the funds held in the donor advised funds taxable period. The excess holdings are deter- contract, which is to be paid or transferred in or accounts because of the donor’s status mined on the day during the tax year when they exchange for the provision of specified services as a donor. were the largest. or property. If the foundation keeps the excess business Exception. A donor advised fund does not A fixed formula can, generally, incorporate holdings after the initial tax has been imposed, it an amount that depends upon future specified include: becomes liable for an additional tax of 200% of events or contingencies, as long as no one has the remaining excess business holdings unless 1. A fund or account that makes distributions discretion when calculating the amount of a pay- it disposes of them within the taxable period. only to a single identified organization or ment or deciding whether to make a payment For more information on the tax on excess governmental entity, or (such as a bonus). business holdings, see the Instructions for Form An initial contract is a binding written contract 2. Any fund or account for a person de- 4720. between an applicable tax-exempt organization scribed in 3 above that gives advice about and a person who was not a disqualified person which individuals receive grants for travel, immediately before entering into the contract. study, or similar purposes, if: A binding written contract, providing it can be Taxable Distributions a. The person’s advisory privileges are terminated or canceled by the applicable performed exclusively by such person tax-exempt organization without the other of Sponsoring in their capacity as a committee mem- party’s consent (except as a result of substantial ber of which all the committee members nonperformance) and without substantial pen- Organizations are appointed by the sponsoring organi- alty, is treated as a new contract, as of the zation. earliest date any termination or cancellation An excise tax is imposed on a sponsoring organ- would be effective. Also, if the parties make a ization for each taxable distribution it makes b. No combination of persons with advi- material change to a contract, which includes an from a donor advised fund. An excise tax is also sory privileges, described in 3 above, or extension or renewal of the contract (except for imposed on any fund manager of the sponsoring persons related to those in 3 above di- an extension or renewal resulting from the exer- organization who agreed to the making of a rectly or indirectly control the commit- cise of an option by the disqualified person), or a distribution, knowing that it is a taxable distribu- tee, or more than incidental change to the amount pay- tion. c. All grants from the fund or account are able under the contract, it is treated as a newcontract as of the effective date of the material awarded on an objective and nondis- Taxable distribution. A taxable distribution is change. criminatory basis according to a proce- any distribution from a donor advised fund to any dure approved in advance by the board natural person or to any other person if: More information. For more information, of directors of the sponsoring organiza- see the Instructions to Forms 990 and 4720. 1. The distribution is for any purpose other tion. The procedure must be designed than one specified in section 170(c)(2)(B), to ensure that all grants meet the re- or quirements of section 4945(g)(1), (2), or(3). 2. The sponsoring organization maintaining Excess Business the donor advised fund does not exerciseexpenditure responsibility with respect to Holdings Disqualified supporting organization. A dis- the distribution in accordance with section qualified supporting organization includes a 4945(h). Private foundations are generally not permitted Type III supporting organization that is not func- to hold more than a 20% interest in an unrelated However, a taxable distribution does not tionally integrated and any Type I, Type II, or business enterprise. They may be subject to an include a distribution from a donor advised fund functionally integrated Type III supporting or- excise tax on the amount of any excess busi- to: ganization where the donor or donor advisor ness holdings. For purposes of section 4943, for (and any related parties) directly or indirectly ·Any organization described in section tax years beginning after August 17, 2006, do- controls a supported organization of the sup- 170(b)(1)(A) (other than a disqualified sup- nor advised funds and certain supporting organi- porting organization. porting organization), zations are considered private foundations.
·The sponsoring organization of the donor Tax on sponsoring organization. A tax of Donor advised fund. In general, a donor ad- advised fund, or 20% of the amount of each taxable distribution is vised fund is a fund or account separately identi- imposed on the sponsoring organization. ·Any other donor advised fund. fied by reference to contributions of a donor or
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Tax on fund manager. If a tax is imposed on a For more information on taxes on prohibited taxable distribution of the sponsoring organiza- benefits distributed from donor advised funds, tion, a tax of 5% of the distribution will be im- see the Instructions for Form 4720. posed on any fund manager who agreed to thedistribution knowing that it was a taxable distri-bution. Any fund manager who took part in thedistribution and is liable for the tax must pay the Excise Taxes On tax. The maximum amount of tax on all fundmanagers for any one taxable distribution is Private Foundations 6. $10,000. If more than one fund manager is liablefor tax on a taxable distribution, all such manag- There is an excise tax on the net investment ers are jointly and severally liable for the tax. income of most domestic private foundations. For more information on the tax on taxable This tax must be reported on Form 990-PF and How To Get Tax distributions of sponsoring organizations, see must be paid annually at the time for filing that the Instructions for Form 4720. return or in quarterly estimated tax payments ifthe total tax for the year (section 4940 tax minus Help credits) is $500 or more. Report estimated taxeson Form 990-W. In addition, there are several other rules that Taxes on Prohibited You can get help with unresolved tax issues, apply to excise taxes on private foundations. order free publications and forms, ask tax ques- These include: Benefits Distributed tions, and get information from the IRS in sev-eral ways. By selecting the method that is best 1. Restrictions on self-dealing between pri- From Donor Advised for you, you will have quick and easy access to vate foundations and their substantial con- tax help. tributors and other disqualified persons, Funds
2. Requirements that the foundation annually Contacting your Taxpayer Advocate. The distribute income for charitable purposes, Prohibited benefit. If any donor, donor advi- Taxpayer Advocate Service (TAS) is an inde- sor, or related party advises the sponsoring or- pendent organization within the IRS. We help 3. Limits on their holdings in any business ganization about making a distribution which taxpayers who are experiencing economic enterprise, results in a donor, donor advisor, or related party harm, such as not being able to provide necessi- 4. Provisions that investments must not jeop- receiving (either directly or indirectly) a more ties like housing, transportation, or food; taxpay- ardize the carrying out of exempt pur- than incidental benefit, then such benefit is a ers who are seeking help in resolving tax poses, and prohibited benefit. The tax on prohibited benefits problems with the IRS; and those who believe applies to distributions occurring in tax years that an IRS system or procedure is not working 5. Provisions to assure that expenditures fur- beginning after August 17, 2006. as it should. Here are seven things every tax- ther the organization’s exempt purposes. payer should know about TAS: Donor advisor. A donor advisor is any person Violations of these provisions give rise to appointed or designated by a donor to advise a ·The Taxpayer Advocate Service is your taxes and penalties against the private founda- sponsoring organization on the distribution or voice at the IRS. tion and, in some cases, its managers, its sub- investment of amounts held in the donor’s fund stantial contributors, and certain related ·Our service is free, confidential, and tai- or account. persons. lored to meet your needs. For more information on the excise taxes Related party. A related party includes any ·You may be eligible for our help if you imposed on private foundations, see the Instruc- family member or 35% controlled entity. See the have tried to resolve your tax problem tions for Form 4720 and the Instructions for definition of those terms under Disqualified Per- through normal IRS channels and have Form 990-PF. son . gotten nowhere, or you believe an IRS Tax on donor, donor advisor, or related per- procedure just isn’t working as it should. son. A tax of 125% of the benefit resulting ·We help taxpayers whose problems are from the distribution is imposed on both the party Excise Taxes on Black causing financial difficulty or significant who advised as to the distribution (which might cost, including the cost of professional be a donor, donor advisor, or related party) and Lung Benefit Trusts representation. This includes businesses the party who received such benefit (which as well as individuals. might be a donor, donor advisor, or related If your organization makes any expenditures, party). The advisor and the party who received ·Our employees know the IRS and how to payments, or investments other than those de- the benefit are jointly and severally liable for the navigate it. If you qualify for our help, we’ll scribed in chapter 4 under 501(c)(21) ± Black tax. assign your case to an advocate who will Lung Benefit Trusts, a tax equal to 10% of the listen to your problem, help you under- amount of such expenditures is imposed on that Tax on fund managers. If a tax is imposed on stand what needs to be done to resolve it, trust. If there are any acts of self-dealing be- a prohibited benefit received by a donor, donor and stay with you every step of the way tween the trust and a disqualified person, a tax advisor, or related person, a tax of 10% of the until your problem is resolved. equal to 10% of the amount involved is imposed amount of the prohibited benefit is imposed on on the disqualified person. Both of these excise any fund manager who agreed to the distribution ·We have at least one local taxpayer advo- taxes are reported on Schedule A (Form knowing that it would confer a prohibited benefit. cate in every state, the District of Colum- 990-BL). See the Form 990-BL instructions for Any fund manager who took part in the distribu- bia, and Puerto Rico. You can call your more information on these taxes and what has to tion and is liable for the tax must pay the tax. The local advocate, whose number is in your be filed, even if the trust is excepted from filing. maximum amount of tax on all fund managers phone book, in Pub. 1546, Taxpayer Ad- for any one taxable distribution is $10,000. If vocate Service ÐYour Voice at the IRS, more than one fund manager is liable for tax on and on our website at www.irs.gov/advo- a taxable distribution, all such managers are cate . You can also call our toll-free line at jointly and severally liable for the tax. 1-877-777-4778 or TTY/TDD1-800-829-4059. Exception. If a person engaged in an excess ·You can learn about your rights and re- benefit transaction and received a prohibited sponsibilities as a taxpayer by visiting our benefit for the same transaction, the person is online tax toolkit at www.taxtoolkit.irs.gov . taxed under section 4958, and no tax is imposed You can get updates on hot tax topics by under section 4967 for a prohibited benefit.
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visiting our YouTube channel www.you- social security number, your filing status, security number, your filing status, and the tube.com/tasta and our Facebook page at and the exact whole dollar amount of your exact whole dollar amount of your refund. www.facebook.com/YourVoiceAtIRS , or refund. If you check the status of your refund and by following our tweets at www.twitter. are not given the date it will be issued, ·Download forms, including talking tax com/YouVoiceatIRS . please wait until the next week before forms, instructions, and publications. checking back. Low Income Taxpayer Clinics (LITCs). ·Order IRS products online. ·Other refund information. To check the The Low Income Taxpayer Clinic program ·Research your tax questions online. status of a prior year refund or amended serves individuals who have a problem with the return refund, call 1-800-829-1040. IRS and whose income is below a certain level. ·Search publications online by topic or LITCs are independent from the IRS. Most keyword. Evaluating the quality of our telephone LITCs can provide representation before the ·Use the online Internal Revenue Code, services. To ensure IRS representatives give IRS or in court on audits, tax collection disputes, Regulations, or other official guidance. accurate, courteous, and professional answers, and other issues for free or a small fee. If an we use several methods to evaluate the quality individual’s native language is not English, some ·View Internal Revenue Bulletins (IRBs) of our telephone services. One method is for a clinics can provide multilingual information published in the last few years. second IRS representative to listen in on or about taxpayer rights and responsibilities. For ·Figure your withholding allowances using record random telephone calls. Another is to ask more information, see Publication 4134, Low the withholding calculator online at www. some callers to complete a short survey at the Income Taxpayer Clinic List. This publication is irs.gov/individuals . available at IRS.gov, by calling end of the call. 1-800-TAX-FORM (1-800-829-3676), or at your ·Determine if Form 6251 must be filed by Walk-in. Many products and services local IRS office. using our Alternative Minimum Tax (AMT) are available on a walk-in basis. Assistant. Free tax services. Publication 910, IRS ·Sign up to receive local and national tax Guide to Free Tax Services, is your guide to IRS ·Products. You can walk in to many post news by email. services and resources. Learn about free tax offices, libraries, and IRS offices to pick up information from the IRS, including publications, ·Get information on starting and operating certain forms, instructions, and publica- services, and education and assistance pro- a small business. tions. Some IRS offices, libraries, grocery grams. The publication also has an index of over stores, copy centers, city and county gov- 100 TeleTax topics (recorded tax information) ernment offices, credit unions, and office you can listen to on the telephone. The majority supply stores have a collection of products Phone. Many services are available by of the information and services listed in this available to print from a CD or photocopy phone. publication are available to you free of charge. If from reproducible proofs. Also, some IRS there is a fee associated with a resource or offices and libraries have the Internal Rev- service, it is listed in the publication. ·Ordering forms, instructions, and publica- enue Code, regulations, Internal Revenue Accessible versions of IRS published prod- tions. Call 1-800-TAX FORM Bulletins, and Cumulative Bulletins avail- ucts are available on request in a variety of (1-800-829-3676) to order current-year able for research purposes. alternative formats for people with disabilities. forms, instructions, and publications, andprior-year forms and instructions. You ·Services. You can walk in to your local Free help with your return. Free help in pre- should receive your order within 10 days. Taxpayer Assistance Center every busi- paring your return is available nationwide from ness day for personal, face-to-face tax ·Asking tax questions. Call the IRS with IRS-trained volunteers. The Volunteer Income help. An employee can explain IRS letters, your tax questions at 1-800-829-1040. Tax Assistance (VITA) program is designed to request adjustments to your tax account, help low-income taxpayers and the Tax Coun- ·Solving problems. You can get or help you set up a payment plan. If you seling for the Elderly (TCE) program is designed face-to-face help solving tax problems need to resolve a tax problem, have ques- to assist taxpayers age 60 and older with their every business day in IRS Taxpayer As- tions about how the tax law applies to your tax returns. Many VITA sites offer free electronic sistance Centers. An employee can ex- individual tax return, or you are more com- filing and all volunteers will let you know about plain IRS letters, request adjustments to fortable talking with someone in person, credits and deductions you may be entitled to your account, or help you set up a pay- visit your local Taxpayer Assistance claim. To find the nearest VITA or TCE site, call ment plan. Call your local Taxpayer Assis- Center where you can spread out your 1-800-829-1040. tance Center for an appointment. To find records and talk with an IRS representa- As part of the TCE program, AARP offers the the number, go to www.irs.gov/localcon- tive face-to-face. No appointment is nec- Tax-Aide counseling program. To find the near- tacts or look in the phone book under essary Ðjust walk in. If you prefer, you est AARP Tax-Aide site, call 1-888-227-7669 or United States Government, Internal Reve- can call your local Center and leave a visit AARP’s website at nue Service . message requesting an appointment to re- www.aarp.org/money/taxaide . solve a tax account issue. A representa- For more information on these programs, go ·TTY/TDD equipment. If you have access tive will call you back within 2 business to IRS.gov and enter keyword ªVITAº in the to TTY/TDD equipment, call upper right-hand corner. days to schedule an in-person appoint- 1-800-829-4059 to ask tax questions or to ment at your convenience. If you have an order forms and publications. Internet. You can access the IRS web- ongoing, complex tax account problem or site at IRS.gov 24 hours a day, 7 days ·TeleTax topics. Call 1-800-829-4477 to lis- a special need, such as a disability, an a week to: ten to pre-recorded messages covering appointment can be requested. All other various tax topics. ·E-file your return. Find out about commer- issues will be handled without an appoint- cial tax preparation and e-file services ment. To find the number of your local ·Refund information. To check the status of available free to eligible taxpayers. office, go to your 2010 refund, call 1-800-829-1954 or www.irs.gov/localcontacts or look in the 1-800-829-4477 (automated refund infor- ·Check the status of your 2010 refund. Go phone book under United States Govern- mation 24 hours a day, 7 days a week). to IRS.gov and click on Where’s My Re- ment, Internal Revenue Service . Wait at least 72 hours after the IRS ac- fund . Wait at least 72 hours after the IRS knowledges receipt of your e-filed return, acknowledges receipt of your e-filed re- or 3 to 4 weeks after mailing a paper re- Mail. You can send your order for turn, or 3 to 4 weeks after mailing a paper turn. If you filed Form 8379 with your re- forms, instructions, and publications to return. If you filed Form 8379 with your turn, wait 14 weeks (11 weeks if you filed the address below. You should receive return, wait 14 weeks (11 weeks if you a response within 10 days after your request is electronically). Have your 2010 tax return filed electronically). Have your 2010 taxreturn available so you can provide your available so you can provide your social received.
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·Tax law frequently asked questions. ·Two releases during the year. Internal Revenue Service ± The first release will ship the beginning ·Tax Topics from the IRS telephone re- 1201 N. Mitsubishi Motorway of January 2011. sponse system. Bloomington, IL 61705-6613 ± The final release will ship the beginning ·Internal Revenue Code ÐTitle 26 of the of March 2011. DVD for tax products. You can order U.S. Code. Publication 1796, IRS Tax Products Purchase the DVD from National Technical ·Fill-in, print, and save features for most tax DVD, and obtain: Information Service (NTIS) at www.irs.gov/ forms. cdorders for $30 (no handling fee) or call ·Current-year forms, instructions, and pub- ·Internal Revenue Bulletins. 1-877-233-6767 toll free to buy the DVD for $30 lications. (plus a $6 handling fee). ·Toll-free and email technical support. ·Prior-year forms, instructions, and publica-tions.
·Tax Map: an electronic research tool andfinding aid.
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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 990 1 or 990-EZ 8 No 2
Exempt Organization exempt organization
501(c)(3) Religious, Educational, Charitable, Activities of nature implied by 1023 990 1 or 990-EZ 8, Yes, generally Scientific, Literary, Testing for Public description of class of organization or 990-PF Safety, to Foster National orInternational Amateur SportsCompetition, or Prevention of Crueltyto Children or Animals Organizations
501(c)(4) Civic Leagues, Social Welfare Promotion of community welfare; 1024 990 1 or 990-EZ 8 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 990 1 or 990-EZ 8 No 2
Organizations purpose being to improve conditions ofwork, and to improve products ofefficiency
501(c)(6) Business Leagues, Chambers of Improvement of business 1024 990 1 or 990-EZ 8 No 2
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 990 1 or 990-EZ 8 No 2
501(c)(8) Fraternal Beneficiary Societies Lodge providing for payment of life, 1024 990 1 or 990-EZ 8 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 990 1 or 990-EZ 8 No 2
Associations accident, or other benefits to members
501(c)(10) Domestic Fraternal Societies Lodge devoting its net earnings to 1024 990 1 or 990-EZ 8 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 Form 6 990 1 or 990-EZ 8 No 2
Associations retirement benefits
501(c)(12) Benevolent Life Insurance Activities of a mutually beneficial 1024 990 1 or 990-EZ 8 No 2
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 990 1 or 990-EZ 8 Yes, generally
501(c)(14) State-Chartered Credit Unions, Loans to members No Form 6 990 1 or 990-EZ 8 No 2
Mutual Reserve Funds
501(c)(15) Mutual Insurance Companies or Providing insurance to members 1024 990 1 or 990-EZ 8 No 2
Associations substantially at cost
501(c)(16) Cooperative Organizations to Financing crop operations in conjunction Form 1120-C 6990 1 or 990-EZ 8 No 2
Finance Crop Operations with activities of a marketing or purchasing association
501(c)(17) Supplemental Unemployment Provides for payment of 1024 990 1 or 990-EZ 8 No 2
Benefit Trusts supplemental unemploymentcompensation benefits
501(c)(18) Employee Funded Pension Trust Payment of benefits under a No Form 6 990 1 or 990-EZ 8 No 2
(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 990 1 or 990-EZ 8 No, generally 7
Present Members of the Armed organization Forces
501(c)(21) Black Lung Benefit Trusts Funded by coal mine operators to No Form 6 990-BL No 4
satisfy their liability for disability or death due to black lung diseases
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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 Form 6 990 or 990-EZ 8 No 5
liability of employers withdrawing from a multi-employer pension fund
501(c)(23) Veterans Organization (created To provide insurance and other No Form 6 990 or 990-EZ 8 No, generally 7
before 1880) benefits to veterans
501(c)(25) Title Holding Corporations or Trusts Holding title and paying over 1024 990 or 990-EZ No with Multiple Parents income from property to 35 or fewerparents or beneficiaries
501(c)(26) State-Sponsored Organization Provides health care coverage to No Form 6 990 1 or 990-EZ 8 No Providing Health Coverage for high-risk individuals High-Risk Individuals
501(c)(27) State-Sponsored Workers’ Reimburses members for losses No Form 6 990 1 or 990-EZ 8 No Compensation Reinsurance under workers’ compensation acts Organization
501(c)(28) National Railroad Retirement Manages and invests the assets of the No Form None No 11
Investment Trust Railroad Retirement Account
501(d) Religious and Apostolic Associations Regular business activities. No Form 1065 9 No 2
Communal religious community
501(e) Cooperative Hospital Service Performs cooperative services for 1023 990 1 or 990-EZ 8 Yes Organizations hospitals
501(f) Cooperative Service Organizations Performs collective investment 1023 990 1 or 990-EZ 8 Yes of Operating Educational services for educational organizations Organizations
501(k) Child Care Organizations Provides cares for children 1023 990 or 990-EZ 8 Yes
501(n) Charitable Risk Pools Pools certain insurance risks of 1023 990 1 or 990-EZ 8 Yes 501(c)(3)
501(q) Credit Counseling Organization Credit counseling services 1023 1023 12 No
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-POL 10 No association, etc., that directly or 990 or 990-EZ 8
indirectly accepts contributions ormakes expenditures for politicalcampaigns
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. Note: For annual tax periods beginning after 2006, most organizing document should be attached and the letter should be signed by tax-exempt organizations, other than churches, are required to file an annual an officer. Form 990, 990-EZ, or 990-PF with the IRS or to submit an annual electronicnotice, Form 990-N ( e-Postcard ), to the IRS. Tax-exempt organizations failing 7Contributions to these organizations are deductible only if 90% or more of to file an annual return or submit an annual notice as required for 3 the organization’s members are war veterans. consecutive years, it will automatically lose their tax-exempt status 8For limits on the use of Form 990-EZ, see chapter 2 and the general 2An organization exempt under a subsection of Code sec. 501 other than instructions for Form 990-EZ (or Form 990). 501(c)(3) can establish a charitable fund, contributions to which aredeductible. Such a fund must itself meet the requirements of section 9Although the organization files a partnership return, all distributions are 501(c)(3) and the related notice requirements of section 508(a). deemed dividends. The members are not entitled to pass through treatment of the organization’s income or expenses. 3Contributions to volunteer fire companies and similar organizations aredeductible, but only if made for exclusively public purposes. 10Form 1120-POL is required only if the organization has taxable income asdefined in Code section 527(c). 4Deductible as a business expense to the extent allowed by Code section192. 11Only required to annually file so much of the Form 990 that relates to thenames and addresses of the officers, directors, trustees, and key employees, 5Deductible as a business expense to the extent allowed by Code section and their titles, compensation, and hours devoted to their positions (Part VII 194A. of Form 990) and complete Tax exempt status (Item I in the Heading of Form990).
12See Code section 501(q) if the organization provides credit counselingservices and seeks recognition of exemption under section 501(c)(4). UseForm 1024 if applying for recognition under Code section 501(c)(4).
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To help us develop a more useful index, please let us know if you have ideas for index entries. Index See ªComments and Suggestionsº in the ªIntroductionº for the ways you can reach us.
Contributions, Filing requirements ……… .9 A H charitable ………… .15, 20 Annual information Acknowledgment of Health coverage returns ……………… .9 Court appeals …………… .6 contributions ………… .15 organization …………. .56 Donee information Credit union ……………. .53 Advance ruling ………….. .5 Help (See Tax help) return ……………… .14 Adverse determination …… .5 High-risk health coverage Due date …………….. .12 organization …………. .56 Aged, home for …………. .27 D Employment tax ……….. .11 Home for the aged ……… .27 Agricultural organization … .47 Determination letter ……… .5 Excise tax ………… .29, 62 Homeowners’ Airport ………………… .46 Political organization ……. .12 Disclosures, required …… .14 association ………….. .46 Alumni association ……… .24 Private foundations …….. .10 Dues used for lobbying …. .19 Horticultural Amateur athletic Unrelated business Nondeductible organization …………. .47 organizations ………… .28 income …………….. .11 contributions ………… .18 Hospital ……………. .26, 30 Animals, prevention of cruelty Quid pro quo Form 990-N …………….. .10 to …………………… .28 contributions ………… .14 Forms ………………….. .3 Appeal procedures ………. .6 Services available from 990 …………. .8, 10, 17, 44 I Application procedures … .3, 4 government …………. .19 990-BL …………….. .9, 55 Inactive organization ……. .19 Bylaws ……………….. .4 Dispositions of donated 990-EZ ………………. .10 Industrial development ….. .46 Conformed copy ……….. .4 property ……………… .14 990-PF ………… .10, 29, 62 Instrumentalities ……….. .20 Description of activities ….. .4 Disqualified persons ……. .40 990-T ………………… .11 Insurance, organizations Employer identification Domestic fraternal 1023 …3, 6, 7, 17, 21, 22, 24, providing ……………. .26 number ……………… .4 society ………………. .49 28, 44, 46 Integral-part test ……….. .41 Financial data ………….. .4 1024 ….. .3, 4, 17, 45, 47, 48, Donor advised funds: Organizing documents …… .4 49, 50, 52, 54, 55, 56 Excess benefit Aquatic resources ………. .47 1040 ………………… .12 transaction ………….. .58 L Articles of organization …. .23 1065 …………………. .9 Dues used for political or Labor organization ….. .19, 46 1120 ±POL …………… .12 Assistance (See Tax help) legislative activities ….. .19, Law, public interest …….. .27 1128 ………………… .20 47 Athletic organization … .24, 28 Legislative activity ….. .44, 47 2848 ……………….. .5, 6 Attorney’s fees …………. .27 Listed transaction ………. .57 4720 ………………… .45 Attribution, special rules … .42 Literary organizations …… .28 E 5578 ………………… .25 Loans, organizations Educational 5768 ………………… .44 providing ……………. .27 organizations …….. .24, 29 6069 ………………… .55 B Lobbying expenditures ….. .44 Employees’ association …. .49 8274 ………………… .12 Black lung benefit trust …. .55 Local benevolent life insurance 8282 ………………… .14 Employment taxes ……… .11 Board of trade ………….. .47 associations …………. .52 8283 ………………… .14 Endowment fund ……….. .30 Bureau defined …………. .38 Local employees’ 8300 ………………… .16 Estimated tax ………….. .11 Burial benefit insurance …. .52 association ………….. .49 8718 ……………….. .3, 5 Excess benefit Business income, Lodge system ………….. .49 8821 …………………. .6 transaction …………… .58 unrelated …………….. .11 8871 …………….. .12, 17 Disqualified person …. .58, 59 Business league ……….. .47 8872 …………….. .12, 17 Controlled entity, 35% … .59 M SS-4 ……………….. .4, 7 Family members …….. .59 Medical research W±2………………… .12 Substantial influence …. .59 C organization …………. .30 Fraternal beneficiary Disregarded benefits …… .60 Cemetery company ……… .52 Medicare and Medicaid society ………………. .49 Donor advised funds … .58, 59 Chamber of commerce ….. .47 payments ……………. .33 Fraternal societies ….. .19, 49 Excise tax ……………. .58 Change in legal Membership fee …….. .32, 38 Initial contracts ………… .61 Free tax services ……….. .62 structure …………….. .19 Modification of exemption … .5 Reasonable Funeral benefit Charitable contributions … .15, More information (See Tax help) compensation ……….. .60 insurance ……………. .52 20 Mutual financial Rebuttable presumption … .60 Charitable organization … .20, organization …………. .53 Excise tax: 26 G Mutual or cooperative Black lung benefit trust …. .55 Charitable risk pools ……. .26 Gifts and contributions, public association ………….. .52 Lobbying expenditures ….. .45 Child care organization ….. .20 charity ………………. .37 Political expenditures …… .45 Children, prevention of cruelty Private foundations …. .29, 62 Governmental unit ……… .30 to …………………… .28 N Exempt function ………… .12 Grant: Church ………………… .27 Nursing bureau ………… .27 Distinguished from gross Exempt purposes ………. .20 Integrated auxiliaries …… .27 receipts …………….. .38 Exemption for terrorist Civic leagues …………… .45 Exclusion for unusual organization ………….. .3 O Clinic ………………….. .27 grant …………… .33, 36 Extensions of time ……… .21 One-third support test …… .30 College bookstore, From public charity …. .33, 38 Organization assets …….. .23 restaurant ……………. .24 Grantor and contributor, Dedication ……………. .23 Comments ……………… .3 F reliance on ruling …….. .43 Community association …. .46 Distribution …………… .23 Facts and circumstances Gross receipts from Community nursing test …………………. .30 nonmembership Organization Reference bureau ………………. .27 sources ……………… .48 Chart ………………… .65 Fair market value, estimate Community trust ……….. .35 of …………………… .15 Group exemption letter …… .7 Organizational changes …. .19
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Section 509(a)(4) ………. .43 Charitable ……………. .26 Taxpayer Advocate ……… .62 P Support test ……….. .30, 36 Educational …………… .24 Technical advice ………… .6 Penalties ………………. .11 Literary ………………. .28 Public inspection: Failure to allow public Testing for public safety …. .43 Prevention of cruelty ……. .28 Annual return …………. .17 inspection ………….. .18 Title-holding corporation … .55 Private foundations …….. .28 Exemption applications …. .16 Failure to disclose ….. .15, 19 TTY/TDD information ……. .62 Public charities ………… .29 Forms 8871 and 8872 ….. .16 Failure to file ………….. .11 Qualifications …………. .20 Publications (See Tax help) Perpetual care U Religious …………….. .27 organization …………. .53 Public-interest law firm ….. .27 Unemployment benefit Scientific ……………… .28 Political activity ….. .19, 21, 46 Publicly supported trust ………………… .50 Single entity ……………. .35 organization …………. .30 Political organization: Unrelated business Social clubs ………… .19, 48 Attraction of public Income tax return ……… .12 income ………………. .11 Social welfare support …………….. .30 Taxable income ……….. .12 Unusual grants ……… .33, 36 organization ……… .19, 45 Ten-percent-of-support …. .30 Power of attorney ……….. .5 User fee ………………. .3, 5 Specified organizations …. .40 Preferred stock …………. .53 Sports organization, Prevention of cruelty to children R amateur ……………… .28 V or animals …………… .28 Racial composition ……… .24 State-sponsored ……….. .56 Veterans’ organization ….. .54 Private delivery service …. .21 Racially nondiscriminatory High-risk health coverage Voluntary employees’ Private foundations …….. .28 policy ……………….. .24 organization ………… .56 beneficiary Private operating Real estate board ………. .47 Workers’ compensation association ………….. .50 foundation …………… .43 Recognition of exemption, reinsurance Volunteer fire company …. .46 Private school ………….. .24 application …………… .21 organization ………… .56 Prohibited tax shelter Religious organizations …. .27 Stock or commodity transactions: Requests other than W exchange ……………. .47 Entity managers ……….. .57 applications …………… .5 War veterans’ Suggestions ……………. .3 Entity managers excise Responsiveness test ……. .41 organization …………. .54 Supplemental unemployment tax ………………… .57 Revocation of exemption …. .5 Withdrawal of application … .4 benefit trust ………….. .50 Listed transaction ……… .57 Ruling letter …………….. .5 Withholding information from Support ……………. .32, 33 Prohibited reportable public ………………… .4 Support test ……………. .30 transactions ………… .57 Workers’ compensation Facts and S Subsequently listed reinsurance circumstances ………. .30 transaction ………….. .57 Scholarship: organization …………. .56 One-third …………….. .30 Tax-exempt entities ……. .57 Private school …………. .25 Public charity …………. .36 Public charity: Scholarships …………… .26 n Supporting organization …. .58 Gifts and contributions ….. .37 School, private …………. .24 Grant from ……………. .38 Scientific organizations …. .28 Section 509(a)(1) ………. .29 T Section 501(c)(3) organizations: Section 509(a)(2) ………. .35 Amateur athletic ……….. .28 Tax help ……………….. .62 Section 509(a)(3) ………. .38
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Appendix. Sample Articles of Organization
The following are examples of a charter (Draft A) and a declaration of trust (Draft B) that contain the required information as
to purposes and powers of an organization and disposition of its assets upon dissolution. You should bear in mind that
requirements for these instruments may vary under applicable state law.
See Private Foundations and Public Charities for the special provisions required in a private foundation’s governing
instrument in order for it to qualify for exemption.
Draft A
Articles of Incorporation of the undersigned, a majority of whom are citizens of the United States, desiring to form a
Non-Profit Corporation under the Non-Profit Corporation Law of , do hereby certify:
First: The name of the Corporation shall be .
Second: The place in this state where the principal office of the Corporation is to be located is the City of
, County.
Third: Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for
such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of
the Internal Revenue Code, or the corresponding section of any future federal tax code.
Fourth: The names and addresses of the persons who are the initial trustees of the corporation are as follows:
Name , Address
Fifth: No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees,
officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable
compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article
Third hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise
attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or
distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office.
Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be
carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the
corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under
section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
If reference to federal law in articles of incorporation imposes a limitation that is invalid in your state, you may wish to
substitute the following for the last sentence of the preceding paragraph: ªNotwithstanding any other provision of these
articles, this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are
not in furtherance of the purposes of this corporation.º
Sixth: Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the
meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or
shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so
disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the
corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall
determine, which are organized and operated exclusively for such purposes.
In witness whereof, we have hereunto subscribed our names this day of ,
20 .
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Appendix. Sample Articles of Organization, continued
Draft B
The Charitable Trust. Declaration of Trust made as of the day of
, 20 , by , of , and
, of , who hereby declare and agree that they have received this day
from , as Donor, the sum of Ten Dollars ($10) and that they will hold and manage the
same, and any additions to it, in trust, as follows:
First: This trust shall be called ªThe Charitable Trust.º
Second: The trustees may receive and accept property, whether real, personal, or mixed, by way of gift, bequest, or devise,
from any person, firm, trust, or corporation, to be held, administered, and disposed of in accordance with and pursuant to the
provisions of this Declaration of Trust; but no gift, bequest, or devise of any such property shall be received and accepted if it
is conditioned or limited in such manner as to require the disposition of the income or its principal to any person or
organization other than a ªcharitable organizationº or for other than ªcharitable purposesº within the meaning of such terms as
defined in Article Third of this Declaration of Trust, or as shall, in the opinion of the trustees, jeopardize the federal income tax
exemption of this trust pursuant to section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future
federal tax code.
Third:
A. The principal and income of all property received and accepted by the trustees to be administered under this Declaration
of Trust shall be held in trust by them, and the trustees may make payments or distributions from income or principal, or
both, to or for the use of such charitable organizations, within the meaning of that term as defined in paragraph C, in such
amounts and for such charitable purposes of the trust as the trustees shall from time to time select and determine; and the
trustees may make payments or distributions from income or principal, or both, directly for such charitable purposes, within
the meaning of that term as defined in paragraph D, in such amounts as the trustees shall from time to time select and
determine without making use of any other charitable organization. The trustees may also make payments or distributions
of all or any part of the income or principal to states, territories, or possessions of the United States, any political
subdivision of any of the foregoing, or to the United States or the District of Columbia but only for charitable purposes within
the meaning of that term as defined in paragraph D. Income or principal derived from contributions by corporations shall be
distributed by the trustees for use solely within the United States or its possessions. No part of the net earnings of this trust
shall inure or be payable to or for the benefit of any private shareholder or individual, and no substantial part of the
activities of this trust shall be the carrying on of propaganda, or otherwise attempting to influence legislation. No part of the
activities of this trust shall be the participation in, or intervention in (including the publishing or distributing of statements),
any political campaign on behalf of or in opposition to any candidate for public office.
B. The trust shall continue forever unless the trustees terminate it and distribute all of the principal and income, which
action may be taken by the trustees in their discretion at any time. On such termination, assets shall be distributed for one
or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding
section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government,
for a public purpose. The donor authorizes and empowers the trustees to form and organize a nonprofit corporation limited
to the uses and purposes provided for in this Declaration of Trust, such corporation to be organized under the laws of any
state or under the laws of the United States as may be determined by the trustees; such corporation when organized to
have power to administer and control the affairs and property and to carry out the uses, objects, and purposes of this trust.
Upon the creation and organization of such corporation, the trustees are authorized and empowered to convey, transfer,
and deliver to such corporation all the property and assets to which this trust may be or become entitled. The charter,
bylaws, and other provisions for the organization and management of such corporation and its affairs and property shall be
such as the trustees shall determine, consistent with the provisions of this paragraph.
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C. In this Declaration of Trust and in any amendments to it, references to ªcharitable organizationsº or ªcharitable
organizationº mean corporations, trusts, funds, foundations, or community chests created or organized in the United States
or in any of its possessions, whether under the laws of the United States, any state or territory, the District of Columbia, or
any possession of the United States, organized and operated exclusively for charitable purposes, no part of the net
earnings of which inures or is payable to or for the benefit of any private shareholder or individual, and no substantial part
of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which do not
participate in or intervene in (including the publishing or distributing of statements) any political campaign on behalf of or in
opposition to any candidate for public office. It is intended that the organization described in this paragraph C shall be
entitled to exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding
section of any future federal tax code.
D. In this Declaration of Trust and in any amendments to it, the term ªcharitable purposesº shall be limited to and shall
include only religious, charitable, scientific, literary, or educational purposes within the meaning of those terms as used in
section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, but only such
purposes as also constitute public charitable purposes under the law of trusts of the State of .
Fourth: This Declaration of Trust may be amended at any time or times by written instrument or instruments signed and
sealed by the trustees, and acknowledged by any of the trustees, provided that no amendment shall authorize the trustees to
conduct the affairs of this trust in any manner or for any purpose contrary to the provisions of section 501(c)(3) of the Internal
Revenue Code, or the corresponding section of any future federal tax code. An amendment of the provisions of this Article
Fourth (or any amendment to it) shall be valid only if and to the extent that such amendment further restricts the trustees’
amending power. All instruments amending this Declaration of Trust shall be noted upon or kept attached to the executed
original of this Declaration of Trust held by the trustees.
Fifth: Any trustee under this Declaration of Trust may, by written instrument, signed and acknowledged, resign his office. The
number of trustees shall be at all times not less than two, and whenever for any reason the number is reduced to one, there
shall be, and at any other time there may be, appointed one or more additional trustees. Appointments shall be made by the
trustee or trustees for the time in office by written instruments signed and acknowledged. Any succeeding or additional
trustee shall, upon his or her acceptance of the office by written instrument signed and acknowledged, have the same
powers, rights, and duties, and the same title to the trust estate jointly with the surviving or remaining trustee or trustees as if
originally appointed.
None of the trustees shall be required to furnish any bond or surety. None of them shall be responsible or liable for the acts or
omissions of any other of the trustees or of any predecessor or of a custodian, agent, depositary, or counsel selected with
reasonable care.
The one or more trustees, whether original or successor, for the time being in office, shall have full authority to act even
though one or more vacancies may exist. A trustee may, by appropriate written instrument, delegate all or any part of his or
her powers to another or others of the trustees for such periods and subject to such conditions as such delegating trustee
may determine.
The trustees serving under this Declaration of Trust are authorized to pay to themselves amounts for reasonable expenses
incurred and reasonable compensation for services rendered in the administration of this trust, but in no event shall any
trustee who has made a contribution to this trust ever receive any compensation thereafter.
Sixth: In extension and not in limitation of the common law and statutory powers of trustees and other powers granted in this
Declaration of Trust, the trustees shall have the following discretionary powers.
a) To invest and reinvest the principal and income of the trust in such property, real, personal, or mixed, and in such
manner as they shall deem proper, and from time to time to change investments as they shall deem advisable; to invest in
or retain any stocks, shares, bonds, notes, obligations, or personal or real property (including without limitation any
interests in or obligations of any corporation, association, business trust, investment trust, common trust fund, or
investment company) although some or all of the property so acquired or retained is of a kind or size which but for this
express authority would not be considered proper and although all of the trust funds are invested in the securities of one
company. No principal or income, however, shall be loaned, directly or indirectly, to any trustee or to anyone else,
corporate or otherwise, who has at any time made a contribution to this trust, nor to anyone except on the basis of an
adequate interest charge and with adequate security.
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b) To sell, lease, or exchange any personal, mixed, or real property, at public auction or by private contract, for such
consideration and on such terms as to credit or otherwise, and to make such contracts and enter into such undertakings
relating to the trust property, as they consider advisable, whether or not such leases or contracts may extend beyond the
duration of the trust.
c) To borrow money for such periods, at such rates of interest, and upon such terms as the trustees consider advisable,
and as security for such loans to mortgage or pledge any real or personal property with or without power of sale; to acquire
or hold any real or personal property, subject to any mortgage or pledge on or of property acquired or held by this trust.
d) To execute and deliver deeds, assignments, transfers, mortgages, pledges, leases, covenants, contracts, promissory
notes, releases, and other instruments, sealed or unsealed, incident to any transaction in which they engage.
e) To vote, to give proxies, to participate in the reorganization, merger, or consolidation of any concern, or in the sale,
lease, disposition, or distribution of its assets; to join with other security holders in acting through a committee, depositary,
voting trustees, or otherwise, and in this connection to delegate authority to such committee, depositary, or trustees and to
deposit securities with them or transfer securities to them; to pay assessments levied on securities or to exercise
subscription rights in respect of securities.
f) To employ a bank or trust company as custodian of any funds or securities and to delegate to it such powers as they
deem appropriate; to hold trust property without indication of fiduciary capacity but only in the name of a registered
nominee, provided the trust property is at all times identified as such on the books of the trust; to keep any or all of the trust
property or funds in any place or places in the United States of America; to employ clerks, accountants, investment
counsel, investment agents, and any special services, and to pay the reasonable compensation and expenses of all such
services in addition to the compensation of the trustees.
Seventh: The trustees’ powers are exercisable solely in the fiduciary capacity consistent with and in furtherance of the
charitable purposes of this trust as specified in Article Third and not otherwise.
Eighth: In this Declaration of Trust and in any amendment to it, references to ªtrusteesº mean the one or more trustees,
whether original or successor, for the time being in office.
Ninth: Any person may rely on a copy, certified by a notary public, of the executed original of this Declaration of Trust held by
the trustees, and of any of the notations on it and writings attached to it, as fully as he might rely on the original documents
themselves. Any such person may rely fully on any statements of fact certified by anyone who appears from such original
documents or from such certified copy to be a trustee under this Declaration of Trust. No one dealing with the trustees need
inquire concerning the validity of anything the trustees purport to do. No one dealing with the trustees need see to the
application of anything paid or transferred to or upon the order of the trustees of the trust.
Tenth: This Declaration of Trust is to be governed in all respects by the laws of the State of .
·Trustee
·Trustee
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