ContentsIntroduction ........................................ 2

Chapter 1. Application, Approval,and Appeal Procedures .............. 2

Application Procedures ................... 2Forms Required ......................... 2Required Inclusions ................... 3Miscellaneous Procedures ........ 3

Rulings and Determination Letters . 4Effective Date of Exemption ...... 4Revocation or Modification of

Exemption ........................... 4Appeal Procedures ......................... 5

Appeals Office Consideration .... 5Headquarters Consideration ..... 5Administrative Remedies ........... 5Appeal to Courts ....................... 5

Group Exemption Letter ................. 6Central Organization Application

Procedure ........................... 6Keeping the Group Exemption

Letter in Force .................... 7Events Causing Loss of Group

Exemption ........................... 7

Chapter 2. Filing Requirements andRequired Disclosures ................. 7

Annual Information Returns ............ 8Unrelated Business Income Tax

Return ...................................... 9Employment Tax Returns ............... 9Political Organization Income Tax

Return ...................................... 9Reporting Requirements for a

Political Organization ............... 10Donee Information Return .............. 11Information Provided to Donors ...... 11Report of Cash Received ............... 12Public Inspection of Exemption

Applications, Annual Returns,and Political OrganizationReporting Forms ...................... 12

Required Disclosures ...................... 14Solicitation of Nondeductible

Contributions ...................... 14Sales of Information or Services

Available Free FromGovernment ........................ 14

Dues Used for Lobbying orPolitical Activities ................ 14

Miscellaneous Rules ....................... 14

Chapter 3. Section 501(c)(3)Organizations .............................. 15

Contributions ................................... 15Application for Recognition of

Exemption ................................ 15Articles of Organization .................. 17Educational Organizations and

Private Schools ........................ 20Organizations Providing Insurance . 22Other Section 501(c)(3)

Organizations ........................... 22Private Foundations and Public

Charities ................................... 24Lobbying Expenditures ................... 43

Chapter 4. Other Section 501(c)Organizations .............................. 45

501(c)(4) — Civic Leagues andSocial Welfare Organizations .. 45

501(c)(5) — Labor, Agricultural, andHorticultural Organizations ...... 46

Departmentof theTreasury

InternalRevenueService

Publication 557(Rev. July 2001)Cat. No. 46573C

Tax-ExemptStatus for YourOrganization

501(c)(6) — Business Leagues,Etc. ........................................... 46

501(c)(7) — Social and RecreationClubs ........................................ 47

501(c)(8) and 501(c)(10) —Fraternal Beneficiary Societiesand Domestic FraternalSocieties .................................. 48

501(c)(4), 501(c)(9), and 501(c)(17)— Employees' Associations .... 48

501(c)(12) — Local Benevolent LifeInsurance Associations, MutualIrrigation and TelephoneCompanies, and LikeOrganizations ........................... 50

501(c)(13) — Cemetery Companies 51501(c)(14) — Credit Unions and

Other Mutual FinancialOrganizations ........................... 52

501(c)(19) — Veterans'Organizations ........................... 53

501(c)(20) — Group Legal ServicesPlan Organizations .................. 53

501(c)(21) — Black Lung BenefitTrusts ....................................... 53

501(c)(2) — Title-HoldingCorporations for Single Parents 54

501(c)(25) — Title-HoldingCorporations for MultipleParents ..................................... 54

501(c)(26) — State-SponsoredHigh-Risk Health CoverageOrganizations ........................... 55

501(c)(27) — State-SponsoredWorkers' CompensationReinsurance Organizations ..... 55

Chapter 5. How To Get Tax Help ...... 55

Organization Reference Chart .......... 57

Index .................................................... 59

IntroductionThis publication discusses the rules and pro-cedures for organizations that seek recogni-tion of exemption from federal income taxunder section 501(a) of the Internal RevenueCode (the Code). It explains the proceduresyou must follow to obtain an appropriate rul-ing or determination letter recognizing yourorganization's exemption, as well as certainother information that applies generally to allexempt organizations. To qualify for ex-emption under the Code, your organizationmust be organized for one or more of thepurposes specifically designated in the Code.Organizations that are exempt under section501(a) of the Code include those organiza-tions described in section 501(c). Section501(c) organizations are covered in this pub-lication.

Chapter 1 provides general informationabout the procedures for obtaining recogni-tion of tax-exempt status.

Chapter 2 contains information about an-nual filing requirements and other matters thatmay affect your organization's tax-exemptstatus.

Chapter 3 contains detailed informationon various matters affecting section 501(c)(3)organizations, including a section on the de-termination of private foundation status.

Chapter 4 includes separate sections forspecific types of organizations described insection 501(c).

Organizations not discussed in this publi-cation. Certain organizations that may qual-ify for exemption are not discussed in thispublication, although they are included in theOrganization Reference Chart found on page57 of this publication. These organizations(and the Code sections that apply to them)are as follows.

Section 501(c)(24) organizations (section4049 ERISA trusts) are neither discussed inthe text nor listed in the Organization Refer-ence Chart.

Likewise, farmers' cooperative associ-ations that qualify for exemption under section521, qualified state tuition programs de-scribed in section 529, and pension, profit-sharing, and stock bonus plans described insection 401(a) are not discussed in this pub-lication. If you think your organization fallswithin one of these categories, contact theInternal Revenue Service (IRS) for any addi-tional information you need. For telephoneassistance, call 1-877-829-5500.

Check the Table of Contents at the be-ginning of this publication to determinewhether your organization is described in thispublication. If it is, read the chapter (or sec-tion) that applies to your type of organizationfor the specific information you must givewhen applying for recognition of exemption.

Organization Reference Chart. This chart,located on page 57, enables you to locate ata glance the section of the Code under whichyour organization might qualify for exemption.It also shows the required application formand, if your organization meets the exemptionrequirements, the annual return to be filed (ifany), and whether or not a contribution to yourorganization will be deductible by a donor. Italso describes each type of qualifying organ-ization and the general nature of its activities.

You may use this chart to determine theCode section that you think applies to yourorganization. Any correspondence with theIRS (in requesting forms or otherwise) will beexpedited if you indicate in your correspond-ence the appropriate Code section.

Comments and suggestions. We welcomeyour comments about this publication andyour suggestions for future editions.

You can e-mail us while visiting our website at www.irs.gov/help/email2.html .

You can write to us at the following ad-dress:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone.Therefore, it would be helpful if you would

include your daytime phone number, includ-ing the area code, in your correspondence.

1.Application,Approval, andAppealProcedures

IntroductionIf your organization is one of the organiza-tions described in this publication and isseeking recognition of tax-exempt status fromthe IRS, you should follow the proceduresdescribed in this chapter and the instructionsthat accompany the appropriate applicationforms.

For information on section 501(c)(3) or-ganizations, see chapter 3. If your organiza-tion is seeking exemption under one of theother paragraphs of section 501(c), seechapter 4.

TopicsThis chapter discusses:

• Application procedures that generallyapply to all organizations discussed inthis publication, including the applicationforms,

• Rulings and determination letters(approvals/disapprovals),

• Appeal procedures available if an ad-verse determination letter is proposed,and

• Group exemption letters.

ApplicationProcedures Oral requests for recognition of exemptionwill not be considered by the IRS. Your ap-plication for tax-exempt status must be inwriting using the appropriate forms as dis-cussed below.

Forms Required Most organizations seeking recognition ofexemption from federal income tax must usespecific application forms prescribed by theIRS. Two forms currently required by the IRSare Form 1023, Application for Recognitionof Exemption Under Section 501(c)(3) of theInternal Revenue Code, and Form 1024, Ap-plication for Recognition of Exemption UnderSection 501(a). For information about how toobtain the latest revision, see chapter 5.

Forms 1023 and 1024 contain instructionsand checklists to help you provide the infor-mation required to process your application.Incomplete applications will not be processed.

Corporations organized under Acts ofCongress .............................................. 501(c)(1)Teachers' retirement fund associations ............................................................... 501(c)(11)Mutual insurance companies ............... 501(c)(15)Corporations organized to finance cropoperations ............................................. 501(c)(16)Employee funded pension trusts (cre-ated before June 25, 1959) ................. 501(c)(18)Withdrawal liability payment fund ........ 501(c)(22)Veterans' organizations (created before1880) .................................................... 501(c)(23)Religious and apostolic associations ... 501(d)Cooperative hospital service organiza-tions ...................................................... 501(e)Cooperative service organizations ofoperating educational organizations .... 501(f)

Page 2 Chapter 1 Application, Approval, and Appeal Procedures

Some organizations do not have to usespecific application forms. The applicationyour organization must use is specified in thechapter in this publication dealing with yourkind of organization. It is also shown in theOrganization Reference Chart on page 57 ofthis publication.

When no specific application form is pre-scribed for your organization, application forexemption is by letter to the IRS. Send theapplication to the appropriate address shownon Form 8718, User Fee for Exempt Organ-ization Determination Letter Request. Theletter must be signed by an authorized indi-vidual such as an officer of the organizationor a person authorized by a power of attorney.(See Power of attorney on page 4.) Send thepower of attorney with the application letterwhen you file it. The letter should also con-tain the name and telephone number of theperson to contact. The information describedbelow under Required Inclusions must besent with the letter.

User fee. The law requires the payment of auser fee for determination letter requests suchas your application for recognition of tax-exempt status. You should use Form 8718 tofigure the amount of your fee and to pay it.Your payment must accompany your request.The IRS will not process a request unless thefee has been paid.

TIPTo find the correct amounts for userfees and the length of time to processa request, call 1-877-829-5500 for

assistance.

Required Inclusions Every exempt organization must have anemployer identification number (EIN),whether or not it has any employees.

If your organization does not have an EIN,your application for recognition of exemptionshould include a completed Form SS–4, Ap-plication for Employer Identification Number.

Organizing documents. Each applicationfor exemption must be accompanied by aconformed copy of your organization's Arti-cles of Incorporation (and the Certificate ofIncorporation, if available), Articles of Associ-ation, Trust Indenture, Constitution, or otherenabling document. If the organization doesnot have an organizing document, it will notqualify for exempt status.

Bylaws. Bylaws alone are not organizingdocuments. However, if your organization hasadopted bylaws, include a current copy. Thebylaws need not be signed if submitted as anattachment.

If your organization's name has been offi-cially changed by an amendment to your or-ganizing instruments, you should also attacha conformed copy of that amendment to yourapplication.

Conformed copy. A conformed copy isa copy that agrees with the original and allamendments to it. If the original documentrequired a signature, the copy should eitherbe signed by a principal officer or, if notsigned, be accompanied by a written decla-ration signed by an authorized officer of theorganization. With either option, the officermust certify that the document is a completeand accurate copy of the original. A certificateof incorporation should be approved anddated by an appropriate state official.

Every attachment should show your or-ganization's name, address, and EIN. It

should also state that it is an attachment toyour application form and identify the part andline item number to which it applies.

Do not submit original documents be-cause they become part of the IRS file andcannot be returned.

Description of activities. Your applicationmust include a full description of the purposesand the activities of your organization. Whendescribing the activities in which your organ-ization expects to engage, you must includethe standards, criteria, procedures, or othermeans that your organization adopted orplanned for carrying out those activities.

To determine the information you need toprovide, you should study the part of thispublication that applies to your organization.The appropriate chapter will describe thepurposes and activities that your organizationmust pursue, engage in, and include in yourapplication in order to achieve exempt status.

Often your organization's articles of or-ganization (or other organizing instruments)contain descriptions of your organization'spurposes and activities.

Financial data. You must include in yourapplication financial statements showing yourreceipts and expenditures for the current yearand the 3 preceding years (or for the numberof years your organization was in existence,if less than 4 years). For each accountingperiod, you must describe the sources of yourreceipts and the nature of your expenditures.You must also include a balance sheet for thecurrent year.

If you have not yet begun operations, orhave operated for less than 1 year, a pro-posed budget for 2 full accounting periodsand a current statement of assets and liabil-ities will be acceptable.

Other information. The IRS may require youto provide additional information necessary toclarify the nature of your organization. Someexamples are:

• Representative copies of advertisingplaced,

• Copies of publications, such as maga-zines,

• Distributed written material used for ex-pressing views on proposed legislation,and

• Copies of leases, contracts, or agree-ments into which your organization hasentered.

Miscellaneous ProceduresFor prompt action on your application, be sureto attach all schedules, statements, and otherdocuments required by the application form.If you do not attach them, you may have toresubmit your application or you may other-wise encounter a delay in obtaining recogni-tion of exemption.

Incomplete application. If the applicationdoes not contain the required information, itmay be returned with a letter of explanationwithout being considered on its merits. If thecompleted application is resubmitted withinthe time period indicated in the letter from theIRS, it will be considered received on the ori-ginal submission date. In that case, if the ori-ginal submission was timely, the applicationwill be considered timely filed as discussed in

chapter 3, under Application for Recognitionof Exemption.

Application made under wrong paragraphof section 501(c). Occasionally, an organ-ization may appear to qualify for exemptionunder a paragraph of section 501(c) that isdifferent from the one for which the organ-ization applied. If the application was madeon Form 1024, which applies to more thanone paragraph of section 501(c), the organ-ization may be recognized as exempt underany paragraph to which the form applies if theorganization has agreed to have its applica-tion considered under that paragraph. It mustalso supply any additional information re-quired for the application under the new par-agraph.

Different application form needed. If adifferent application form is required for yourorganization, the IRS will so advise your or-ganization and will provide the appropriateapplication form for your convenience in re-applying under that paragraph, if you wish todo so. Although supporting information previ-ously furnished need not be duplicated, youmust provide any necessary additional infor-mation required for the application. If yourreply is not received within a limited time, yourapplication will be processed only for theparagraph under which you originally applied.

When a specific application form isneeded for the paragraph under which yourorganization qualifies, that form is requiredbefore a letter recognizing exemption can beissued. This includes cases in which an ex-emption letter is modified to recognize an or-ganization's exempt status under a paragraphother than the paragraph under which it ori-ginally established exemption.

IRS responses. Organizations that submita complete application will receive an ac-knowledgment from the IRS. Others will re-ceive a letter requesting more information orreturning an incomplete application. Appli-cants also will be notified if the application isforwarded to the Headquarters of the IRS forconsideration. These letters will be sent outas soon as possible after receipt of the or-ganization's application.

Withdrawal of application. An applicationmay be withdrawn at any time before the is-suance of a ruling or determination letter uponthe written request of a principal officer orauthorized representative of your organiza-tion. However, the withdrawal will not preventthe information contained in the applicationfrom being used by the IRS in any subse-quent examination of your organization's re-turns. The information forwarded with an ap-plication will not be returned to yourorganization and, generally, when an appli-cation is withdrawn, the user fee paid will notbe refunded.

Requests for withholding of informationfrom the public. The law requires manyexempt organizations and private foundationsto make their application forms and annualinformation returns available for public in-spection. The law also requires the IRS tomake available for public inspection, in ac-cordance with section 6104 of the Code andthe related regulations, your approved appli-cation for recognition of exemption (includingany papers submitted in support of the appli-cation) and the ruling or determination letter(discussed later, under Rulings and Determi-nation Letters).

Chapter 1 Application, Approval, and Appeal Procedures Page 3

Any information submitted in the applica-tion or in support of it that relates to any tradesecret, patent, process, style of work, or ap-paratus, upon request, may be withheld frompublic inspection if the Commissioner deter-mines that the disclosure of such informationwould adversely affect the organization. Yourrequest must:

1) Identify the material to be withheld (thedocument, page, paragraph, and line)by clearly marking it, “Not Subject ToPublic Inspection,”

2) Include the reasons for your organiza-tion's position that the information is ofthe type that may be withheld from publicinspection, and

3) Be filed with the documents in which thematerial to be withheld is contained.

Where to file. Your application for recogni-tion of tax-exempt status must be filed withthe IRS at the address shown on Form 8718.

Your application will be considered by theManager, EO Determinations, who will eitherissue a favorable determination letter to yourorganization, issue an adverse determinationletter denying the exempt status claimed inthe application, or refer the case to the Ex-empt Organizations Technical Office (EOTechnical) in the Headquarters of the IRS fora ruling.

Requests other than applications.Requests other than applications forrecognition of exemption (for exam-

ple, requests for rulings involving feeder or-ganizations, application of excise taxes toactivities of private foundations, taxation ofunrelated business income, etc.) should besent to:

Exempt OrganizationsInternal Revenue ServiceCommissioner, TE/GEAttention: T:EO:RAP.O. Box 27720, McPherson StationWashington, DC 20038

These requests, like applications for recogni-tion of exemption, must be accompanied bythe appropriate user fee.

Referral to Headquarters. EO ExaminationsArea Manager, EO Determinations AreaManager, or Appeals Area Director, SB/SE -TE/GE, will refer to Headquarters any exemptorganization issue concerning qualification forexemption or foundation status for whichthere is no published precedent or for whichthere is reason to believe that nonuniformityexists. An EO Examinations, an EO Determi-nations, or an Appeals Office may requesttechnical advice on any technical or proce-dural question that cannot be resolved on thebasis of law, regulations, or a clearly appli-cable revenue ruling or other publishedprecedent. An organization may request thatan issue be referred to EO Technical, Head-quarters, for technical advice if it feels that alack of uniformity exists as to the dispositionof the issue or if an issue is so unusual orcomplex as to warrant consideration byHeadquarters. If a determination letter is is-sued based on technical advice from Head-quarters regarding qualification for exemptionor foundation status, no further administrativeappeal is available on the issue that was thesubject of technical advice.

Power of attorney. If your organization ex-pects to be represented by an agent or attor-ney, whether in person or by correspondence,you must file a power of attorney with yourexemption application specifically authorizingthe agent or attorney to represent your or-ganization. Form 2848, Power of Attorneyand Declaration of Representative, may beused for this purpose.

Reminder. The law requires payment ofa user fee for determination letter requests.Use Form 8718 to figure the amount and paythe fee. Payment must accompany each re-quest.

Rulings andDetermination Letters

A ruling or determination letter will be issuedto your organization if its application andsupporting documents establish that it meetsthe particular requirements of the section un-der which it is claiming exemption. However,the IRS will not ordinarily issue rulings or de-termination letters recognizing exemption ifan issue involving the organization's exemptstatus is pending in litigation or is under con-sideration within the IRS.

Advance ruling. A ruling or determinationletter may be issued in advance of operationsif your organization can describe its proposedoperations in enough detail to permit a con-clusion that it will clearly meet the particularrequirements of the section under which it isclaiming exemption. A restatement of the or-ganization's purpose or a statement that itwill be operated in furtherance of that purposewill not satisfy this requirement. The organ-ization must describe fully the activities inwhich it expects to engage. This includesstandards, procedures, or other meansadopted or planned by the organization forcarrying out its activities, expected sourcesof funds, and the nature of its contemplatedexpenses.

When an organization does not supply theinformation previously mentioned under Ap-plication Procedures, or fails to furnish a suf-ficiently detailed description of its proposedactivities to permit a conclusion that it willclearly be exempt, a record of actual oper-ations may be required before a ruling or de-termination letter is issued.

Adverse determination. If an organizationis unable to describe fully its purposes andactivities, resulting in a refusal by the IRS toissue a ruling or determination letter, that re-fusal is considered an adverse determination,which the organization can appeal. See Ap-peal Procedures, later.

Effective Date of ExemptionA ruling or determination letter recognizingexemption is usually effective as of the dateof formation of an organization if, duringthe period before the date of the ruling ordetermination letter, its purposes and activ-ities were those required by the law. (SeeApplication for Recognition of Exemption inchapter 3 for the special rule for organizationsapplying for recognition of exemption undersection 501(c)(3).) Upon obtaining recognition

of exemption, the organization may file aclaim for a refund of income taxes paid for theperiod for which its exempt status is recog-nized.

If an organization is required to alter itsactivities or substantially amend its charter toqualify, the ruling or determination letter re-cognizing exemption will be effective as ofthe date specified in the letter. If a non-substantive amendment is made, such ascorrection of a clerical error in the enablinginstrument or the addition of a dissolutionclause, exemption will ordinarily be recog-nized as of the date of formation if the activ-ities of the organization before the ruling ordetermination are consistent with the ex-emption requirements.

A ruling or determination letter recognizingexemption may not be relied upon if there isa material change, inconsistent with ex-emption, in the character, the purpose, or themethod of operation of the organization.

Revocation or Modificationof ExemptionA ruling or determination letter recognizingexemption may be revoked or modified by:

1) A notice to the organization to which theruling or determination letter originallywas issued,

2) Enactment of legislation or ratification ofa tax treaty,

3) A decision of the United States SupremeCourt,

4) Issuance of temporary or final regu-lations, or

5) Issuance of a revenue ruling, a revenueprocedure, or other statement publishedin the Internal Revenue Bulletin or Cu-mulative Bulletin.

When revocation takes effect. If the or-ganization omitted or misstated a materialfact, operated in a manner materially differentfrom that originally represented, or, with re-gard to organizations to which section 503applies, engaged in a prohibited transaction(such as diverting corpus or income from itsexempt purpose), the revocation or modifica-tion may be retroactive.

Material change in organization. If there isa material change, inconsistent with ex-emption, in the character, purpose, or methodof operation of the organization, revocationor modification will ordinarily take effect as ofthe date of that material change.

Relief from retroactivity. If a ruling ordetermination letter was issued in error or isno longer in accord with the holding of theIRS, and if section 7805(b) relief is granted,retroactivity of the revocation or modificationordinarily will be limited to a date not earlierthan that on which the original ruling or de-termination letter was modified or revoked.For more information on requesting section7805(b) relief, see Revenue Procedure2001-4 (or later update).

Foundations. The determination of theeffective date is the same for the revocationor modification of foundation status or oper-ating foundation status unless the effectivedate is expressly covered by statute or regu-lations.

Page 4 Chapter 1 Application, Approval, and Appeal Procedures

Written notice. If an EO area managerconcludes, as a result of examining an infor-mation return or considering information fromany other source, that a ruling or determi-nation letter should be revoked or modified,the organization will be advised in writing ofthe proposed action and the reasons for it.

The organization will also be advised of itsright to protest the proposed action by re-questing Appeals Office consideration. Theappeal procedures are discussed next.

Appeal Procedures If an organization applies for tax-exempt sta-tus and receives an adverse determinationletter, the organization will be advised of itsright to protest the determination by request-ing Appeals Office consideration. The organ-ization must send its protest to the EO areamanager of the office issuing the adverseletter. The letter must be sent within 30 daysfrom the date of the adverse determinationletter and must state whether it wishes anAppeals Office conference.

Representation. A principal officer or trusteemay represent an organization at any levelof appeal within the IRS. Or, the organizationmay be represented by an attorney, certifiedpublic accountant, or individual enrolled topractice before the IRS.

If the organization's representative attendsa conference without a principal officer ortrustee, the representative must file a properpower of attorney or a tax information au-thorization before receiving or inspectingconfidential information. Form 2848, or Form8821, Tax Information Authorization, as ap-propriate (or any other properly written powerof attorney or authorization), may be used forthis purpose. These forms may be obtainedfrom the IRS. For more information, get Pub-lication 947, Practice Before the IRS andPower of Attorney.

Appeals OfficeConsiderationThe protest to the Appeals Office should befiled with the local Appeals Office consideringthe application and contain all of the followinginformation.

1) The organization's name, address, andemployer identification number.

2) A statement that the organization wantsto protest the determination.

3) The date and symbols on the determi-nation letter.

4) A statement of facts supporting the or-ganization's position in any contestedfactual issue.

5) A statement outlining the law or otherauthority the organization is relying on.

6) A statement as to whether a conferenceat the Appeals Office is desired.

The statement of facts (item 4) must bedeclared true under penalties of perjury. Thismay be done by adding to the protest thefollowing signed declaration:

If the organization's representative submitsthe protest, a substitute declaration must beincluded, stating:

1) That the representative prepared theprotest and accompanying documents,and

2) Whether the representative knows per-sonally that the statements of fact con-tained in the protest and accompanyingdocuments are true and correct.

Be sure the protest contains all of the in-formation requested. Incomplete protests willbe returned for completion.

If a conference is requested, it will be heldat the Appeals Office, unless the organizationrequests that the meeting be held at a fieldoffice convenient to both parties.

The Appeals Office, after considering theorganization's protest as well as informationpresented in any conference held, will notifythe organization of its decision and issue anappropriate determination letter. An adversedecision may be appealed to the courts (dis-cussed later).

Appeals offices must request technicaladvice from EO Technical, IRS Headquar-ters, on any exempt organization issue con-cerning qualification for exemption or foun-dation status for which there is no publishedprecedent or for which there is reason to be-lieve that nonuniformity exists. If an organ-ization believes that its case involves suchan issue, it should ask the Appeals Office torequest technical advice.

Any determination letter issued on thebasis of technical advice from Headquartersmay not be appealed to the Appeals Office forthose issues that were the subject of thetechnical advice.

Headquarters ConsiderationIf an application is referred to IRS Headquar-ters for issuance of a ruling and an adverseruling is issued, the organization will be in-formed of the basis for the conclusion, its rightto file a protest within 30 days, and its rightto have a conference at Headquarters.

Administrative RemediesIn the case of an application under section501(c)(3) of the Code, all of the followingactions, called administrative remedies, mustbe completed by your organization before anunfavorable ruling or determination letter fromthe IRS can be appealed to the courts.

1) The filing of a substantially completedapplication Form 1023 (described earlierin this chapter) or the filing of a requestfor a determination of foundation status(see Private Foundations and PublicCharities in chapter 3).

2) In the case of a late-filed application,requesting relief under section 301.9100of the Income Tax Regulations regardingapplications for extensions of time formaking an election or application for re-lief from tax (see Application for Recog-nition of Exemption in chapter 3).

“Under penalties of perjury, I declare thatI have examined the statement of factspresented in this protest and in any ac-companying schedules and statementsand, to the best of my knowledge and be-lief, it is true, correct, and complete.”

3) The timely submission of all additionalinformation requested to perfect an ex-emption application or request for deter-mination of private foundation status.

4) Exhaustion of all administrative appealsavailable within the IRS, including pro-test of an adverse ruling in the Head-quarters original jurisdiction exemptionapplication cases.

The actions just described will not beconsidered completed until the IRS has hada reasonable time to act upon the appeal orprotest, as the case may be.

An organization will not be considered tohave exhausted its administrative remediesbefore the earlier of:

1) The completion of the steps just listedand the sending by certified or registeredmail of a notice of final determination,or

2) The expiration of the 270-day period inwhich the IRS has not issued a noticeof final determination and the organiza-tion has taken, in a timely manner, allreasonable steps to secure a ruling ordetermination.

270-day period. The 270-day period will beconsidered by the IRS to begin on the datea substantially completed Form 1023 is sentto the IRS. See Application Procedures, ear-lier, for information needed to complete Form1023.

If the application does not contain all of therequired items, it will not be further processedand may be returned to the applicant forcompletion. The 270-day period, in this event,will not be considered as starting until thedate the application is remailed to the IRSwith the requested information, or, if a post-mark is not evident, on the date the IRS re-ceives a substantially completed application.

Appeal to Courts If the IRS issues an unfavorable determi-nation letter or ruling to your organization andyou have exhausted all the administrativeremedies just discussed, your organizationcan seek judicial remedies.

For example, if your organization has paidthe tax resulting from the unfavorable deter-mination and met all other statutory prerequi-sites, it can file suit for a refund in a UnitedStates District Court or the U.S. Court ofFederal Claims. Or, if your organizationelected not to pay the tax deficiency resultingfrom the unfavorable determination and metall other statutory prerequisites, it can file suitfor a redetermination of the tax deficienciesin the United States Tax Court. For more in-formation on these types of suits, get Publi-cation 556, Examination of Returns, AppealRights, and Claims for Refund.

In certain situations, your organization canfile suit for a declaratory judgment in theU.S. District Court for the District of Columbia,the U.S. Court of Federal Claims, or the U.S.Tax Court. This remedy is available if yourorganization received an adverse notice offinal determination, or if the IRS failed tomake a timely determination on your initial orcontinuing qualification or classification as anexempt organization. However, your exemptstatus claim must be as:

• An organization qualifying under section501(c)(3),

Signature.

Chapter 1 Application, Approval, and Appeal Procedures Page 5

• An organization to which a deduction fora contribution is allowed under section170(c)(2),

• An organization other than a privatefoundation under section 509, or

• A private operating foundation undersection 4942(j)(3).

Adverse notice of final determination. Theadverse notice of final determination referredto above is a ruling or determination lettersent by certified or registered mail, holdingthat your organization:

• Is not described in section 501(c)(3) orsection 170(c)(2) of the Code,

• Is a private foundation as defined insection 4942(j)(3), or

• Is a public charity described in a part ofsection 509 or section 170(b)(1)(A) otherthan the part under which your organiza-tion requested classification.

Favorable court rulings - IRS procedure.If a suit results in a final determination thatyour organization is exempt from tax, the IRSwill issue a favorable ruling or determinationletter, provided your organization has filed anapplication for exemption and submitted astatement that the underlying facts and ap-plicable law are the same as in the periodconsidered by the court.

Group ExemptionLetter A group exemption letter is a ruling or deter-mination letter issued to a central organizationrecognizing on a group basis the exemptionunder section 501(c) of subordinate organ-izations on whose behalf the central organ-ization has applied for recognition of ex-emption.

A central organization is an organizationthat has one or more subordinates under itsgeneral supervision or control.

A subordinate organization is a chapter,local, post, or unit of a central organization.A central organization may be a subordinateitself, such as a state organization that hassubordinate units and is itself affiliated with anational (central) organization.

A subordinate organization may or maynot be incorporated, but it must have an or-ganizing document. A subordinate that is or-ganized and operated in a foreign countrymay not be included in a group exemptionletter. A subordinate described in section501(c)(3) may not be included in a group ex-emption letter if it is a private foundation de-scribed in section 509(a).

If your organization is a subordinate onecontrolled by a central organization (for ex-ample, a church, the Boy Scouts, or a frater-nal organization), you should check with thecentral organization to see if it has been is-sued a group exemption letter that coversyour organization. If it has, you do not haveto file a separate application unless your or-ganization no longer wants to be included inthe group exemption letter.

If the group exemption letter does notcover your organization, ask your central or-ganization about being included in the nextannual group ruling update that it submits tothe IRS.

Central OrganizationApplication ProcedureIf your organization is a central organizationwith affiliated subordinates under its control,it may apply for a group exemption letter forits subordinates, provided it has obtainedrecognition of its own exemption. You shouldmake the application for such subordinatesby letter instead of submitting either Form1023 or 1024. This procedure relieves eachof the subordinates covered by a group ex-emption letter from filing its own application.A central organization obtains its own recog-nition of exemption by sending its applicationto the IRS address shown on Form 8718 forthe area in which the central organization'sprincipal place of business or principal officeis located.

If the central organization has previouslyobtained recognition of its own exemption, itmust indicate its employer identification num-ber, the date of the letter recognizing its ex-emption, and the IRS office that issued it. Itneed not forward documents already submit-ted. However, if it has not already done so,the central organization must submit a copyof any amendment to its governing instru-ments or internal regulations as well as anyinformation about changes in its character,purposes, or method of operation.

Employer identification number. If thecentral organization does not have an em-ployer identification number (EIN), it mustsend a completed Form SS–4 with its ex-emption application. Each subordinate musthave its own EIN even if it has no employees.The central organization must send with thegroup exemption application a completedForm SS–4 on behalf of each subordinate nothaving an EIN.

Information required for subordinate or-ganizations. In addition to the informationrequired to obtain recognition of its own ex-emption, the central organization must submitinformation for those subordinates to be in-cluded in the group exemption letter. The in-formation should be forwarded in a lettersigned by a principal officer of the central or-ganization setting forth or including as at-tachments the following.

1) Information verifying that the subordi-nates:

a) Are affiliated with the central or-ganization,

b) Are subject to its general super-vision or control,

c) Are all eligible to qualify for ex-emption under the same paragraphof section 501(c), though not nec-essarily the paragraph under whichthe central organization is exempt,

d) Are not private foundations if theapplication for a group exemptionletter involves section 501(c)(3),

e) Are all on the same accounting pe-riod as the central organization ifthey are to be included in groupreturns, and

f) Are organizations that have beenformed within the 15-month periodpreceding the date of submissionof the group exemption applicationif they are claiming section

501(c)(3) status and are subject tothe requirements of section 508(a)and wish to be recognized as ex-empt from their dates of creation (agroup exemption letter may be is-sued covering subordinates, one ormore of which have not been or-ganized within the 15-month periodpreceding the date of submission,if all subordinates are willing to berecognized as exempt only from thedate of application).

2) A detailed description of the purposesand activities of the subordinates, in-cluding the sources of receipts and thenature of expenditures.

3) A sample copy of a uniform governinginstrument (such as a charter or articlesof association) adopted by the subordi-nates, or, in its absence, copies of rep-resentative instruments.

4) An affirmation to the effect that, to thebest of the officer's knowledge, the pur-poses and activities of the subordinatesare as stated in (2) and (3), above.

5) A statement that each subordinate to beincluded in the group exemption letterhas given written authorization to thateffect, signed by an authorized officerof the subordinate, to the central organ-ization (see also New 501(c)(3) organ-izations that want to be included, later inthis section).

6) A list of subordinates to be included inthe group exemption letter to which theIRS has issued an outstanding ruling ordetermination letter relating to ex-emption.

7) If the application for a group exemptionletter involves section 501(c)(3) and issubject to the provisions of the Code re-quiring that it give timely notice that it isnot a private foundation (see PrivateFoundations in chapter 3), an affirmationto the effect that, to the best of the offi-cer's knowledge and belief, no subordi-nate to be included in the group ex-emption letter is a private foundation asdefined in section 509(a).

8) For each subordinate that is a schoolclaiming exemption under section501(c)(3), the information required byRevenue Ruling 71–447 and RevenueProcedure 75–50 (these requirementsare fully described in chapter 3, underPrivate Schools; see also Schedule B,Form 1023).

9) For any school affiliated with a church,the information to show that the pro-visions of Revenue Ruling 75–231 havebeen met.

10) A list of the names, mailing addresses,actual addresses if different, and EINsof subordinates to be included in thegroup exemption letter. A current direc-tory of subordinates may be furnishedinstead of the list if it includes the re-quired information and if the subordi-nates not to be included in the groupexemption letter are identified.

New 501(c)(3) organizations that want tobe included. A new organization, describedin section 501(c)(3), that wants to be includedin a group exemption letter, must submit itsauthorization (as explained in item number 5

Page 6 Chapter 1 Application, Approval, and Appeal Procedures

above, under Information required for subor-dinate organizations) to the central organiza-tion before the end of the 15th month after itwas formed in order to satisfy the requirementof section 508(a). The central organizationmust also include this subordinate in its nextannual submission of information as dis-cussed below under Information RequiredAnnually.

Keeping the GroupExemption Letter in ForceContinued effectiveness of a group exemptionletter is based on the following conditions.

1) The continued existence of the centralorganization.

2) The continued qualification of the centralorganization for exemption under section501(c).

3) The submission by the central organiza-tion of the information required annually(described below under Information Re-quired Annually).

4) The annual filing of an information return(Form 990, for example) by the centralorganization if required.

The continued effectiveness of a group ex-emption letter as to a particular subordinateis based on these four conditions, as well ason the continued conformity by the subordi-nate to the requirements for inclusion in agroup exemption letter, the authorization forinclusion, and the annual filing of any requiredinformation return for the subordinate.

Information Required AnnuallyTo maintain a group exemption letter, thecentral organization must submit annually, atleast 90 days before the close of its annualaccounting period, all of the following infor-mation.

1) Information about all changes in thepurposes, character, or method of oper-ation of the subordinates included in thegroup exemption letter.

2) A separate list (that includes the names,mailing addresses, actual addresses ifdifferent, and EINs of the affected sub-ordinates) for each of the three followingcategories.

a) Subordinates that have changedtheir names or addresses during theyear.

b) Subordinates no longer to be in-cluded in the group exemption letterbecause they no longer exist orhave disaffiliated or withdrawn theirauthorization to the central organ-ization.

c) Subordinates to be added to thegroup exemption letter becausethey are newly organized or affil-iated or because they have recentlyauthorized the central organizationto include them.

An annotated directory of subordi-nates will not be accepted for this pur-

pose. If there were none of the abovechanges, the central organization mustsubmit a statement to that effect.

3) The information required to be submittedby a central organization on behalf ofsubordinates to be included in the groupexemption letter is required for subordi-nates to be added to the letter. (Thisinformation is listed in items 1 through9, under Information required for subor-dinate organizations, earlier. However, ifthe information upon which the groupexemption letter was based applies inall material respects to these subordi-nates, a statement to this effect may besubmitted instead of the information re-quired by items 1 through 4 of that list.)

The organization should send this in-formation to:

Ogden Service CenterMail Stop 62711000 South 1200 WestOgden, UT 84404–4749

CAUTION!

Submitting the required informationannually does not relieve the centralorganization or any of its subordinates

of the duty to submit any other informationthat may be required by an EO area managerto determine whether the conditions for cont-inued exemption are being met.

Events CausingLoss of Group ExemptionA group exemption letter no longer has effect,for either a particular subordinate or the groupas a whole, when:

1) The central organization notifies the IRSthat it is going out of existence,

2) The central organization notifies the IRS,by its annual submission or otherwise,that any of its subordinates will no longerfulfill the conditions for continued effec-tiveness, explained earlier, or

3) The IRS notifies the central organizationor the affected subordinate that thegroup exemption letter will no longerhave effect for some or all of the groupbecause the conditions for continued ef-fectiveness of a group exemption letterhave not been fulfilled.

When notice is given under any of these threeconditions, the IRS will no longer recognizethe exempt status of the affected subordi-nates until they file separate applications ontheir own behalf or the central organizationfiles complete supporting information for theirreinclusion in the group exemption at the timeof its annual submission. However, when thenotice is given by the IRS and the withdrawalof recognition is based on the failure of theorganization to comply with the requirementsfor recognition of tax-exempt status under theparticular subsection of section 501(c), therevocation will ordinarily take effect as of thedate of that failure. The notice, however, willbe given only after the appeal proceduresdescribed earlier in this chapter are com-pleted.

2.FilingRequirementsand RequiredDisclosures

IntroductionMost exempt organizations (including privatefoundations) must file various returns and re-ports at some time during (or following theclose of) their accounting period.

TopicsThis chapter discusses:

• Annual information returns that must befiled

• The unrelated business income tax return

• Employment tax returns

• A return to report taxable income frompolitical organizations

• Reporting requirements for certain poli-tical organizations

• A return to report the sale of certain do-nated property

• Information to provide to donors

• A report of cash received

• Public inspection of certain documents

• Certain required disclosures and thepenalties for not making them

Useful ItemsYou may want to see:

Publication

� 15 Circular E, Employer's Tax Guide

� 598 Tax on Unrelated Business In-come of Exempt Organizations

Form (and Instructions)

� 990 Return of Organization ExemptFrom Income Tax

� 990–EZ Short Form Return of Organiza-tion Exempt From Income Tax

� Schedule A (Form 990 or 990–EZ) Or-ganization Exempt Under Section501(c)(3)

� Schedule B (Form 990 or 990–EZ)Schedule of Contributors

� 990–PF Return of Private Foundation orSection 4947(a)(1) NonexemptCharitable Trust Treated as aPrivate Foundation

� 990–T Exempt Organization BusinessIncome Tax Return

Chapter 2 Filing Requirements and Required Disclosures Page 7

� 1120–POL U.S. Income Tax Return forCertain Political Organizations

� 8300 Report of Cash Payments Over$10,000 Received in a Trade orBusiness

� 8868 Application for Extension of Timeto File an Exempt OrganizationReturn

� 8870 Information Return for TransfersAssociated with Certain PersonalBenefits Contracts

� 8871 Political Organization Notice ofSection 527 Status

� 8872 Political Organization Report ofContributions and Expenditures

See chapter 5 for information about get-ting these publications and forms.

Annual InformationReturns Every organization exempt from federal in-come tax under section 501(a) must file anannual information return except:

1) A church, an interchurch organization oflocal units of a church, a convention orassociation of churches, or an integratedauxiliary of a church (as defined laterunder Religious Organizations in chapter3),

2) A church-affiliated organization that isexclusively engaged in managing fundsor maintaining retirement programs,

3) A school below college level affiliatedwith a church or operated by a religiousorder, even though it is not an integratedauxiliary of a church,

4) A mission society sponsored by or affil-iated with one or more churches orchurch denominations, more than halfof the society's activities are conductedin, or directed at, persons in foreigncountries,

5) An exclusively religious activity of anyreligious order,

6) A state institution, the income of whichis excluded from gross income undersection 115,

7) A corporation described in section501(c)(1) [a corporation that is organizedunder an Act of Congress and is:

a) an instrumentality of the UnitedStates, and

b) exempt from Federal income taxes],

8) A black lung benefit trust described insection 501(c)(21) [Required to file Form990–BL, Information and Initial ExciseTax Return for Black Lung Benefit Trustsand Certain Related Persons. Seechapter 4 for more information.],

9) A stock bonus, pension, or profit-sharingtrust that qualifies under section 401.[required to file Form 5500, AnnualReturn/Report of Employee BenefitPlan],

10) A religious or apostolic organization de-scribed in section 501(d) [required to fileForm 1065, U.S. Return of PartnershipIncome],

11) A foreign organization described in sec-tion 501(a) [other than a privatefoundation] that normally does not havemore than $25,000 in annual gross re-ceipts from sources within the UnitedStates and has no significant activity inthe United States. For further informa-tion, see Revenue Procedure 94–17,1994–1 C.B. 579,

12) A governmental unit or an affiliate of agovernmental unit that meets the re-quirements of Revenue Procedure95–48, 1995–2 C.B. 418,

13) An exempt organization (other than aprivate foundation, discussed in chapter3) having gross receipts in each tax yearthat normally are not more than $25,000.(See the instructions for Form 990 formore information about what constitutesannual gross receipts that are normallynot more than $25,000.), or

14) A private foundation exempt under sec-tion 501(c)(3) and described in section509(a). (Required to file Form 990–PF).

Forms 990 and 990–EZ. Exempt organiza-tions, other than private foundations, must filetheir annual information returns on Form 990,or Form 990–EZ.

Political organizations that are required tofile Form 1120–POL (discussed later underPolitical Organization Income Tax Return) arealso required to file Form 990 or 990–EZ andSchedule B (Form 990 or 990–EZ) for taxyears beginning after June 30, 2000. Organ-izations with gross receipts of less than$25,000 are not required to file Form 990 or990–EZ and Schedule B (Form 990 or990–EZ).

Form 990–EZ. This is a shortened ver-sion of Form 990. It is designed for use bysmall exempt organizations and nonexemptcharitable trusts.

An organization may file Form 990–EZ,instead of Form 990, if it meets both of thefollowing requirements.

1) Its gross receipts during the year wereless than $100,000.

2) Its total assets (line 25, column (B) ofForm 990–EZ) at the end of the yearwere less than $250,000.

If your organization does not meet either ofthese conditions, you cannot file Form990–EZ. Instead you must file Form 990.

Group return. A group return on Form990 may be filed by a central, parent, or likeorganization for two or more local organiza-tions, none of which is a private foundation.This return is in addition to the central or-ganization's separate annual return if it mustfile a return. It cannot be included in the groupreturn. See the instructions for Form 990 forthe conditions under which this proceduremay be used.

TIPIn any year that an organization isproperly included as a subordinateorganization on a group return, it

should not file its own Form 990.

Schedule A (Form 990 or 990–EZ). Or-ganizations, other than private foundations,that are described in section 501(c)(3) andthat are otherwise required to file Form 990or 990–EZ must also complete Schedule Aof that form.

Schedule B (Form 990 or 990–EZ). Or-ganizations that file Form 990 or 990–EZ usethis schedule to provide required informationregarding their contributors.

Form 990–PF. All private foundations ex-empt under section 501(c)(3) must file Form990–PF. These organizations are discussedin chapter 3.

Due date. Form 990, 990–EZ, or 990–PFmust be filed by the 15th day of the 5th monthafter the end of your organization's account-ing period. Thus, for a calendar year tax-payer, Form 990, 990–EZ, or 990–PF is dueMay 15 of the following year.

TIPBeginning in 2001, use Form 8868 torequest an automatic 3-month exten-sion of time to file Form 990, 990–EZ,

or 990–PF and also to apply for an additional(not automatic) 3-month extension if needed.

Do not apply for both the automatic3-month extension and the additional 3-monthextension at the same time. Also, do not useForm 2758, Application for Extension of Timeto File Certain Excise, Income, Information,and Other Returns, to get an extension onceForm 8868 becomes available. For more in-formation, see Form 8868 and its instructions.

Application for exemption pending. Anorganization that claims to be exempt undersection 501(a) of the Code but has not es-tablished its exempt status by the due datefor filing an information return should com-plete and file Form 990 or 990–EZ (or Form990–PF if it considers itself a private founda-tion). If the organization's application ispending with the IRS, it must so indicate onForm 990, 990–EZ, or 990–PF (whicheverapplies) by checking the application pend-ing block at the top of page 1 of the return.

For more information on the filing require-ments, see the instructions for Forms 990,990–EZ, and 990–PF.

State reporting requirements. Copies ofForm 990, 990–EZ, or 990–PF may be usedto satisfy state reporting requirements. Seethe instructions for those forms.

Form 8870. Organizations that filed a Form990, 990–EZ, or 990–PF, and paid premiumsor received transfers on certain life insurance,annuity, and endowment contracts (personalbenefit contracts), must file Form 8870. Formore information, see Form 8870 and its in-structions.

Penalties for failure to file. An exempt or-ganization that fails to file a required returnmust pay a penalty of $20 a day for each daythe failure continues. The same penalty willapply if the organization does not give all theinformation required on the return or does notgive the correct information.

Maximum penalty. The maximum pen-alty for any one return is the smaller of$10,000 or 5% of the organization's grossreceipts for the year.

Organization with gross receipts over$1 million. For an organization that hasgross receipts of over $1 million for the year,the penalty is $100 a day up to a maximumof $50,000.

Managers. If the organization is subjectto this penalty, the IRS may specify a dateby which the return or correct information

Page 8 Chapter 2 Filing Requirements and Required Disclosures

must be supplied by the organization. Failureto comply with this demand will result in apenalty imposed upon the manager of theorganization, or upon any other person re-sponsible for filing a correct return. The pen-alty is $10 a day for each day that a return isnot filed after the period given for filing. Themaximum penalty imposed on all personswith respect to any one return is $5,000.

Exception for reasonable cause. Nopenalty will be imposed if reasonable causefor failure to file timely can be shown.

Unrelated BusinessIncome Tax Return Even though an organization is recognizedas tax exempt, it still may be liable for tax onits unrelated business income. Unrelatedbusiness income is income from a trade orbusiness, regularly carried on, that is notsubstantially related to the charitable, educa-tional, or other purpose that is the basis forthe organization's exemption. An exempt or-ganization that has $1,000 or more of grossincome from an unrelated business must fileForm 990–T.

The obligation to file Form 990–T is inaddition to the obligation to file the annualinformation return, Form 990, 990–EZ, or990–PF.

Estimated tax. Exempt organizationsmust make quarterly payments of estimatedtax on unrelated business income. An organ-ization must make estimated tax payments ifit expects its tax for the year to be $500 ormore.

Travel tour programs. Travel tour activitiesthat are a trade or business are an unrelatedtrade or business if the activities are notsubstantially related to the purpose to whichtax exemption was granted to the organiza-tion.

Whether travel tour activities conductedby an organization are substantially related tothe organization's tax exempt purpose is de-termined by looking at all the relevant factsand circumstances, including, but not limitedto, how a travel tour is developed, promoted,and operated.

Example. ABC, a university alumni as-sociation, is tax exempt as an educationalorganization under section 501(c)(3) of theCode. As part of its activities, ABC operatesa travel tour program. The program is opento all current members of ABC and theirguests. ABC works with travel agents toschedule approximately ten tours annually tovarious destinations around the world. Mem-bers of ABC pay $1,000 to XYZ TravelAgency to participate in a tour. XYZ pays ABCa per person fee for each participant. Al-though the literature advertising the tours en-courages ABC members to continue theirlifelong learning by joining the tours, and afaculty member of ABC's related universityfrequently joins the tour as a guest of thealumni association, none of the tours includeany scheduled instruction or curriculum re-lated to the destinations being visited. Thetravel tours made available to ABC's mem-bers do not contribute importantly to the ac-complishment of ABC's educational purpose.Rather, ABC's program is designed to gen-erate revenues for ABC by regularly offeringits members travel services. Therefore, ABC's

tour program is an unrelated trade or busi-ness.

For additional information on unrelatedbusiness income, see Publication 598.

EmploymentTax ReturnsEvery employer, including an organizationexempt from federal income tax, who payswages to employees is responsible for with-holding, depositing, paying, and reportingfederal income tax, social security and Medi-care (FICA) taxes, and federal unemploymenttax (FUTA), unless that employer is specif-ically excepted by law from those require-ments or if the taxes clearly do not apply.

For more information, get a copy of Pub-lication 15, Circular E, Employer's Tax Guide,which summarizes the responsibilities of anemployer, Publication 15–A, Employer'sSupplemental Tax Guide, and Form 941,Employer's Quarterly Federal Tax Return.

Penalty. If any person required to collect,truthfully account for, and pay over any ofthese taxes willfully fails to satisfy any ofthese requirements or willfully tries in any wayto evade or defeat any of them, that personwill be subject to a penalty. The penalty, oftencalled the trust fund recovery penalty isequal to the tax evaded, not collected, or notaccounted for and paid over. The term per-son includes:

• An officer or employee of a corporation,or

• A member or employee of a partnership.

Exception. The penalty is not imposedon any unpaid volunteer director or memberof a board of trustees of an exempt organ-ization if the unpaid volunteer serves solelyin an honorary capacity, does not participatein the day-to-day or financial operations of theorganization, and does not have actualknowledge of the failure on which the penaltyis imposed.

This exception does not apply if it resultsin no one being liable for the penalty.

FICA and FUTA tax exceptions. Paymentsfor services performed by a minister of achurch in the exercise of the ministry, or amember of a religious order performing dutiesrequired by the order, are generally not sub-ject to FICA or FUTA taxes.

FUTA tax exception. Payments for ser-vices performed by an employee of a reli-gious, charitable, educational, or other or-ganization described in section 501(c)(3) thatare generally subject to FICA taxes if thepayments are $100 or more for the year, arenot subject to FUTA taxes.

FICA tax exemption election. Churchesand qualified church-controlled organizationscan elect exemption from employer FICAtaxes by filing Form 8274, Certification byChurches and Qualified Church-ControlledOrganizations Electing Exemption from Em-ployer Social Security and Medicare Taxes.

To elect exemption, Form 8274 must befiled before the first date on which a quarterlyemployment tax return would otherwise bedue from the electing organization. The or-ganization may make the election only if it is

opposed for religious reasons to the paymentof FICA taxes.

The election applies to payments for ser-vices of current and future employees otherthan services performed in an unrelated tradeor business.

Revoking the election. The election canbe revoked by the IRS if the organization failsto file Form W–2, Wage and Tax Statement,for 2 years and fails to furnish certain infor-mation upon request by the IRS. Such revo-cation will apply retroactively to the beginningof the 2-year period.

Definitions. For purposes of this election,the term church means a church, a conven-tion or association of churches, or an ele-mentary or secondary school that is con-trolled, operated, or principally supported bya church or by a convention or associationof churches.

The term qualified church-controlledorganization means any church-controlledsection 501(c)(3) tax-exempt organization,other than an organization that both:

1) Offers goods, services, or facilities forsale, other than on an incidental basis,to the general public at other than anominal charge that is substantially lessthan the cost of providing such goods,services, or facilities, and

2) Normally receives more than 25% of itssupport from the sum of governmentalsources and receipts from admissions,sales of merchandise, performance ofservices, or furnishing of facilities, in ac-tivities that are not unrelated trades orbusinesses.

Effect on employees. If a church orqualified church-controlled organization hasmade an election, payment for services per-formed for that church or organization, otherthan in an unrelated trade or business, willnot be subject to FICA taxes. However, theemployee, unless otherwise exempt, will besubject to self-employment tax on the income.The tax applies to income of $108.28 or morefor the tax year from that church or organiza-tion, and no deductions for trade or businessexpenses are allowed against this “self-employment” income.

Schedule SE (Form 1040), Self-Employment Tax, should be attached to theemployee's income tax return.

Political OrganizationIncome Tax Return Generally, a political organization is treatedas an organization exempt from tax. Certainpolitical organizations, however, must file anannual income tax return, Form 1120–POL,for any year it has any political organizationtaxable income in excess of the $100 specificdeduction allowed under section 527 of theCode. In addition, for tax years beginning af-ter June 30, 2000, a political organization thathas $25,000 or more in gross receipts for thetax year is also required to file Form1120–POL, even if it has no taxable income.

TIPFor tax years beginning after June 30,2000, a political organization that has$25,000 or more in gross receipts for

the tax year must file Form 990 or 990–EZ(and Schedule B of the form). See Forms 990and 990–EZ, earlier.

Chapter 2 Filing Requirements and Required Disclosures Page 9

Political organization. A political organiza-tion is a party, committee, association, fund,or other organization (whether or not incor-porated) organized and operated primarily forthe purpose of directly or indirectly acceptingcontributions or making expenditures, or both,for an exempt function.

Exempt function. An exempt functionmeans influencing or attempting to influencethe selection, nomination, election, or ap-pointment of any individual to any federal,state, local public office or office in a politicalorganization, or the election of the Presiden-tial or Vice Presidential electors, whether ornot such individual or electors are selected,nominated, elected, or appointed. It also in-cludes certain office expenses of a holder ofpublic office or an office in a political organ-ization.

CAUTION!

Beginning July 1, 2000, certain poli-tical organizations are required to no-tify the IRS that they are section 527

organizations. These organizations must useForm 8871 . Certain of the notifying section527 organizations must use Form 8872 to fileperiodic reports with the IRS dealing with theircontributions and expenditures. For a dis-cussion on these forms, see Reporting Re-quirements for a Political Organization, later.

Political organization taxable income.Political organization taxable income is theexcess of:

1) Gross income for the tax year (excludingexempt function income) over

2) Deductions directly connected with theearning of gross income.

To figure taxable income, allow for a $100specific deduction, but do not allow for the netoperating loss deduction, the dividends-received deduction, and other special de-ductions for corporations. Newsletter fundscannot claim the specific deduction of $100.

Exempt organization not a political organ-ization. An organization exempt under sec-tion 501(c) of the Code must file Form1120–POL, for any year in which it:

1) Spends any amount for an exemptfunction, or

2) Has net investment income,

whichever is less.Separate fund. A section 501(c) organ-

ization can set up a separate segregated fundthat will be treated as an independent politicalorganization. The earnings and expendituresmade by the separate fund will not be attri-buted to the section 501(c) organization.

CAUTION!

Section 501(c)(3) organizations areprecluded from, and suffer loss ofexemption for, engaging in any poli-

tical campaign on behalf of, or in oppositionto, any candidate for public office.

Due date. Form 1120–POL is due by the15th day of the 3rd month after the end of thetax year. Thus, for a calendar year taxpayer,Form 1120–POL is due on March 15 of thefollowing year. If any due date falls on a Sat-urday, Sunday, or legal holiday, the organ-ization may file the return on the next busi-ness day.

TIPForm 1120–POL is not required ofan exempt organization that makesexpenditures for political purposes if

its gross income does not exceed its directlyconnected deductions by more than $100 forthe tax year.

Failure to file. A political organization thatfails to file Form 1120–POL, or fails to includethe required information on the form, is sub-ject to a penalty of $20 per day for each daysuch failure continues. The maximum penaltyimposed on failures regarding any one returnis the lesser of $10,000 or 5% of the grossreceipts of the organization for the year. Inthe case of an organization having gross re-ceipts exceeding $1,000,000 for any year, thepenalty is increased to $100 per day with amaximum penalty of $50,000.

For more information about filing Form1120–POL, refer to the instructions accom-panying the form.

Failure to pay on time. An organization thatdoes not pay the tax when due generally mayhave to pay a penalty of 1/2 of 1% of theunpaid tax for each month or part of a monththe tax is not paid, up to a maximum of 25%of the unpaid tax. The penalty will not be im-posed if the organization can show that thefailure to pay on time was due to reasonablecause.

ReportingRequirements for aPolitical OrganizationCertain political organizations are required tonotify the IRS that the organization is to betreated as a section 527 political organiza-tion. The organization is also required to pe-riodically report certain contributions acceptedand expenditures made by the organization.To notify the IRS of section 527 treatment,an organization must file Form 8871. To re-port contributions and expenditures, certainnotifying organizations must file Form 8872.

Form 8871. A political organization must fileForm 8871 to notify the IRS both electron-ically and in writing that it is to be treated asa section 527 organization. However, an or-ganization is not required to file Form 8871if:

• It reasonably expects its gross receiptsto always be less than $25,000,

• It is a political committee required to re-port under the Federal Election Cam-paign Act of 1971 (FECA)(2 U.S.C.431(4), or

• It is a section 501(c) organization that istreated as having political organizationtaxable income under section 527(f)(1)of the Code.

All other political organizations, includingstate and local candidate committees, arerequired to file Form 8871.

An organization must provide on Form8871:

1) Its name and address (including anybusiness address, if different) and itselectronic mailing address,

2) Its purpose,

3) The names and addresses of its officers,highly compensated employees, contactperson, custodian of records, and mem-bers of its Board of Directors, and

4) The name and address of, and relation-ship to, any related entities (within themeaning of section 168(h)(4) of theCode).

TIPBefore filing Form 8871, the politicalorganization must have its own EINeven if it has no employees. To get

an EIN, file Form SS-4 with the IRS. FormSS-4 can be obtained by downloading it fromthe IRS Internet web site at www.irs.gov orby calling 1–800–TAX–FORM.

Due dates. Form 8871 must be filedwithin 24 hours of the date on which the or-ganization was established for an organiza-tion formed after June 30, 2000. Form 8871must have been filed by July 31, 2000, for anorganization already in existence on June 30,2000.

If the due date falls on a Saturday, Sun-day, or legal holiday, the organization may fileon the next business day.

How to file. An organization must fileForm 8871 electronically and in writing asfollows:

• Electronically via the IRS Internet website at www.irs.gov/polorgs , and

• On paper by sending a signed copy of theform to the Internal Revenue Service,Ogden UT 84201. An organization can fillin and print out Form 8871 from the IRSInternet web site.

Failure to file. An organization that isrequired to file Form 8871, but fails to do soon a timely basis, will not be treated as asection 527 organization for any period beforethe date Form 8871 is filed. Also, the taxableincome of the organization for that period willinclude its exempt function income (includingcontributions received, membership dues,and political fundraising receipts) minus anydeductions directly connected with the pro-duction of that income.

The tax is computed by multiplying theorganization's taxable income by the highestcorporate tax rate.

For more information on Form 8871, seethe form and its instructions. For a discussionon the public inspection requirements for theform, see Public Inspection of ExemptionApplications, Annual Returns, and PoliticalOrganization Reporting Forms, later.

Form 8872. Every section 527 political or-ganization that accepts a contribution ormakes an expenditure after July 1, 2000, foran exempt function during the calendar year,must file Form 8872 except:

• A political organization that is not re-quired to file Form 8871 (discussed ear-lier),

• A state or local committee of a politicalparty, or

• A political committee of a state or localcandidate.

All other section 527 organizations, includingother state and local political action commit-tees, are required to file Form 8872 even if

Page 10 Chapter 2 Filing Requirements and Required Disclosures

they file reports with state or local electionagencies.

The Form 8872 reports must include thename, address, and (if an individual) the oc-cupation and employer of any person towhom expenditures are made that aggregate$500 or more in a calendar year and theamount of such expenditures. The reportsmust also include the name, address, and (ifan individual) the occupation and employerof any person that contributes in the aggre-gate $200 or more in a calendar year and theamount of that contribution.

TIPAn organization is not required to re-port contributions accepted or expen-ditures made after July 1, 2000, if they

were received or made under a contract en-tered into before July 2, 2000.

Due dates. The due dates for filing Form8872 vary depending on whether the form isdue for a reporting period that occurs duringa calendar year in which a regularly sched-uled election is held or any other calendaryear ( a non-election year). In election years,the forms must be filed on a quarterly ormonthly basis and in connection to electiondates. In non-election years, the forms mustbe filed on a semiannual or monthly basis. Acomplete listing of these filing periods can befound in the Form 8872 instructions.

How to file. Complete and file Form 8872in one of two ways:

1) Electronically via the IRS Internet website at www.irs.gov/polorgs , or

2) By sending a signed copy of the form tothe Internal Revenue Service, Ogden,UT 84201.

The form must be signed by an official au-thorized by the organization to sign Form8872.

An organization that filed Form 8871 bothelectronically and in writing will receive a let-ter from IRS with the user ID and passwordneeded to file Form 8872 electronically. If anorganization does not receive its user ID andpassword, it may request one by writing to thefollowing address:

Internal Revenue ServiceRoom 4010P.O. Box 2508Cincinnati, OH 45201

Penalty for failure to file. A penalty willbe imposed if the organization is required tofile Form 8872 and it:

• Fails to file the form by the due date, or

• Files the form but fails to report all of theinformation required or reports incorrectinformation.

The penalty is 35% of the total amount ofcontributions and expenditures to which afailure relates.

Donee InformationReturn Dispositions of donated property. If an or-ganization receives charitable deductionproperty and within 2 years sells, exchanges,or disposes of the property, the organizationmust file Form 8282, Donee Information Re-

turn. However, an organization is not requiredto file Form 8282 if :

• The property is valued at $500 or less,or

• The property is distributed for charitablepurposes.

Form 8282 must be filed within 125 daysafter the disposition. A copy of Form 8282must be given to the previous donor. If theorganization fails to file the required informa-tion return, penalties may apply.

Charitable deduction property. This isany property (other than money or publiclytraded securities) for which the donee or-ganization signed an appraisal summary orForm 8283, Noncash Charitable Contribu-tions.

Publicly traded securities. These aresecurities for which market quotations arereadily available on an established securitiesmarket as of the date of the contribution.

Appraisal summary. If the value of thedonated property exceeds $5,000, the donormust get a qualified appraisal for contributionsof property (other than money or publiclytraded securities). The donee organization isnot a qualified appraiser for the purpose ofvaluing the donated property. For more infor-mation, get Publication 561, Determining theValue of Donated Property.

Form 8283. For noncash donations over$5,000, the donor must attach Form 8283 tothe tax return to support the charitable de-duction. The donee must sign Part IV ofSection B, Form 8283 unless publicly tradedsecurities are donated. The person who signsfor the donee must be an official authorizedto sign the donee's tax or information returns,or a person specifically authorized to sign bythat official. The signature does not representconcurrence in the appraised value of thecontributed property. A signed acknowl-edgement represents receipt of the propertydescribed on Form 8283 on the date specifiedon the form. The signature also indicatesknowledge of the information reporting re-quirements on dispositions, as previouslydiscussed. A copy of Form 8283 must begiven to the donee.

Information Providedto DonorsA charitable organization must give a donora disclosure statement for a quid pro quocontribution over $75. A donor cannot deducta charitable contribution of $250 or more un-less the donor has a written acknowledge-ment from the charitable organization.

In certain circumstances, an organizationmay be able to meet both of these require-ments with the same written document.

Disclosure ofQuid Pro Quo Contributions

A charitable organization must provide awritten disclosure statement to donors of aquid pro quo contribution over $75.

Quid pro quo contribution. This is a pay-ment a donor makes to a charity partly as acontribution and partly for goods or services.For example, if a donor gives a charity $100

and receives a concert ticket valued at $40,the donor has made a quid pro quo contribu-tion. In this example, the charitable contri-bution part of the payment is $60. Eventhough the deductible part of the payment isnot more than $75, a disclosure statementmust be filed because the donor's payment(quid pro quo contribution) is more than $75.

Disclosure statement. The required writtendisclosure statement must:

1) Inform the donor that the amount of thecontribution that is deductible for federalincome tax purposes is limited to theexcess of any money (and the value ofany property other than money) contrib-uted by the donor over the fair marketvalue of goods or services provided bythe charity, and

2) Provide the donor with a good faith es-timate of the fair market value of thegoods or services that the donor re-ceived.

The charity must furnish the statement inconnection with either the solicitation or thereceipt of the quid pro quo contribution. If thedisclosure statement is furnished in con-nection with a particular solicitation, it is notnecessary for the organization to provide an-other statement when it actually receives thecontribution.

No disclosure statement is required if anyof the following are true.

1) The goods or services given to a donorhave insubstantial value as describedin Revenue Procedure 90–12, in Cumu-lative Bulletin 1990–1, and RevenueProcedure 92–49, in Cumulative Bulletin1992–1.

2) There is no donative element involved ina particular transaction with a charity (forexample, there is generally no donativeelement involved in a visitor's purchasefrom a museum gift shop).

3) There is only an intangible religiousbenefit provided to the donor. The in-tangible religious benefit must be pro-vided to the donor by an organizationorganized exclusively for religious pur-poses, and must be of a type that gen-erally is not sold in a commercial trans-action outside the donative context. Forexample, a donor who, for a payment, isgranted admission to a religious cere-mony for which there is no admissioncharge is provided an intangible religiousbenefit. A donor is not provided intan-gible religious benefits for paymentsmade for tuition for education leading toa recognized degree, travel services, orconsumer goods.

4) The donor makes a payment of $75 orless per year and receives only annualmembership benefits that consist of:

a) Any rights or privileges (other thanthe right to purchase tickets forcollege athletic events) that thetaxpayer can exercise often duringthe membership period, such asfree or discounted admissions orparking or preferred access togoods or services, or

b) Admission to events that are openonly to members and the cost perperson of which is within the limits

Chapter 2 Filing Requirements and Required Disclosures Page 11

for low-cost articles described inRevenue Procedure 90-12 (as ad-justed for inflation).

Good faith estimate of fair marketvalue. An organization may use any rea-sonable method to estimate the fair marketvalue (FMV) of goods or services it providedto a donor, as long as it applies the methodin good faith.

The organization may estimate the FMVof goods or services that generally are notcommercially available by using the FMV ofsimilar or comparable goods or services.Goods or services may be similar or compa-rable even if they do not have the uniquequalities of the goods or services being val-ued.

Example 1. A charity provides a one-hourtennis lesson with a tennis professional forthe first $500 payment it receives. The tennisprofessional provides one-hour lessons on acommercial basis for $100. A good faith esti-mate of the lesson's FMV is $100.

Example 2. For a payment of $50,000,a museum allows a donor to hold a privateevent in a room of the museum. A good faithestimate of the FMV of the right to hold theevent in the museum can be made by usingthe cost of renting a hotel ballroom with acapacity, amenities, and atmosphere compa-rable to the museum room, even though thehotel ballroom lacks the unique art displayedin the museum room. If the hotel ballroomrents for $2,500, a good faith estimate of theFMV of the right to hold the event in the mu-seum is $2,500.

Example 3. For a payment of $1,000, acharity provides an evening tour of a museumconducted by a well-known artist. The artistdoes not provide tours on a commercial basis.Tours of the museum normally are free to thepublic. A good faith estimate of the FMV ofthe evening museum tour is $0 even thoughit is conducted by the artist.

Penalty for failure to disclose. A penalty isimposed on a charity that does not make therequired disclosure of a quid pro quo contri-bution of more than $75. The penalty is $10per contribution, not to exceed $5,000 perfundraising event or mailing. The charity canavoid the penalty if it can show that the failurewas due to reasonable cause.

Acknowledgement ofCharitable Contributions of$250 or More A donor can deduct a charitable contributionof $250 or more only if the donor has a writtenacknowledgement from the charitable organ-ization. The donor must get the acknowl-edgement by the earlier of:

1) The date the donor files the original re-turn for the year the contribution is made,or

2) The due date, including extensions, forfiling the return.

The donor is responsible for requesting andobtaining the written acknowledgement fromthe donee.

Quid pro quo contribution. If the doneeprovides goods or services to the donor inexchange for the contribution (a quid pro quo

contribution), the acknowledgement must in-clude a good faith estimate of the value of thegoods or services. See Disclosure of QuidPro Quo Contributions, earlier.

Form of acknowledgement. Although thereis no prescribed format for the written ac-knowledgement, it must provide enough in-formation to substantiate the amount of thecontribution. For more information, get IRSPublication 1771, Charitable Contributions –Substantiation and Disclosure Requirements.

Report of CashReceivedAn exempt organization that receives, in thecourse of its activities, more than $10,000cash in one transaction (or 2 or more relatedtransactions) that is not a charitable contri-bution, must report the transaction to the IRSon Form 8300 , Report of Cash PaymentsOver $10,000 Received in a Trade or Busi-ness.

Public Inspectionof ExemptionApplications, AnnualReturns, and PoliticalOrganizationReporting Forms The following rules apply to private founda-tions as well as other tax-exempt organiza-tions. Private foundations filing annual returnson or after March 13, 2000, are subject to thepublic disclosure requirements under section6104(d) of the Internal Revenue Code.

Included in this section is a discussion onthe public inspection requirements for politicalorganizations filing Forms 8871 and 8872.

Annual return. An exempt organization mustmake available for public inspection, uponrequest and without charge, a copy of its ori-ginal and amended annual information re-turns. Each information return must be madeavailable from the date it is required to be filed(determined without regard to any exten-sions), or is actually filed, whichever is later.An original return does not have to be madeavailable if more than 3 years have passedfrom the date the return was required to befiled (including any extensions) or was filed,whichever is later. An amended return doesnot have to be made available if more than 3years have passed from the date it was filed.

An annual information return includes anexact copy of the return (Form 990, 990–EZ,990–BL, 990–PF, or 1065), and amendedreturn if any, and all schedules, attachments,and supporting documents filed with the IRS.It does not include Schedule A of Form990–BL, Form 990–T, Schedule K–1 of Form1065, or Form 1120–POL. In the case of atax-exempt organization other than a privatefoundation, an annual information return doesnot include the names and addresses ofcontributors to the organization.

Exemption application. An exempt organ-ization must also make available for publicinspection without charge its application fortax-exempt status. An application for tax ex-emption includes the application form (suchas Form 1023 or 1024), all documents andstatements the IRS requires the organizationto file with the form, any statement or othersupporting document submitted by an organ-ization in support of its application, and anyletter or other document issued by the IRSconcerning the application. It does not in-clude:

• Any application from an organization thatis not yet recognized as exempt,

• Any material that is required to be with-held from public inspection, see Materialrequired to be withheld from public in-spection, next,

• In the case of a tax-exempt organizationother than a private foundation, thenames and addresses of contributors tothe organization, or

• Any applications filed before July 15,1987, if the organization did not have acopy of the application on July 15, 1987.

If there is no prescribed application form,see section 301.6104(d)–1(b)(3)(ii) of theregulations for a list of the documents thatmust be made available.

Material required to be withheld frompublic inspection. Material that is requiredto be withheld from public inspection includes:

• Trade secrets, patents, processes, stylesof work, or apparatus for which withhold-ing was requested and granted,

• National defense material,

• Unfavorable rulings or determination let-ters issued in response to applications fortax exemption,

• Rulings or determination letters revokingor modifying a favorable determinationletter,

• Technical advice memoranda relating toa disapproved application for tax ex-emption or the revocation or modificationof a favorable determination letter,

• Any letter or document filed with or issuedby the IRS relating to whether a proposedor accomplished transaction is a prohib-ited transaction under section 503,

• Any letter or document filed with or issuedby the IRS relating to an organization'sstatus as an organization described insection 509(a) or 4942(j)(3), unless theletter or document relates to the organ-ization's application for tax exemption,and

• Any other letter or document filed with orissued by the IRS which, although it re-lates to an organization's tax-exemptstatus as an organization described insection 501(c) or 501(d), does not relateto that organization's application for taxexemption.

Time, place, and manner restrictions. Theannual returns and exemption applicationmust be made available for inspection, with-out charge, at the organization's principal,regional, and district offices during regularbusiness hours. The organization may havean employee present during inspection, butmust allow the individual to take notes freely

Page 12 Chapter 2 Filing Requirements and Required Disclosures

and to photocopy at no charge if the individualprovides the photocopying equipment. Gen-erally, regional and district offices are thosethat have paid employees who together arenormally paid at least 120 hours a week.

If the organization does not maintain apermanent office, it must make its applicationfor tax exemption and its annual informationreturns available for inspection at a reason-able location of its choice. It must permitpublic inspection within a reasonable amountof time after receiving a request for inspection(normally not more than 2 weeks) and at areasonable time of day. At its option, it maymail, within 2 weeks of receiving the request,a copy of its application for tax exemption andannual information returns to the requester inlieu of allowing an inspection. The organiza-tion may charge the requester for copying andactual postage costs only if the requesterconsents to the charge.

An organization that has a permanent of-fice, but has no office hours or very limitedhours during certain times of the year, mustmake its documents available during thoseperiods when office hours are limited or notavailable as though it were an organizationwithout a permanent office.

Furnishing copies. An exempt organizationalso must provide a copy of all, or any specificpart or schedule, of its three most recent an-nual information returns and/or exemptionapplication to anyone who requests a copyeither in person or in writing at its principal,regional or district office during regular busi-ness hours. If the individual made the requestin person, the copy must be provided on thesame business day the request is made un-less there are unusual circumstances. Unu-sual circumstances are defined in section301.6104(d)–1(d)(1)(ii) of the regulations.

The organization must honor a written re-quest for a copy of documents or specificparts or schedules of documents that are re-quired to be disclosed. However, this rule onlyapplies if the request:

• Is addressed to the exempt organization'sprincipal, regional, or district office,

• Is sent to that address by mail, electronicmail (e-mail), facsimile (fax), or a privatedelivery service approved by the IRS, and

• Gives the address to where the copy ofthe document should be sent.

The organization must mail the copy within30 days from the date it receives the request.The organization may request payment inadvance and must then provide the copieswithin 30 days from the date it receives pay-ment.

Fees for copies. The organization maycharge a reasonable fee for providing copies.It can charge no more for the copies than theper page rate the IRS charges for providingcopies. That rate is stated in section601.702(f)(5)(iv)(B) of the regulations. (As ofJune 2001, the rate was $1.00 for the firstpage and 15 cents for each additional page.)The organization can also charge the actualpostage costs it pays to provide the copies.

Regional and district offices. Generally,the same rules regarding public inspectionand providing copies of applications and an-nual returns that apply to a principal office ofan exempt organization also apply to its re-gional and district offices. However, a regionalor district office is not required to make its

annual information return available for in-spection or to provide copies until 30 daysafter the date the return is required to be filed(including any extensions) or is actually filed,whichever is later.

Local and subordinate organizations.A local or subordinate organization is an ex-empt organization that did not file its ownapplication for tax exemption because it iscovered by a group exemption letter. Gener-ally, a local or subordinate organization of anexempt organization must, upon request,make available for public inspection, or pro-vide copies of:

1) The application submitted to the IRS bythe central or parent organization to ob-tain the group exemption letter, and

2) Those documents which were submittedby the central or parent organization toinclude the local or subordinate organ-ization in the group exemption letter.

However, if the central or parent organizationsubmits to the IRS a list or directory of localor subordinate organizations covered by thegroup exemption letter, the local or subordi-nate organization is required to provide onlythe application for the group exemption rulingand the pages of the list or directory thatspecifically refer to it.

The local or subordinate organizationmust permit public inspection or comply witha request for copies made in person, withina reasonable amount of time (normally notmore than 2 weeks) after receiving a requestmade in person for public inspection or copiesand at a reasonable time of day. In lieu ofallowing an inspection, the local or subordi-nate organization may mail a copy of the ap-plicable documents to the person requestinginspection within the same time period. In thatcase, the organization may charge the re-quester for copying and actual postage costsonly if the requester consents to the charge.If the local or subordinate organization re-ceives a written request for a copy of its ap-plication for exemption, it must fulfill the re-quest in the time and manner specifiedearlier.

The requester has the option of requestingfrom the central or parent organization, at itsprincipal office, inspection or copies of theapplication for group exemption and the ma-terial submitted by the central or parent or-ganization to include a local or subordinateorganization in the group ruling. If the centralor parent organization submits to the IRS alist or directory of local or subordinate organ-izations covered by the group exemption let-ter, it must make the list or directory availablefor public inspection, but it is required to pro-vide copies only of those pages of the list ordirectory that refer to particular local or sub-ordinate organizations specified by the re-quester. The central or parent organizationmust fulfill such requests in the time andmanner specified earlier.

A local or subordinate organization thatdoes not file its own annual information return(because it is affiliated with a central or parentorganization that files a group return) must,upon request, make available for public in-spection, or provide copies of, the group re-turns filed by the central or parent organiza-tion. However, if the group return includesseparate schedules for each local or subor-dinate organization included in the group re-turn, the local or subordinate organization re-ceiving the request may omit any schedulesrelating only to other organizations included

in the group return. The local or subordinateorganization must permit public inspection,or comply with a request for copies made inperson, within a reasonable amount of time(normally not more than 2 weeks) after re-ceiving a request made in person for publicinspection or copies and at a reasonable timeof day.

In lieu of allowing an inspection, the localor subordinate organization may mail a copyof the applicable documents to the personrequesting inspection within the same timeperiod. In this case, the organization cancharge the requester for copying and actualpostage costs only if the requester consentsto the charge. If the local or subordinate or-ganization receives a written request for acopy of its annual information return, it mustfulfill the request by providing a copy of thegroup return in the time and manner specifiedearlier. The requester has the option of re-questing from the central or parent organiza-tion, at its principal office, inspection or copiesof group returns filed by the central or parentorganization. The central or parent organiza-tion must fulfill such requests in the time andmanner specified earlier.

If an organization fails to comply, it maybe liable for a penalty. See Penalties, later.

Making applications and returns widelyavailable. An exempt organization does nothave to comply with requests for copies of itsannual returns or exemption application if itmakes them widely available. However,making these documents widely availabledoes not relieve the organization from makingits documents available for public inspection.

The organization can make its applicationand returns widely available by posting theapplication and returns on a World Wide Webpage. For the rules to follow so that theInternet posting will be considered widelyavailable, see section 301.6104(d)–2(b) of theregulations.

If the organization has made its applica-tion for tax exemption and/or annual returnswidely available, it must inform any individualrequesting a copy where the documents areavailable, including the address on the WorldWide Web, if applicable. If the request ismade in person, the notice must be providedimmediately. If the request is made in writing,the notice must be provided within 7 days.

Harassment campaign. If the tax-exemptorganization is the subject of a harassmentcampaign, the organization may not have tofulfill requests for information. For more in-formation, see section 301.6104(d)–3 of theregulations.

Political organization reporting forms.Forms 8871 and 8872 (discussed earlier un-der Reporting Requirements for a PoliticalOrganization) are open to public inspection.

Form 8871. Form 8871 (including anysupporting papers) and any letter or otherdocument the IRS issues with regard to Form8871 is open to public inspection at the IRSin Washington, DC. Copies of Form 8871 thathave been filed are available at the IRSInternet web site and are considered widelyavailable as long as the organization providesthe IRS web site address to the person mak-ing the request. In addition, the organizationmust make a copy of these materials avail-able for public inspection during regular busi-ness hours at the organization's principal of-fice and at each of its regional or districtoffices having at least 3 paid employees.

Chapter 2 Filing Requirements and Required Disclosures Page 13

Form 8872. Form 8872 (includingSchedules A and B) is open to public in-spection. Copies of Form 8872 that havebeen filed are available at the IRS web siteand are considered widely available as longas the organization provides the IRS web siteaddress to the person making the request. Inaddition, the organization is required to makea copy of this form available for public in-spection during regular business hours at theorganization's principal office and at each ofits regional or district offices having at least3 paid employees.

Penalties. The penalty for failure to allowpublic inspection of annual returns is $20 foreach day the failure continues. The maximumpenalty on all persons for failures involvingany one return is $10,000.

The penalty for failure to allow public in-spection of exemption applications is $20 foreach day the failure continues.

The penalty for willful failure to allow pub-lic inspection of a return or exemption appli-cation is $5,000 for each return or application.The penalty also applies to a willful failure toprovide copies.

The penalty for failure to allow public in-spection of a political organization's section527 notice (Form 8871) is $20 for each daythe failure continues.

The penalty for failure to allow public in-spection of a section 527 organization's con-tributions and expenditures report (Form8872) is $20 for each day the failure contin-ues. The maximum penalty on all persons forfailures involving any one report is $10,000.

Required DisclosuresCertain exempt organizations must discloseto the IRS or the public certain informationabout their activities. Generally, an organiza-tion discloses this information by entering iton the appropriate lines of its annual return.In addition, there are disclosure requirementsfor:

• Solicitation of nondeductible contribu-tions,

• Sales of information or services that areavailable free from the government, and

• Dues paid to the organization that are notdeductible because they are used forlobbying or political activities.

Solicitation ofNondeductibleContributionsSolicitations for contributions or other pay-ments by certain exempt organizations (in-cluding lobbying groups and political actioncommittees) must include a statement thatpayments to those organizations are notdeductible as charitable contributions for fed-eral income tax purposes. The statementmust be included in the fundraising solicitationand be conspicuous and easily recognizable.

Organizations subject to requirements.An organization must follow these disclosurerequirements if it is exempt under section501(c), other than section 501(c)(1), or undersection 501(d), unless the organization is eli-gible to receive tax deductible charitablecontributions under section 170(c). These re-

quirements must be followed by, among oth-ers:

1) Social welfare organizations (section501(c)(4)),

2) Labor unions (section 501(c)(5)),

3) Trade associations (section 501(c)(6)),

4) Social clubs (section 501(c)(7)),

5) Fraternal organizations (section501(c)(8) and 501 (c)(10)) (however,fraternal organizations described in sec-tion 170(c)(4) must follow these require-ments only for solicitations for funds thatare to be used for noncharitable pur-poses not described in section170(c)(4)),

6) Any political organization described insection 527(e), including political cam-paign committees and political actioncommittees, and

7) Any organization not eligible to receivetax-deductible contributions if the organ-ization or a predecessor organizationwas, at any time during the 5-year periodending on the date of the fundraisingsolicitation, an organization of the typeto which this disclosure requirement ap-plies.

Fundraising solicitation. This disclosurerequirement applies to a fundraising solicita-tion if all of the following are true.

1) The organization soliciting the fundsnormally has gross receipts over$100,000 per year.

2) The solicitation is part of a coordinatedfundraising campaign that is solicitingmore than 10 persons during the year.

3) The solicitation is made in written orprinted form, by television or radio, or bytelephone.

Penalties. Failure by an organization tomake the required statement will result in apenalty of $1,000 for each day the failure oc-curred, up to a maximum penalty of $10,000for a calendar year. No penalty will be im-posed if it is shown that the failure was dueto reasonable cause. If the failure was due tointentional disregard of the requirements, thepenalty may be higher and is not subject toa maximum amount.

Sales of Information orServices Available FreeFrom GovernmentCertain organizations that offer to sell to indi-viduals (or solicit money for) information orroutine services that could be readily obtainedfree (or for a nominal fee) from the federalgovernment must include a statement that theinformation or service can be so obtained.The statement must be made in a conspicu-ous and easily recognized format when theorganization makes an offer or solicitation tosell the information or service. Organizationsaffected are those exempt under section501(c) or 501(d) and political organizationsdefined in section 527(e).

Penalty. A penalty is provided for failure tocomply with this requirement if the failure isdue to intentional disregard of the require-ment. The penalty is the greater of $1,000 for

each day the failure occurred, or 50% of thetotal cost of all offers and solicitations thatwere made by the organization the same daythat it fails to meet the requirement.

Dues Used for Lobbyingor Political ActivitiesCertain exempt organizations must notifyanyone paying dues to the organizationwhether any part of the dues is not deductiblebecause it is related to lobbying or politicalactivities.

An organization must provide the notice ifit is exempt from tax under section 501(a) andis one of the following.

1) A social welfare organization describedin section 501(c)(4) that is not a veter-ans' organization.

2) An agricultural or horticultural organiza-tion described in section 501(c)(5).

3) A business league, chamber of com-merce, real estate board, or other or-ganization described in section501(c)(6).

However, an organization described in (1),(2), or (3) does not have to provide the noticeif it establishes that substantially all the duespaid to it are not deductible anyway or if cer-tain other conditions are met. For more infor-mation, see Revenue Procedure 98–19 inCumulative Bulletin 1998–1 or later update.

If the organization does not provide therequired notice, it may have to pay a tax thatis reported on Form 990–T. But the tax doesnot apply to any amount on which the section527 tax has been paid on Form 1120–POL.See Political Organization Income TaxReturn, earlier.

For more information about nondeductibledues, see Deduction not allowed for duesused for political or legislative activities onpage 46.

Miscellaneous RulesOrganizational changes and exempt sta-tus. If your exempt organization changes itslegal structure, such as from a trust to acorporation, you must file a new exemptionapplication to establish that the new legalentity qualifies for exemption. If your organ-ization becomes inactive for a period of timebut does not cease being an entity under thelaws of the state in which it was formed, itsexemption will not be terminated. However,unless you are covered by one of the filingexceptions, you will have to continue to filean annual information return during the periodof inactivity. If your organization has beenliquidated, dissolved, terminated, or sub-stantially contracted, you should file yourannual return of information by the 15th dayof the 5th month after the change and followthe applicable instructions to the form.

If your organization amends its articles oforganization or its internal regulations (by-laws), you should send a conformed copy ofthese changes to the appropriate EO areamanager. (An organization that is covered bya group exemption letter should send twocopies of these changes.) If you did not givethe IRS a copy of the amendments previ-ously, you may include it when you file Form990 (or 990–EZ or Form 990–PF), if that re-turn is required.

Page 14 Chapter 2 Filing Requirements and Required Disclosures

Change in accounting period. The proce-dures that an organization must follow tochange its accounting period differ for an in-dividual organization and for a central organ-ization that seeks a group change for itssubordinate organizations.

Individual organizations that wish tochange annual accounting periods generallyneed only file an information return for theshort period indicating that a change is beingmade. However, if the organization haschanged its accounting period within the pre-vious 10 years, it must file Form 1128, Ap-plication to Adopt, Change, or Retain a TaxYear. Form 1128 is attached to the short pe-riod return. See Revenue Procedure 85–58.

Central organizations may obtain ap-proval for a group change in annual account-ing period for their subordinate organizationson a group basis only by filing Form 1128 withthe Ogden Service Center. The address isgiven on page 7 under Information RequiredAnnually. For more information, see RevenueProcedure 76–10, as modified by RevenueProcedure 79–3 or later update.

Form 1128 must be filed by the 15th dayof the 5th month following the close of theshort period.

3.Section501(c)(3)Organizations

IntroductionAn organization may qualify for exemptionfrom federal income tax if it is organized andoperated exclusively for one or more of thefollowing purposes.

Charitable.

Religious.

Educational.

Scientific.

Literary.

Testing for public safety.

Fostering national or international amateursports competition (but only if none of itsactivities involve providing athletic facilitiesor equipment; however, see Amateur Ath-letic Organizations, later in this chapter).

The prevention of cruelty to children or ani-mals.

To qualify, the organization must be acorporation, community chest, fund, or foun-dation. A trust is a fund or foundation and willqualify. However, an individual or a partner-ship will not qualify.

Examples. Qualifying organizations include:

Nonprofit old-age homes,

Parent-teacher associations,

Charitable hospitals or other charitable or-ganizations,

Alumni associations,

Schools,

Chapters of the Red Cross or Salvation Army,

Boys' or Girls' clubs, and

Churches.

Child care organizations. The term ed-ucational purposes includes providing forcare of children away from their homes ifsubstantially all the care provided is to enableindividuals (the parents) to be gainfully em-ployed and the services are available to thegeneral public.

Instrumentalities. A state or municipal in-strumentality may qualify under section501(c)(3) if it is organized as a separate entityfrom the governmental unit that created it andif it otherwise meets the organizational andoperational tests of section 501(c)(3). Ex-amples of a qualifying instrumentality mightinclude state schools, universities, or hospi-tals. However, if an organization is an integralpart of the local government or possessesgovernmental powers, it does not qualify forexemption. A state or municipality itself doesnot qualify for exemption.

TopicsThis chapter discusses:

• Contributions to 501(c)(3) organizations

• Applications for recognition of exemption

• Educational organizations and certainother 501(c)(3) organizations

• Private foundations and public charities

• Lobbying expenditures

Useful ItemsYou may want to see:

Forms (and Instructions)

� 1023 Application for Recognition of Ex-emption Under Section 501(c)(3)of the Internal Revenue Code

� 8718 User Fee for Exempt OrganizationDetermination Letter Request

See chapter 5 for information about get-ting publications and forms.

Contributions Contributions to domestic organizations de-scribed in this chapter, except organizationstesting for public safety, are deductible ascharitable contributions on the donor's federalincome tax return.

Fundraising events. If the donor re-ceives something of value in return for thecontribution, a common occurrence withfundraising efforts, part or all of the contribu-tion may not be deductible. This may applyto fundraising activities such as charity balls,bazaars, banquets, auctions, concerts, ath-letic events, and solicitations for membershipor contributions when merchandise or bene-fits are given in return for payment of aspecified minimum contribution.

If the donor receives or expects to receivegoods or services in return for a contributionto your organization, the donor cannot deductany part of the contribution unless the donorintends to, and does, make a payment greaterthan the fair market value of the goods orservices. If a deduction is allowed, the donorcan deduct only the part of the contribution,if any, that is more than the fair market valueof the goods or services received. You shoulddetermine in advance the fair market valueof any goods or services to be given to con-tributors and tell them, when you publicize thefundraising event or solicit their contributions,how much is deductible and how much is forthe goods or services. See Disclosure of QuidPro Quo Contributions in chapter 2.

Exemption application not filed. Donorsmay not deduct any charitable contribution toan organization that is required to apply forrecognition of exemption but has not done so.

Separate fund—contributions to which aredeductible. An organization that is exemptfrom federal income tax other than as an or-ganization described in section 501(c)(3)may, if it desires, establish a fund, separateand apart from its other funds, exclusively forreligious, charitable, scientific, literary, or ed-ucational purposes, fostering national orinternational amateur sports competition, orfor the prevention of cruelty to children oranimals.

If the fund is organized and operated ex-clusively for these purposes, it may qualify forexemption as an organization described insection 501(c)(3), and contributions made toit will be deductible as provided by section170. A fund with these characteristics mustbe organized in such a manner as to prohibitthe use of its funds upon dissolution, or oth-erwise, for the general purposes of the or-ganization creating it.

Application forRecognition ofExemption This discussion describes certain informationto be provided upon application for recogni-tion of exemption by all organizations createdfor any of the purposes described earlier inthis chapter. For example, the applicationmust include a conformed copy of the organ-ization's articles of incorporation, as dis-cussed under Articles of Organization later inthis chapter. See the organization headingsthat follow for specific information your or-ganization may need to provide.

Form 1023. Your organization must file itsapplication for recognition of exemption onForm 1023. See chapter 1 and the in-structions accompanying Form 1023 for theprocedures to follow in applying. Some or-ganizations are not required to file Form1023. These are discussed later in this sec-tion.

Form 1023 and accompanying statementsmust show that all of the following are true.

1) The organization is organized exclu-sively for, and will be operated exclu-sively for, one or more of the purposes(charitable, religious, etc.) specified inthe introduction to this chapter.

Chapter 3 Section 501(c)(3) Organizations Page 15

2) No part of the organization's netearnings will inure to the benefit of pri-vate shareholders or individuals. Youmust establish that your organization willnot be organized or operated for thebenefit of private interests, such as thecreator or the creator's family, share-holders of the organization, other desig-nated individuals, or persons controlleddirectly or indirectly by such private in-terests.

3) The organization will not, as a substan-tial part of its activities, attempt to influ-ence legislation (unless it elects to comeunder the provisions allowing certainlobbying expenditures) or participate toany extent in a political campaign for oragainst any candidate for public office.See Political activity, next, and LobbyingExpenditures, near the end of thischapter.

Political activity. If any of the activities(whether or not substantial) of your organiza-tion consist of participating in, or interveningin, any political campaign on behalf of (or inopposition to) any candidate for public office,your organization will not qualify for tax-exempt status under section 501(c)(3). Suchparticipation or intervention includes the pub-lishing or distributing of statements.

Whether your organization is participatingor intervening, directly or indirectly, in anypolitical campaign on behalf of (or in oppo-sition to) any candidate for public office de-pends upon all of the facts and circumstancesof each case. Certain voter education activ-ities or public forums conducted in a non-partisan manner may not be prohibited poli-tical activity under section 501(c)(3), whileother so-called voter education activities maybe prohibited.

If your organization is uncertain as tothe effect of its voter education activ-ities, you should request a letter ruling

from the Internal Revenue Service. Send therequest to:

Exempt OrganizationsInternal Revenue ServiceCommissioner, TE/GEAttention: T:EO:RAP.O. Box 27720, McPherson StationWashington, DC 20038

Requests may also be hand deliveredbetween the hours of 8:15 a.m. and 5:00 p.m.to:

Courier's DeskInternal Revenue ServiceAttention: T:AS1111 Constitution Avenue, N.W.Washington, DC 20224

A receipt will be given at the courier'sdesk. The package should be marked: RUL-ING REQUEST SUBMISSION.

Effective date of exemption. Most organ-izations described in this chapter that wereorganized after October 9, 1969, will not betreated as tax exempt unless they apply forrecognition of exemption by filing Form 1023.These organizations will not be treated as taxexempt for any period before they file Form1023, unless they file the form within 15months from the end of the month in whichthey were organized. If the organization files

the application within this 15-month period,the organization's exemption will be recog-nized retroactively to the date it was organ-ized. Otherwise, exemption will be recognizedonly for the period after the IRS receives theapplication. The date of receipt is the date ofthe U.S. postmark on the cover in which anexemption application is mailed or, if nopostmark appears on the cover, the date theapplication is stamped as received by theIRS.

Private delivery service. If a private de-livery service designated by the IRS, ratherthan the U.S. Postal Service, is used to de-liver the application, the date of receipt is thedate recorded or marked by the private de-livery service. At the time this publication wasprinted, the following private delivery serviceshad been designated by the IRS.

• Airborne Express (Airborne): OvernightAir Express Service, Next AfternoonService, and Second Day Service.

• DHL Worldwide Express (DHL): DHL“Same Day” Service, and DHL USAOvernight.

• Federal Express (FedEx): FedEx PriorityOvernight, FedEx Standard Overnight,and FedEx 2Day.

• United Parcel Service (UPS): UPS NextDay Air, UPS Next Day Air Saver, UPS2nd Day Air, and UPS 2nd Day Air A.M.

Amendments to enabling instrumentrequired. If an organization is required toalter its activities or to make substantiveamendments to its enabling instrument, theruling or determination letter recognizing itsexempt status will be effective as of the datethe changes are made. If only a nonsub-stantive amendment is made, exempt statuswill be effective as of the date it was organ-ized, if the application was filed within the15-month period, or the date the applicationwas filed.

Extensions of time for filing. There are twoways organizations seeking exemption canreceive an extension of time for filing Form1023.

1) Automatic 12-month extension. Or-ganizations will receive an automatic12-month extension if they file an appli-cation for recognition of exemption withthe IRS within 12 months of the originaldeadline. To get this extension, an or-ganization must add the following state-ment at the top of its application: “FiledPursuant to Section 301.9100–2.”

2) Discretionary extensions. An organ-ization that fails to file a Form 1023within the extended 12-month period willbe granted an extension to file if it sub-mits evidence (including affidavits) toestablish that:

a) It acted reasonably and in goodfaith, and

b) Granting a discretionary extensionwill not prejudice the interests of thegovernment.

How to show reasonable action andgood faith. An organization acted reason-ably and showed good faith if at least one ofthe following is true.

1) The organization requests relief beforeits failure to file is discovered by the IRS.

2) The organization failed to file becauseof intervening events beyond its control.

3) The organization exercised reasonablediligence (taking into account the com-plexity of the return or issue and the or-ganization's experience in these matters)but was not aware of the filing require-ment.

4) The organization reasonably relied uponthe written advice of the IRS.

5) The organization reasonably relied uponthe advice of a qualified tax professionalwho failed to file or advise the organiza-tion to file Form 1023. An organizationcannot rely on the advice of a tax pro-fessional if it knows or should know thathe or she is not competent to renderadvice on filing exemption applicationsor is not aware of all the relevant facts.

Not acting reasonably and in goodfaith. An organization has not acted reason-ably and in good faith under the followingcircumstances.

1) It seeks to change a return position forwhich an accuracy-related penalty hasbeen or could be imposed at the time therelief is requested.

2) It was informed of the requirement to fileand related tax consequences, butchose not to file.

3) It uses hindsight in requesting relief. TheIRS will not ordinarily grant an extensionif specific facts have changed since thedue date that makes filing an applicationadvantageous to an organization.

Prejudicing the interest of the govern-ment. Prejudice to the interest of the gov-ernment results if granting an extension oftime to file to an organization results in alower total tax liability for the years to whichthe filing applies than would have been thecase if the organization had filed on time.Before granting an extension, the IRS mayrequire the organization requesting it to sub-mit a statement from an independent auditorcertifying that no prejudice will result if theextension is granted.

The interests of the Government are ordi-narily prejudiced if the tax year in which theapplication should have been filed (or any taxyear that would have been affected had thefiling been timely) are closed by the statuteof limitations before relief is granted. The IRSmay condition a grant of relief on the organ-ization providing the IRS with a statementfrom an independent auditor certifying that theinterests of the Government are not preju-diced.

Procedure for requesting extension.To request a discretionary extension, an or-ganization must submit (to the IRS addressshown on Form 8718) the following.

• A statement showing the date Form 1023was required to have been filed and thedate it was actually filed.

• Any documents relevant to the applica-tion.

• An affidavit describing in detail the eventsthat led to the failure to apply and to thediscovery of that failure. If the organiza-tion relied on a tax professional's advice,the affidavit must describe the engage-ment and responsibilities of the profes-

Page 16 Chapter 3 Section 501(c)(3) Organizations

sional and the extent to which the or-ganization relied on him or her.

• This affidavit must be accompanied by adated declaration, signed by an individualwho has personal knowledge of the factsand circumstances, who is authorized toact for the organization, which states,“Under penalties of perjury, I declare thatI have examined this request, includingaccompanying documents, and, to thebest of my knowledge and belief, the re-quest contains all the relevant facts re-lating to the request, and such facts aretrue, correct, and complete.”

• Detailed affidavits from individuals havingknowledge or information about theevents that led to the failure to make theapplication and to the discovery of thatfailure. This includes the organization'sreturn preparer, and any accountant orattorney, knowledgeable in tax matters,who advised the taxpayer on the appli-cation. The affidavits must describe theengagement and responsibilities of theindividual and the advice that he or sheprovided.

• These affidavits must include the name,current address, and taxpayer identifica-tion number of the individual, and be ac-companied by a dated declaration, signedby the individual, which states: “Underpenalties of perjury, I declare that I haveexamined this request, including accom-panying documents, and, to the best ofmy knowledge and belief, the requestcontains all the relevant facts relating tothe request, and such facts are true,correct, and complete.”

• The organization must state whether thereturns for the tax year in which the ap-plication should have been filed or anytax years that would have been affectedby the application had it been timelymade is being examined by the IRS, anappeals office, or a federal court. Theorganization must notify the IRS officeconsidering the request for relief if theIRS starts an examination of any suchreturn while the organization's request forrelief is pending.

• The organization, if requested, has tosubmit copies of its tax returns, andcopies of the returns of other affectedtaxpayers.

A request for this relief is a request thatmust be submitted as a request for a letterruling and be accompanied by the applicableuser fee.

More information. For more informationabout these procedures, see sections301.9100–1, 301.9100–2, and 301.9100–3 ofthe regulations.

Notification from IRS. Organizations filingForm 1023 and satisfying all requirements ofsection 501(c)(3) will be notified of their ex-empt status in writing.

Organizations Not RequiredTo File Form 1023 Some organizations are not required to fileForm 1023.

These include:

• Churches, interchurch organizations oflocal units of a church, conventions or

associations of churches, or integratedauxiliaries of a church, such as a men'sor women's organization, religiousschool, mission society, or youth group.

• Any organization (other than a privatefoundation) normally having annual grossreceipts of not more than $5,000 (seeGross receipts test, later).

These organizations are exempt automat-ically if they meet the requirements of section501(c)(3).

Filing Form 1023 to establish exemption.If the organization wants to establish its ex-emption with the IRS and receive a ruling ordetermination letter recognizing its exemptstatus, it should file Form 1023. By estab-lishing its exemption, potential contributorsare assured by the IRS that contributions willbe deductible. A subordinate organization(other than a private foundation) covered bya group exemption letter does not have tosubmit a Form 1023 for itself.

Private foundations. See Private Foun-dations and Public Charities, later, in thischapter, for more information about the addi-tional notice required from an organization inorder for it not to be presumed to be a privatefoundation and for the additional informationrequired from a private foundation claiming tobe an operating foundation.

Gross receipts test. For purposes of thegross receipts test, an organization normallydoes not have more than $5,000 annually ingross receipts if:

1) During its first tax year the organizationreceived gross receipts of $7,500 or less,

2) During its first 2 years the organizationhad a total of $12,000 or less in grossreceipts, and

3) In the case of an organization that hasbeen in existence for at least 3 years, thetotal gross receipts received by the or-ganization during the immediately pre-ceding 2 years, plus the current year, are$15,000 or less.

An organization with gross receipts morethan the amounts in the gross receipts test,unless otherwise exempt from filing Form1023, must file a Form 1023 within 90 daysafter the end of the period in which theamounts are exceeded. For example, an or-ganization's gross receipts for its first tax yearwere less than $7,500, but at the end of itssecond tax year its gross receipts for the2–year period were more than $12,000. Theorganization must file Form 1023 within 90days after the end of its second tax year.

If the organization had existed for at least3 tax years and had met the gross receiptstest for all prior tax years but fails to meet therequirement for the current tax year, its tax-exempt status for the prior years will not belost even if Form 1023 is not filed within 90days after the close of the current tax year.However, the organization will not be treatedas a section 501(c)(3) organization for theperiod beginning with the current tax year andending with the filing of Form 1023.

Example. An organization is organizedand operated exclusively for charitable pur-poses and is not a private foundation. It wasincorporated on January 1, 1996, and filesreturns on a calendar-year basis. It did not filea Form 1023. The organization's gross re-ceipts during the years 1996 through 1999were as follows:

The organization's total gross receipts for1996, 1997, and 1998 were $6,900. There-fore, it did not have to file Form 1023 and isexempt for those years. However, for 1997,1998, and 1999 the total gross receipts were$15,900. Therefore, the organization must fileForm 1023 within 90 days after the end of its1999 tax year. If it does not file within this timeperiod, it will not be exempt under section501(c)(3) for the period beginning with taxyear 1999 and ending when the Form 1023is received by the IRS. The organization,however, will not lose its exempt status for thetax years ending before January 1, 1999.

The IRS will consider applying the Com-missioner's discretionary authority to extendthe time for filing Form 1023. See the proce-dures for this extension discussed earlier.

Articles ofOrganization Your organization must include a conformedcopy of its articles of organization with theapplication for recognition of exemption. Thismay be its trust instrument, corporate charter,articles of association, or any other writteninstrument by which it is created.

Organizational TestThe articles of organization must limit theorganization's purposes to one or more ofthose described at the beginning of thischapter and must not expressly empower itto engage, other than as an insubstantial partof its activities, in activities that do not furtherone or more of those purposes. These con-ditions for exemption are referred to as theorganizational test.

Section 501(c)(3) is the provision of lawthat grants exemption to the organizationsdescribed in this chapter. Therefore, the or-ganizational test may be met if the purposesstated in the articles of organization are lim-ited in some way by reference to section501(c)(3).

The requirement that your organization'spurposes and powers must be limited by thearticles of organization is not satisfied if thelimit is contained only in the bylaws or otherrules or regulations. Moreover, the organiza-tional test is not satisfied by statements ofyour organization's officers that you intend tooperate only for exempt purposes. Also, thetest is not satisfied by the fact that your actualoperations are for exempt purposes.

In interpreting an organization's articles,the law of the state where the organizationwas created is controlling. If an organizationcontends that the terms of its articles have adifferent meaning under state law than theirgenerally accepted meaning, such meaningmust be established by a clear and convinc-ing reference to relevant court decisions,opinions of the state attorney general, orother appropriate state authorities.

The following are examples illustratingthe organizational test.

Example 1. Articles of organization statethat an organization is formed exclusively forliterary and scientific purposes within themeaning of section 501(c)(3) of the InternalRevenue Code. These articles appropriately

1996 ........................................................... $3,6001997 ........................................................... 2,9001998 ........................................................... 4001999 ........................................................... 12,600

Chapter 3 Section 501(c)(3) Organizations Page 17

limit the organization's purposes. The organ-ization meets the organizational test.

Example 2. An organization, by the termsof its articles, is formed to engage in researchwithout any further description or limitation.The organization will not be properly limitedas to its purposes since all research is notscientific. The organization does not meet theorganizational test.

Example 3. An organization's articlesstate that its purpose is to receive contribu-tions and pay them over to organizations thatare described in section 501(c)(3) and exemptfrom taxation under section 501(a). The or-ganization meets the organizational test.

Example 4. If a stated purpose in thearticles is the conduct of a school of adulteducation and its manner of operation is de-scribed in detail, such a purpose will be sat-isfactorily limited.

Example 5. If the articles state the or-ganization is formed for charitable purposes,without any further description, such lan-guage ordinarily will be sufficient since theterm charitable has a generally accepted legalmeaning. On the other hand, if the purposesare stated to be charitable, philanthropic, andbenevolent, the organizational requirementwill not be met since the terms philanthropicand benevolent have no generally acceptedlegal meaning and, therefore, the stated pur-poses may, under the laws of the state, permitactivities that are broader than those intendedby the exemption law.

Example 6. If the articles state an or-ganization is formed to promote Americanideals, or to foster the best interests of thepeople, or to further the common welfare andwell-being of the community, without any lim-itation or provision restricting such purposesto accomplishment only in a charitable man-ner, the purposes will not be sufficiently lim-ited. Such purposes are vague and may beaccomplished other than in an exempt man-ner.

Example 7. A stated purpose to operatea hospital does not meet the organizationaltest since it is not necessarily charitable. Ahospital may or may not be exempt depend-ing on the manner in which it is operated.

Example 8. An organization that is ex-pressly empowered by its articles to carry onsocial activities will not be sufficiently limitedas to its power, even if its articles state thatit is organized and will be operated exclu-sively for charitable purposes.

Dedication andDistribution of AssetsAssets of an organization must be perma-nently dedicated to an exempt purpose. Thismeans that should an organization dissolve,its assets must be distributed for an exemptpurpose described in this chapter, or to thefederal government or to a state or localgovernment for a public purpose. If the assetscould be distributed to members or privateindividuals or for any other purpose, the or-ganizational test is not met.

Dedication. To establish that your or-ganization's assets will be permanently dedi-cated to an exempt purpose, the articles oforganization should contain a provision in-suring their distribution for an exempt purpose

in the event of dissolution. Although reliancemay be placed upon state law to establishpermanent dedication of assets for exemptpurposes, your organization's applicationprobably can be processed much more rap-idly if its articles of organization include aprovision insuring permanent dedication ofassets for exempt purposes.

Distribution. Revenue Procedure 82–2,1982–1 C.B. 367, identifies the states andcircumstances in which the IRS will not re-quire an express provision for the distributionof assets upon dissolution in the articles oforganization. The procedure also provides asample of an acceptable dissolution provisionfor organizations required to have one.

If a named beneficiary is to be thedistributee, it must be one that would qualifyand would be exempt within the meaning ofsection 501(c)(3) at the time the dissolutiontakes place. Since the named beneficiary atthe time of dissolution may not be qualified,may not be in existence, or may be unwillingor unable to accept the assets of the dissolv-ing organization, a provision should be madefor distribution of the assets for one or moreof the purposes specified in this chapter in theevent of any such contingency.

Sample Articlesof OrganizationThe following are examples of a charter (DraftA) and a declaration of trust (Draft B) thatcontain the required information as to pur-poses and powers of an organization anddisposition of its assets upon dissolution. Youshould bear in mind that requirements forthese instruments may vary under applicablestate law.

See page 25 for the special provisionsrequired in a private foundation's governinginstrument in order for it to qualify for ex-emption.

Draft AArticles of Incorporation of the under-

signed, a majority of whom are citizens of theUnited States, desiring to form a Non-ProfitCorporation under the Non-Profit CorporationLaw of , do hereby certify:

First: The name of the Corporation shallbe .

Second: The place in this state where theprincipal office of the Corporation is to be lo-cated is the City of , County.

Third: Said corporation is organized ex-clusively for charitable, religious, educational,and scientific purposes, including, for suchpurposes, the making of distributions to or-ganizations that qualify as exempt organiza-tions under section 501(c)(3) of the InternalRevenue Code, or the corresponding sectionof any future federal tax code.

Fourth: The names and addresses of thepersons who are the initial trustees of thecorporation are as follows:

Name Address Fifth: No part of the net earnings of the

corporation shall inure to the benefit of, or bedistributable to its members, trustees, offi-cers, or other private persons, except that thecorporation shall be authorized and em-powered to pay reasonable compensation forservices rendered and to make payments anddistributions in furtherance of the purposesset forth in Article Third hereof. No substantialpart of the activities of the corporation shallbe the carrying on of propaganda, or other-

wise attempting to influence legislation, andthe corporation shall not participate in, or in-tervene in (including the publishing or distri-bution of statements) any political campaignon behalf of or in opposition to any candidatefor public office. Notwithstanding any otherprovision of these articles, the corporationshall not carry on any other activities notpermitted to be carried on (a) by a corporationexempt from federal income tax under section501(c)(3) of the Internal Revenue Code, orthe corresponding section of any future fed-eral tax code, or (b) by a corporation, contri-butions to which are deductible under section170(c)(2) of the Internal Revenue Code, orthe corresponding section of any future fed-eral tax code.

If reference to federal law in articles of in-corporation imposes a limitation that is invalidin your state, you may wish to substitute thefollowing for the last sentence of the preced-ing paragraph: “Notwithstanding any otherprovision of these articles, this corporationshall not, except to an insubstantial degree,engage in any activities or exercise anypowers that are not in furtherance of the pur-poses of this corporation.”

Sixth: Upon the dissolution of the corpo-ration, assets shall be distributed for one ormore exempt purposes within the meaningof section 501(c)(3) of the Internal RevenueCode, or the corresponding section of anyfuture federal tax code, or shall be distributedto the federal government, or to a state orlocal government, for a public purpose. Anysuch assets not so disposed of shall be dis-posed of by a Court of Competent Jurisdictionof the county in which the principal office ofthe corporation is then located, exclusively forsuch purposes or to such organization or or-ganizations, as said Court shall determine,which are organized and operated exclusivelyfor such purposes.

In witness whereof, we have hereuntosubscribed our names this dayof 20 .

Draft BThe Charitable Trust. Declaration

of Trust made as of the day of ,20 , by , of ,and , of , who herebydeclare and agree that they have receivedthis day from , as Donor, the sumof Ten Dollars ($10) and that they will holdand manage the same, and any additions toit, in trust, as follows:

First: This trust shall be called “The Charitable Trust.”

Second: The trustees may receive andaccept property, whether real, personal, ormixed, by way of gift, bequest, or devise, fromany person, firm, trust, or corporation, to beheld, administered, and disposed of in ac-cordance with and pursuant to the provisionsof this Declaration of Trust; but no gift, be-quest or devise of any such property shall bereceived and accepted if it is conditioned orlimited in such manner as to require the dis-position of the income or its principal to anyperson or organization other than a “charita-ble organization” or for other than “charitablepurposes” within the meaning of such termsas defined in Article Third of this Declarationof Trust, or as shall in the opinion of thetrustees, jeopardize the federal income taxexemption of this trust pursuant to section501(c)(3) of the Internal Revenue Code, orthe corresponding section of any future fed-eral tax code.

Page 18 Chapter 3 Section 501(c)(3) Organizations

Third: A. The principal and income of allproperty received and accepted by the trus-tees to be administered under this Declarationof Trust shall be held in trust by them, and thetrustees may make payments or distributionsfrom income or principal, or both, to or for theuse of such charitable organizations, withinthe meaning of that term as defined in para-graph C, in such amounts and for such char-itable purposes of the trust as the trusteesshall from time to time select and determine;and the trustees may make payments or dis-tributions from income or principal, or both,directly for such charitable purposes, withinthe meaning of that term as defined in para-graph D, in such amounts as the trusteesshall from time to time select and determinewithout making use of any other charitableorganization. The trustees may also makepayments or distributions of all or any part ofthe income or principal to states, territories,or possessions of the United States, any pol-itical subdivision of any of the foregoing, or tothe United States or the District of Columbiabut only for charitable purposes within themeaning of that term as defined in paragraphD. Income or principal derived from contribu-tions by corporations shall be distributed bythe trustees for use solely within the UnitedStates or its possessions. No part of the netearnings of this trust shall inure or be payableto or for the benefit of any private shareholderor individual, and no substantial part of theactivities of this trust shall be the carrying onof propaganda, or otherwise attempting, toinfluence legislation. No part of the activitiesof this trust shall be the participation in, orintervention in (including the publishing ordistributing of statements), any political cam-paign on behalf of or in opposition to anycandidate for public office.

B. The trust shall continue forever unlessthe trustees terminate it and distribute all ofthe principal and income, which action maybe taken by the trustees in their discretion atany time. On such termination, assets shallbe distributed for one or more exempt pur-poses within the meaning of section 501(c)(3)of the Internal Revenue Code, or the corre-sponding section of any future federal taxcode, or shall be distributed to the federalgovernment, or to a state or local govern-ment, for a public purpose. The donor au-thorizes and empowers the trustees to formand organize a nonprofit corporation limitedto the uses and purposes provided for in thisDeclaration of Trust, such corporation to beorganized under the laws of any state or un-der the laws of the United States as may bedetermined by the trustees; such corporationwhen organized to have power to administerand control the affairs and property and tocarry out the uses, objects, and purposes ofthis trust. Upon the creation and organizationof such corporation, the trustees are author-ized and empowered to convey, transfer, anddeliver to such corporation all the propertyand assets to which this trust may be or be-come entitled. The charter, bylaws, and otherprovisions for the organization and manage-ment of such corporation and its affairs andproperty shall be such as the trustees shalldetermine, consistent with the provisions ofthis paragraph.

C. In this Declaration of Trust and in anyamendments to it, references to “charitableorganizations” or “charitable organization”mean corporations, trusts, funds, foundations,or community chests created or organized inthe 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, or-ganized and operated exclusively for charita-ble purposes, no part of the net earnings ofwhich inures or is payable to or for the benefitof any private shareholder or individual, andno substantial part of the activities of whichis carrying on propaganda, or otherwise at-tempting to influence legislation, and whichdo not participate in or intervene in (includingthe publishing or distributing of statements)any political campaign on behalf of or in op-position to any candidate for public office. Itis intended that the organization described inthis paragraph C shall be entitled to ex-emption from federal income tax under sec-tion 501(c)(3) of the Internal Revenue Code,or the corresponding section of any futurefederal tax code.

D. In this Declaration of Trust and in anyamendments to it, the term “charitable pur-poses” shall be limited to and shall includeonly religious, charitable, scientific, literary,or educational purposes within the meaningof those terms as used in section 501(c)(3)of the Internal Revenue Code, or the corre-sponding section of any future federal taxcode, but only such purposes as also consti-tute public charitable purposes under the lawof trusts of the State of .

Fourth: This Declaration of Trust may beamended at any time or times by written in-strument or instruments signed and sealedby the trustees, and acknowledged by any ofthe trustees, provided that no amendmentshall authorize the trustees to conduct theaffairs of this trust in any manner or for anypurpose contrary to the provisions of section501(c)(3) of the Internal Revenue Code, orthe corresponding section of any future fed-eral tax code. An amendment of the pro-visions of this Article Fourth (or any amend-ment to it) shall be valid only if and to theextent that such amendment further restrictsthe trustees' amending power. All instrumentsamending this Declaration of Trust shall benoted upon or kept attached to the executedoriginal of this Declaration of Trust held by thetrustees.

Fifth: Any trustee under this Declarationof Trust may, by written instrument, signedand acknowledged, resign his office. Thenumber of trustees shall be at all times notless than two, and whenever for any reasonthe number is reduced to one, there shall be,and at any other time there may be, appointedone or more additional trustees. Appoint-ments shall be made by the trustee or trus-tees for the time in office by written instru-ments signed and acknowledged. Anysucceeding or additional trustee shall, uponhis or her acceptance of the office by writteninstrument signed and acknowledged, havethe same powers, rights and duties, and thesame title to the trust estate jointly with thesurviving or remaining trustee or trustees asif originally appointed.

None of the trustees shall be required tofurnish any bond or surety. None of them shallbe responsible or liable for the acts or omis-sions of any other of the trustees or of anypredecessor or of a custodian, agent,depositary or counsel selected with reason-able care.

The one or more trustees, whether originalor successor, for the time being in office, shallhave full authority to act even though one ormore vacancies may exist. A trustee may, byappropriate written instrument, delegate allor any part of his or her powers to anotheror others of the trustees for such periods and

subject to such conditions as such delegatingtrustee may determine.

The trustees serving under this Declara-tion of Trust are authorized to pay to them-selves amounts for reasonable expenses in-curred and reasonable compensation forservices rendered in the administration of thistrust, but in no event shall any trustee whohas made a contribution to this trust ever re-ceive any compensation thereafter.

Sixth: In extension and not in limitationof the common law and statutory powers oftrustees and other powers granted in thisDeclaration of Trust, the trustees shall havethe following discretionary powers.

a) To invest and reinvest the principal andincome of the trust in such property, real,personal, or mixed, and in such manner asthey shall deem proper, and from time to timeto change investments as they shall deemadvisable; to invest in or retain any stocks,shares, bonds, notes, obligations, or personalor real property (including without limitationany interests in or obligations of any corpo-ration, association, business trust, investmenttrust, common trust fund, or investment com-pany) although some or all of the property soacquired or retained is of a kind or size whichbut for this express authority would not beconsidered proper and although all of the trustfunds are invested in the securities of onecompany. No principal or income, however,shall be loaned, directly or indirectly, to anytrustee or to anyone else, corporate or other-wise, who has at any time made a contribu-tion to this trust, nor to anyone except on thebasis of an adequate interest charge and withadequate security.

b) To sell, lease, or exchange any per-sonal, mixed, or real property, at public auc-tion or by private contract, for such consider-ation and on such terms as to credit orotherwise, and to make such contracts andenter into such undertakings relating to thetrust property, as they consider advisable,whether or not such leases or contracts mayextend beyond the duration of the trust.

c) To borrow money for such periods, atsuch rates of interest, and upon such termsas the trustees consider advisable, and assecurity for such loans to mortgage or pledgeany real or personal property with or withoutpower of sale; to acquire or hold any real orpersonal property, subject to any mortgageor pledge on or of property acquired or heldby this trust.

d) To execute and deliver deeds, assign-ments, transfers, mortgages, pledges, leases,covenants, contracts, promissory notes, re-leases, and other instruments, sealed or un-sealed, incident to any transaction in whichthey engage.

e) To vote, to give proxies, to participatein the reorganization, merger or consolidationof any concern, or in the sale, lease, disposi-tion, or distribution of its assets; to join withother security holders in acting through acommittee, depositary, voting trustees, orotherwise, and in this connection to delegateauthority to such committee, depositary, ortrustees and to deposit securities with themor transfer securities to them; to pay assess-ments levied on securities or to exercisesubscription rights in respect of securities.

f) To employ a bank or trust company ascustodian of any funds or securities and todelegate to it such powers as they deem ap-propriate; to hold trust property without indi-cation of fiduciary capacity but only in thename of a registered nominee, provided thetrust property is at all times identified as such

Chapter 3 Section 501(c)(3) Organizations Page 19

on the books of the trust; to keep any or allof the trust property or funds in any place orplaces in the United States of America; toemploy clerks, accountants, investmentcounsel, investment agents, and any specialservices, and to pay the reasonable com-pensation and expenses of all such servicesin addition to the compensation of the trus-tees.

Seventh: The trustees' powers areexercisable solely in the fiduciary capacityconsistent with and in furtherance of thecharitable purposes of this trust as specifiedin Article Third and not otherwise.

Eighth: In this Declaration of Trust andin any amendment to it, references to “trus-tees” mean the one or more trustees, whetheroriginal or successor, for the time being inoffice.

Ninth: Any person may rely on a copy,certified by a notary public, of the executedoriginal of this Declaration of Trust held by thetrustees, and of any of the notations on it andwritings attached to it, as fully as he might relyon the original documents themselves. Anysuch person may rely fully on any statementsof fact certified by anyone who appears fromsuch original documents or from such certifiedcopy to be a trustee under this Declarationof Trust. No one dealing with the trusteesneed inquire concerning the validity of any-thing the trustees purport to do. No onedealing with the trustees need see to the ap-plication of anything paid or transferred to orupon the order of the trustees of the trust.

Tenth: This Declaration of Trust is to begoverned in all respects by the laws of theState of .

Trustee Trustee

EducationalOrganizationsand Private Schools If your organization wants to obtain recogni-tion of exemption as an educational organ-ization, you must submit complete informationas to how your organization carries on orplans to carry on its educational activities,such as by conducting a school, by panels,discussions, lectures, forums, radio and tele-vision programs, or through various culturalmedia such as museums, symphony orches-tras, or art exhibits. In each instance, youmust explain by whom and where these ac-tivities are or will be conducted and theamount of admission fees, if any. You mustsubmit a copy of the pertinent contracts,agreements, publications, programs, etc.

If you are organized to conduct a school,you must submit full information regardingyour tuition charges, number of faculty mem-bers, number of full-time and part-time stu-dents enrolled, courses of study and degreesconferred, together with a copy of your schoolcatalog. See also Private Schools, discussedlater.

Educational OrganizationsThe term educational relates to:

1) The instruction or training of individualsfor the purpose of improving or develop-ing their capabilities, or

2) The instruction of the public on subjectsuseful to individuals and beneficial to thecommunity.

Advocacy of a position. Advocacy of aparticular position or viewpoint may be edu-cational if there is a sufficiently full and fairexposition of pertinent facts to permit an in-dividual or the public to form an independentopinion or conclusion. The mere presentationof unsupported opinion is not educational.

Method not educational. The methodused by an organization to develop andpresent its views is a factor in determining ifan organization qualifies as educational withinthe meaning of section 501(c)(3). The fol-lowing factors may indicate that the methodis not educational.

1) The presentation of viewpoints unsup-ported by facts is a significant part of theorganization's communications.

2) The facts that purport to support theviewpoint are distorted.

3) The organization's presentations makesubstantial use of inflammatory anddisparaging terms and express conclu-sions more on the basis of emotion thanof objective evaluations.

4) The approach used is not aimed at de-veloping an understanding on the partof the audience because it does notconsider their background or training.

Exceptional circumstances, however, mayexist where an organization's advocacy maybe educational even if one or more of thefactors listed above are present.

Qualifying organizations. The followingtypes of organizations may qualify as educa-tional:

1) An organization, such as a primary orsecondary school, a college, or a pro-fessional or trade school, that has aregularly scheduled curriculum, a regularfaculty, and a regularly enrolled studentbody in attendance at a place where theeducational activities are regularly car-ried on,

2) An organization whose activities consistof conducting public discussion groups,forums, panels, lectures, or other similarprograms,

3) An organization that presents a courseof instruction by correspondence orthrough the use of television or radio,

4) A museum, zoo, planetarium, symphonyorchestra, or other similar organization,and

5) A nonprofit children's day-care center.

College book stores, cafeterias, res-taurants, etc. These and other on-campusorganizations should submit information toshow that they are controlled by and operatefor the convenience of the faculty and studentbody or by whom they are controlled andwhom they serve.

Alumni association. An alumni associ-ation should establish that it is organized topromote the welfare of the university withwhich it is affiliated, is subject to the controlof the university as to its policies and desti-nation of funds, and is operated as an integralpart of the university or is otherwise organized

to promote the welfare of the college or uni-versity. If your association does not havethese characteristics, it may still be exemptas a social club if it meets the requirementsdescribed in chapter 4, under 501(c)(7) —Social and Recreation Clubs.

Athletic organization. This type of or-ganization must submit evidence that it isengaged in activities such as directing andcontrolling interscholastic athletic competi-tions, conducting tournaments, and prescrib-ing eligibility rules for contestants. If it is notso engaged, your organization may be ex-empt as a social club described in chapter 4.Raising funds to be used for travel and otheractivities to interview and persuade prospec-tive students with outstanding athletic abilityto attend a particular university does not showan exempt purpose. If your organization is notexempt as an educational organization, seeAmateur Athletic Organizations, later in thischapter.

Private Schools Every private school filing an application forrecognition of tax-exempt status must supplythe IRS (on Schedule B, Form 1023) with thefollowing information.

1) The racial composition of the studentbody, and of the faculty and administra-tive staff, as of the current academicyear. (This information also must beprojected, so far as may be feasible, forthe next academic year.)

2) The amount of scholarship and loanfunds, if any, awarded to students en-rolled and the racial composition of stu-dents who have received the awards.

3) A list of the school's incorporators,founders, board members, and donorsof land or buildings, whether individualsor organizations.

4) A statement indicating whether any ofthe organizations described in item (3)above have an objective of maintainingsegregated public or private school edu-cation at the time the application is filedand, if so, whether any of the individualsdescribed in item (3) are officers or ac-tive members of those organizations atthe time the application is filed.

5) The public school district and county inwhich the school is located.

How to determine racial composition. Theracial composition of the student body, fac-ulty, and administrative staff may be an esti-mate based on the best information readilyavailable to the school, without requiring stu-dent applicants, students, faculty, or admin-istrative staff to submit to the school informa-tion that the school otherwise does notrequire. Nevertheless, a statement of themethod by which the racial composition wasdetermined must be supplied. The identity ofindividual students or members of the facultyand administrative staff should not be in-cluded with this information.

A school that is a state or municipal in-strumentality (see Instrumentalities, near thebeginning of this chapter), whether or not itqualifies for exemption under section501(c)(3), is not considered to be a privateschool for purposes of the following dis-cussion.

Page 20 Chapter 3 Section 501(c)(3) Organizations

Racially Nondiscriminatory Policy

To qualify as an organization exempt fromfederal income tax, a private school must in-clude a statement in its charter, bylaws, orother governing instrument, or in a resolutionof its governing body, that it has a raciallynondiscriminatory policy as to students andthat it does not discriminate against appli-cants and students on the basis of race, color,or national or ethnic origin. Also, the schoolmust circulate information that clearly statesthe school's admission policies. A raciallynondiscriminatory policy toward studentsmeans that the school admits the students ofany race to all the rights, privileges, pro-grams, and activities generally accorded ormade available to students at that school andthat the school does not discriminate on thebasis of race in administering its educationalpolicies, admission policies, scholarship andloan programs, and athletic and otherschool-administered programs.

The IRS considers discrimination on thebasis of race to include discrimination on thebasis of color or national or ethnic origin.

The existence of a racially discriminatorypolicy with respect to the employment offaculty and administrative staff is indicativeof a racially discriminatory policy as to stu-dents. Conversely, the absence of racial dis-crimination in the employment of faculty andadministrative staff is indicative of a raciallynondiscriminatory policy as to students.

A policy of a school that favors racial mi-nority groups with respect to admissions,facilities and programs, and financial assist-ance is not discrimination on the basis of racewhen the purpose and effect of this policy isto promote establishing and maintaining theschool's nondiscriminatory policy.

A school that selects students on the basisof membership in a religious denominationor unit is not discriminating if membership inthe denomination or unit is open to all on aracially nondiscriminatory basis.

Policy statement. The school must includea statement of its racially nondiscriminatorypolicy in all its brochures and catalogs dealingwith student admissions, programs, andscholarships. Also, the school must include areference to its racially nondiscriminatorypolicy in other written advertising that it usesto inform prospective students of its pro-grams.

Publicity requirement. The school mustmake its racially nondiscriminatory policyknown to all segments of the general com-munity served by the school. Selective com-munication of a racially nondiscriminatorypolicy that a school provides solely to leadersof racial groups will not be considered an ef-fective means of communication to make thepolicy known to all segments of the commu-nity. To satisfy this requirement, the schoolmust use one of the following two methods.

Method one. The school may publish anotice of its racially nondiscriminatory policyin a newspaper of general circulation thatserves all racial segments of the community.Such publication must be repeated at leastonce annually during the period of theschool's solicitation for students or, in theabsence of a solicitation program, during theschool's registration period. When more thanone community is served by a school, theschool may publish the notice in those news-

papers that are reasonably likely to be readby all racial segments in the communities thatthe school serves.

If this method is used, the notice mustmeet the following printing requirements.

1) It must appear in a section of the news-paper likely to be read by prospectivestudents and their families.

2) It must occupy at least 3 column inches.

3) It must have its title printed in at least12 point bold face type.

4) It must have the remaining text printedin at least 8 point type.

The following is an acceptable exampleof the notice:

Method two. The school may use thebroadcast media to publicize its raciallynondiscriminatory policy if this use makes thepolicy known to all segments of the generalcommunity the school serves. If the schooluses this method, it must provide documen-tation showing that the means by which thispolicy was communicated to all segments ofthe general community was reasonably ex-pected to be effective. In this case, appropri-ate documentation would include copies ofthe tapes or scripts used and records showingthat there was an adequate number of an-nouncements. The documentation alsowould include proof that these announce-ments were made during hours when theywere likely to be communicated to all seg-ments of the general community, that theywere long enough to convey the messageclearly, and that they were broadcast on radioor television stations likely to be listened toby substantial numbers of members of all ra-cial segments of the general community. An-nouncements must be made during the periodof the school's solicitation for students or, inthe absence of a solicitation program, duringthe school's registration period.

Exceptions. The publicity requirementswill not apply in the following situations.

First, if for the preceding 3 years the en-rollment of a parochial or other church-relatedschool consists of students at least 75% ofwhom are members of the sponsoring reli-gious denomination or unit, the school maymake known its racially nondiscriminatorypolicy in whatever newspapers or circularsthe religious denomination or unit uses in thecommunities from which the students aredrawn. These newspapers and circulars maybe distributed by a particular religious de-nomination or unit or by an association thatrepresents a number of religious organiza-tions of the same denomination. If, however,the school advertises in newspapers of gen-eral circulation in the community or commu-nities from which its students are drawn andthe second exception (discussed next) doesnot apply to the school, then it must complywith either of the publicity requirements ex-plained earlier.

Second, if a school customarily draws asubstantial percentage of its students nation-wide, worldwide, from a large geographicsection or sections of the United States, orfrom local communities, and if the school fol-lows a racially nondiscriminatory policy as toits students, the school may satisfy the pub-licity requirement by complying with the in-structions explained, earlier, under Policystatement.

The school may demonstrate that it fol-lows a racially nondiscriminatory policy eitherby showing that it currently enrolls studentsof racial minority groups in meaningful num-bers or, except for local community schools,when minority students are not enrolled inmeaningful numbers, that its promotional ac-tivities and recruiting efforts in each ge-ographic area were reasonably designed toinform students of all racial segments in thegeneral communities within the area of theavailability of the school. The question as towhether a school demonstrates such a policysatisfactorily will be determined on the basisof the facts and circumstances of each case.

The IRS recognizes that the failure by aschool drawing its students from local com-munities to enroll racial minority group stu-dents may not necessarily indicate the ab-sence of a racially nondiscriminatory policywhen there are relatively few or no such stu-dents in these communities. Actual enroll-ment is, however, a meaningful indication ofa racially nondiscriminatory policy in a com-munity in which a public school or schoolsbecame subject to a desegregation order ofa federal court or are otherwise expresslyobligated to implement a desegregation planunder the terms of any written contract orother commitment to which any federalagency was a party.

The IRS encourages schools to satisfy thepublicity requirement by using either of themethods described earlier, even though aschool considers itself to be within one of theExceptions. The IRS believes that thesepublicity requirements are the most effectivemethods to make known a school's raciallynondiscriminatory policy. In this regard, it iseach school's responsibility to determinewhether either of the exceptions apply. Suchresponsibility will prepare the school, if it isaudited by the IRS, to demonstrate that thefailure to publish its racially nondiscriminatorypolicy in accordance with either one of thepublicity requirements was justified by one ofthe exceptions. Also, a school must be pre-pared to demonstrate that it has publicly dis-avowed or repudiated any statements pur-ported to have been made on its behalf (afterNovember 6, 1975) that are contrary to itspublicity of a racially nondiscriminatory policyas to students, to the extent that the schoolor its principal official was aware of thesestatements.

Facilities and programs. A school must beable to show that all of its programs and fa-cilities are operated in a raciallynondiscriminatory manner.

Scholarship and loan programs. As ageneral rule, all scholarship or other compa-rable benefits obtainable at the school mustbe offered on a racially nondiscriminatorybasis. This must be known throughout thegeneral community being served by theschool and should be referred to in its pub-licity. Financial assistance programs, as wellas scholarships and loans made under finan-cial assistance programs, that favor members

NOTICE OFNONDISCRIMINATORY POLICYAS TO STUDENTSThe M School admits students of any race,color, national and ethnic origin to all therights, privileges, programs, and activitiesgenerally accorded or made available to stu-dents at the school. It does not discriminateon the basis of race, color, national and eth-nic origin in administration of its educationalpolicies, admissions policies, scholarship andloan programs, and athletic and otherschool-administered programs.

Chapter 3 Section 501(c)(3) Organizations Page 21

of one or more racial minority groups and thatdo not significantly detract from or are de-signed to promote a school's raciallynondiscriminatory policy will not adverselyaffect the school's exempt status.

Certification. An individual authorized to takeofficial action on behalf of a school that claimsto be racially nondiscriminatory as to studentsmust certify annually, under penalties ofperjury, on Schedule A (Form 990) or Form5578, Annual Certification of Racial Nondis-crimination for a Private School Exempt FromFederal Income Tax, whichever applies, thatto the best of his or her knowledge and beliefthe school has satisfied all requirements thatapply, as previously explained.

Failure to comply with the guidelines ordi-narily will result in the proposed revocationof the exempt status of a school.

RECORDS

Recordkeeping requirements. Withcertain exceptions, given later, eachexempt private school must maintain

the following records for a minimum periodof 3 years, beginning with the year after theyear of compilation or acquisition.

1) Records indicating the racial compositionof the student body, faculty, and admin-istrative staff for each academic year.

2) Records sufficient to document thatscholarship and other financial assist-ance is awarded on a raciallynondiscriminatory basis.

3) Copies of all materials used by or onbehalf of the school to solicit contribu-tions.

4) Copies of all brochures, catalogs, andadvertising dealing with student admis-sions, programs, and scholarships.(Schools advertising nationally or in alarge geographic segment or segmentsof the United States need only maintaina record sufficient to indicate when andin what publications their advertisementswere placed.)

The racial composition of the studentbody, faculty, and administrative staff may bedetermined in the same manner as that de-scribed at the beginning of this section.However, a school may not discontinuemaintaining a system of records that reflectsthe racial composition of its students, faculty,and administrative staff used on November6, 1975, unless it substitutes a different sys-tem that compiles substantially the same in-formation, without advance approval of theIRS.

The IRS does not require that a schoolrelease any personally identifiable records orpersonal information except in accordancewith the requirements of the Family Educa-tional Rights and Privacy Act of 1974. Simi-larly, the IRS does not require a school tokeep records prohibited under state or federallaw.

Exceptions. The school does not haveto independently maintain these records forIRS use if both of the following are true.

1) Substantially the same information hasbeen included in a report or reports filed

with an agency or agencies of federal,state, or local governments, and this in-formation is current within 1 year.

2) The school maintains copies of thesereports from which this information isreadily obtainable.

If these reports do not include all of the in-formation required, as discussed earlier, rec-ords providing such remaining informationmust be maintained by the school for IRS use.

Failure to maintain records. Failure tomaintain or to produce the required recordsand information, upon proper request, willcreate a presumption that the organizationhas failed to comply with these guidelines.

OrganizationsProviding InsuranceAn organization described in section501(c)(3) or 501(c)(4) may be exempt fromtax only if no substantial part of its activitiesconsist of providing commercial-type insur-ance.

However, this rule does not apply tostate-sponsored organizations described insections 501(c)(26) or 501(c)(27), which arediscussed in chapter 4, or to charitable riskpools, discussed next.

Charitable Risk PoolsA charitable risk pool is treated as organizedand operated exclusively for charitable pur-poses if it:

1) Is organized and operated only to poolinsurable risks of its members (not in-cluding risks related to medical mal-practice) and to provide information to itsmembers about loss control and riskmanagement,

2) Consists only of members that are sec-tion 501(c)(3) organizations exempt fromtax under section 501(a),

3) Is organized under state law authorizingthis type of risk pooling,

4) Is exempt from state income tax (or willbe after qualifying as a section 501(c)(3)organization),

5) Has obtained at least $1,000,000 instartup capital from nonmember charita-ble organizations,

6) Is controlled by a board of directorselected by its members, and

7) Is organized under documents requiringthat:

a) Each member be a section501(c)(3) organization exempt fromtax under section 501(a),

b) Each member that receives a finaldetermination that it no longerqualifies under section 501(c)(3)notify the pool immediately, and

c) Each insurance policy issued by thepool provide that it will not coverevents occurring after a final deter-mination described in (b).

Other Section501(c)(3)OrganizationsIn addition to the information required for allorganizations, as described earlier, youshould include any other information de-scribed in this section.

Charitable Organizations If your organization is applying for recognitionof exemption as a charitable organization, itmust show that it is organized and operatedfor purposes that are beneficial to the publicinterest. Some examples of this type of or-ganization are those organized for:

• Relief of the poor, the distressed, or theunderprivileged,

• Advancement of religion,

• Advancement of education or science,

• Erection or maintenance of publicbuildings, monuments, or works,

• Lessening the burdens of government,

• Lessening of neighborhood tensions,

• Elimination of prejudice and discrimi-nation,

• Defense of human and civil rights se-cured by law, and

• Combating community deterioration andjuvenile delinquency.

The rest of this section contains a descriptionof the information to be provided by certainspecific organizations. This information is inaddition to the required inclusions de-scribed in chapter 1, and other statementsrequested on Form 1023. Each of the follow-ing organizations must submit the informationdescribed.

Charitable organization supporting edu-cation. Submit information showing how yourorganization supports education — for exam-ple, contributes to an existing educational in-stitution, endows a professorial chair, con-tributes toward paying teachers' salaries, orcontributes to an educational institution toenable it to carry on research.

Scholarships. If the organization awardsor plans to award scholarships, completeSchedule H of Form 1023. Submit the fol-lowing also.

1) Criteria used for selecting recipients, in-cluding the rules of eligibility.

2) How and by whom the recipients are orwill be selected.

3) If awards are or will be made directly toindividuals, whether information is re-quired assuring that the student remainsin school.

4) If awards are or will be made to recipi-ents of a particular class, for example,children of employees of a particularemployer—

a) Whether any preference is or willbe accorded an applicant by reasonof the parent's position, length ofemployment, or salary,

Page 22 Chapter 3 Section 501(c)(3) Organizations

b) Whether as a condition of the awardthe recipient must upon graduationaccept employment with the com-pany, and

c) Whether the award will be contin-ued even if the parent's employ-ment ends.

5) A copy of the scholarship applicationform and any brochures or literature de-scribing the scholarship program.

Hospital. If you are organized to operate acharitable hospital, complete and attach Sec-tion I of Schedule C, Form 1023.

If your hospital was transferred to youfrom proprietary ownership, complete and at-tach Schedule I of Form 1023. You must at-tach a list showing:

1) The names of the active and courtesystaff members of the proprietary hospital,as well as the names of your medicalstaff members after the transfer tononprofit ownership, and

2) The names of any doctors who contin-ued to lease office space in the hospitalafter its transfer to nonprofit ownershipand the amount of rent paid. Submit alsoan appraisal showing the fair rental valueof the rented space.

Clinic. If you are organized to operate aclinic, attach a statement including:

1) A description of the facilities and ser-vices,

2) To whom the services are offered, suchas the public at large or a specific group,

3) How charges are determined, such ason a profit basis, to recover costs, or atless than cost,

4) By whom administered and controlled,

5) Whether any of the professional staff(that is, those who perform or will per-form the clinical services) also serve orwill serve in an administrative capacity,and

6) How compensation paid the professionalstaff is or will be determined.

Home for the aged. If you are organized tooperate a home for the aged, complete andattach Schedule F of Form 1023. Explain onSchedule F:

1) How charges are or will be determined,such as on a profit basis, to recovercosts, or at less than cost, and whetherthe charges are based on providing ser-vice at the lowest feasible cost to theresidents,

2) Whether all residents are or will be re-quired to pay fees,

3) Whether any residents are or will be ac-cepted at lower rates or entirely withoutpay and, if so, how many, and

4) Whether federal mortgage financing hasbeen applied for and if so, the type.

Community nursing bureau. If you providea nursing register or community nursing bu-reau, provide information showing that yourorganization will be operated as a communityproject and will receive its primary supportfrom public contributions to maintain anonprofit register of qualified nursing person-

nel, including graduate nurses, unregisterednursing school graduates, licensed attendantsand practical nurses for the benefit of hospi-tals, health agencies, doctors, and individ-uals.

Organization providing loans. If you make,or will make loans for charitable and educa-tional purposes, submit the following infor-mation.

1) An explanation of the circumstances un-der which such loans are, or will be,made.

2) Criteria for selection, including the rulesof eligibility.

3) How and by whom the recipients are orwill be selected.

4) Manner of repayment of the loan.

5) Security required, if any.

6) Interest charged, if any, and when pay-able.

7) Copies in duplicate of the loan applica-tion and any brochures or literature de-scribing the loan program.

Public-interest law firms. If your organiza-tion was formed to litigate in the public inter-est (as opposed to providing legal services tothe poor), such as in the area of protectionof the environment, you should submit thefollowing information.

1) How the litigation can reasonably be saidto be representative of a broad publicinterest rather than a private one.

2) Whether the organization will acceptfees for its services.

3) A description of the cases litigated or tobe litigated and how they benefit thepublic generally.

4) Whether the policies and program of theorganization are the responsibility of aboard or committee representative of thepublic interest, which is neither con-trolled by employees or persons who lit-igate on behalf of the organization norby any organization that is not itself anorganization described in this chapter.

5) Whether the organization is operated,through sharing of office space or other-wise, in a way to create identification orconfusion with a particular private lawfirm.

6) Whether there is an arrangement toprovide, directly or indirectly, a deductionfor the cost of litigation that is for theprivate benefit of the donor.

Acceptance of attorneys' fees. Anonprofit public-interest law firm can acceptattorneys' fees in public interest cases if thefees are paid directly by its clients and thefees are not more than the actual costs in-curred in the case. Once undertaking a rep-resentation, the organization cannot withdrawfrom the case because the litigant is unableto pay the fee.

Firms can accept fees awarded or ap-proved by a court or an administrativeagency and paid by an opposing party if thefirms do not use the likelihood or probabilityof fee awards as a consideration in the se-lection of cases. All fee awards must be paidto the organization and not to its individualstaff attorneys. Instead, a public-interest law

firm can reasonably compensate its staff at-torneys, but only on a straight salary basis.Private attorneys, whose services are re-tained by the firm to assist it in particularcases, can be compensated by the firm, butonly on a fixed fee or salary basis.

The total amount of all attorneys' fees(court awarded and those received from cli-ents) must not be more than 50% of the totalcost of operations of the organization's legalfunctions, calculated over a 5-year period.

If, in order to carry out its program, an or-ganization violates applicable canons of eth-ics, disrupts the judicial system, or engagesin any illegal action, the organization willjeopardize its exemption.

Religious Organizations To determine whether an organization meetsthe religious purposes test of section501(c)(3), the IRS maintains two basicguidelines.

1) That the particular religious beliefs of theorganization are truly and sincerely held.

2) That the practices and rituals associatedwith the organization's religious belief orcreed are not illegal or contrary to clearlydefined public policy.

Therefore, your group (or organization) maynot qualify for treatment as an exempt reli-gious organization for tax purposes if itsactions, as contrasted with its beliefs, arecontrary to well established and clearly de-fined public policy. If there is a clear showingthat the beliefs (or doctrines) are sincerelyheld by those professing them, the IRS willnot question the religious nature of those be-liefs.

Churches. Although a church, its integratedauxiliaries, or a convention or association ofchurches is not required to file Form 1023 tobe exempt from federal income tax or to re-ceive tax deductible contributions, the organ-ization may find it advantageous to obtainrecognition of exemption. In this event, youshould submit information showing that yourorganization is a church, synagogue, associ-ation or convention of churches, religious or-der, or religious organization that is an inte-gral part of a church, and that it is engagedin carrying out the function of a church.

In determining whether an admittedly reli-gious organization is also a church, the IRSdoes not accept any and every assertion thatthe organization is a church. Because beliefsand practices vary so widely, there is no sin-gle definition of the word church for tax pur-poses. The IRS considers the facts and cir-cumstances of each organization applying forchurch status.

Integrated auxiliaries. An organizationis an integrated auxiliary of a church if all thefollowing are true.

1) The organization is described both insections 501(c)(3) and 509(a)(1),509(a)(2), or 509(a)(3).

2) It is affiliated with a church or a conven-tion or association of churches.

3) It is internally supported. An organizationis internally supported unless both of thefollowing are true.

a) It offers admissions, goods, ser-vices or facilities for sale, other thanon an incidental basis, to the gen-eral public (except goods, services,

Chapter 3 Section 501(c)(3) Organizations Page 23

or facilities sold at a nominal chargeor for a small part of the cost).

b) It normally gets more than 50% ofits support from a combination ofgovernmental sources, public solic-itation of contributions, and receiptsfrom the sale of admissions, goods,performance of services, or fur-nishing of facilities in activities thatare not unrelated trades or busi-nesses.

Special rule. Men's and women's organ-izations, seminaries, mission societies, andyouth groups that satisfy (1) and (2) aboveare integrated auxiliaries of a church even ifthey are not internally supported.

Note. In order for an organization (in-cluding a church and religious organization)to qualify for tax exemption, no part of its netearnings may benefit any individual.

Although an individual is entitled to acharitable deduction for contributions to achurch, the assignment or similar transfer ofcompensation for personal services to achurch generally does not relieve a taxpayerof federal income tax liability on the compen-sation, regardless of the motivation behindthe transfer.

Scientific OrganizationsYou must show that your organization's re-search will be carried on in the public interest.Scientific research will be considered to be inthe public interest if the results of the research(including any patents, copyrights, processes,or formulas) are made available to the publicon a nondiscriminatory basis; if the researchis performed for the United States or a state,county, or municipal government; or if the re-search is carried on for one of the followingpurposes.

1) Aiding in the scientific education of col-lege or university students.

2) Obtaining scientific information that ispublished in a treatise, thesis, tradepublication, or in any other form that isavailable to the interested public.

3) Discovering a cure for a disease.

4) Aiding a community or geographical areaby attracting new industry to the com-munity or area, or by encouraging thedevelopment or retention of an industryin the community or area.

Scientific research, for exemption pur-poses, does not include activities of a typeordinarily incidental to commercial or indus-trial operations such as the ordinary in-spection or testing of materials or products,or the designing or constructing of equipment,buildings, etc.

If you engage or plan to engage in re-search, submit all of the following.

1) An explanation of the nature of the re-search.

2) A brief description of research projectscompleted or presently being engagedin.

3) How and by whom research projects aredetermined and selected.

4) Whether you have, or contemplate, con-tracted or sponsored research and, if so,

names of past sponsors or grantors,terms of grants or contracts, togetherwith copies of any executed contractsor grants.

5) Disposition made or to be made of theresults of your research, includingwhether preference has been or will begiven to any organization or individualeither as to results or time of release.

6) Who will retain ownership or control ofany patents, copyrights, processes orformulas resulting from your research.

7) A copy of publications or other mediashowing reports of your research activ-ities. Only reports of your research ac-tivities or those conducted in your behalf,as distinguished from those of your cre-ators or members conducted in their in-dividual capacities, should be submitted.

Literary Organizations If your organization is established to operatea book store or engage in publishing activitiesof any nature (printing, publication, or distri-bution of your own material or that printed orpublished by others and distributed by you),explain fully the nature of the operations, in-cluding whether sales are or will be made tothe general public, the type of literature in-volved, and how these activities are relatedto your stated purposes.

Amateur AthleticOrganizations There are two types of amateur athletic or-ganizations that can qualify for tax-exemptstatus. The first type is an organization thatfosters national or international amateursports competition but only if none of its ac-tivities involve providing athletic facilities orequipment. The second type is a Qualifiedamateur sports organization (discussed be-low). The difference is that a qualified ama-teur sports organization may provide athleticfacilities and equipment.

Donations to either amateur athletic or-ganization are deductible as charitable con-tributions on the donor's federal income taxreturn. However, no deduction is allowed ifthere is a direct personal benefit to the donoror any other person other than the organiza-tion.

Qualified amateur sports organization. Anorganization will be a qualified amateur sportsorganization if it is organized and operated:

1) Exclusively to foster national or interna-tional amateur sports competition, and

2) Primarily to conduct national or interna-tional competition in sports or to supportand develop amateur athletes for thatcompetition.

The organization's membership may be localor regional in nature.

Prevention of Crueltyto Children or Animals Examples of activities that may qualify thistype of organization for exempt status are:

1) Preventing children from working inhazardous trades or occupations,

2) Promoting high standards of care forlaboratory animals, and

3) Providing funds to pet owners to havetheir pets spayed or neutered to preventoverbreeding.

Private Foundationsand Public Charities It is important that you determine if your or-ganization is a private foundation. Most or-ganizations exempt from income tax (as or-ganizations described in section 501(c)(3))are presumed to be private foundations un-less they notify the Internal Revenue Servicewithin a specified period of time that they arenot. This notice requirement applies to mostsection 501(c)(3) organizations regardless ofwhen they were formed.

Private FoundationsEvery organization that qualifies for tax ex-emption as an organization described in sec-tion 501(c)(3) is a private foundation unlessit falls into one of the categories specificallyexcluded from the definition of that term (re-ferred to in section 509(a)(1), 509(a)(2),509(a)(3), or 509(a)(4)). In effect, the defi-nition divides these organizations into twoclasses, namely private foundations andpublic charities. Public charities are dis-cussed later.

Organizations that fall into the excludedcategories are generally those that eitherhave broad public support or actively functionin a supporting relationship to those organ-izations. Organizations that test for publicsafety also are excluded.

Notice to IRS. Even if an organization fallswithin one of the categories excluded from thedefinition of private foundation, it will be pre-sumed to be a private foundation, with someexceptions, unless it gives timely notice to theIRS that it is not a private foundation. Thisnotice requirement applies to an organizationregardless of when it was organized. The onlyexceptions to this requirement are those or-ganizations that are excepted from the re-quirement of filing Form 1023 as discussed,earlier, under Organizations Not Required ToFile Form 1023.

When to file notice. If an organizationhas to file the notice, it must do so within 15months from the end of the month in which itwas organized.

If your organization is newly applying forrecognition of exemption as an organizationdescribed in this chapter (a section 501(c)(3)organization) and you wish to establish thatyour organization is a public charity ratherthan a private foundation, you must completethe applicable lines of Part III of your ex-emption application (Form 1023). An exten-sion of time for filing this application may begranted by the IRS if your request is timelyand you demonstrate that additional time isneeded. See Application for Recognition ofExemption, earlier in this chapter, for moreinformation.

In determining the date on which a cor-poration is organized for purposes of applyingfor recognition of section 501(c)(3) status, theIRS looks to the date the corporation cameinto existence under the law of the state inwhich it is incorporated. For example, where

Page 24 Chapter 3 Section 501(c)(3) Organizations

state law provides that existence of a corpo-ration begins on the date its articles are filedby a certain state official in the appropriatestate office, the corporation is considered or-ganized on that date. Later nonsubstantiveamendments to the enabling instrument willnot change the date of organization, for pur-poses of the notice requirement.

Notice filed late. An organization thatstates it is a private foundation when it filesits application for recognition of exemptionafter the 15-month period will be treated asa section 501(c)(3) organization and as aprivate foundation only from the date it filesits application.

An organization that states it is a publiclysupported charity when it files its applicationfor recognition of exemption after the15-month period cannot be treated as a sec-tion 501(c)(3) organization before the date itfiles the application. Financial support re-ceived before that date may not be used forpurposes of determining whether the organ-ization is publicly supported. However, anorganization that can reasonably be expectedto meet the support requirements (discussedlater under Public Charities) can obtain anadvance ruling from the IRS that it is a pub-licly supported organization.

Excise taxes on private foundations. There is an excise tax on the net investmentincome of most domestic private foundations.This tax must be reported on Form 990–PFand must be paid annually at the time for filingthat return or in quarterly estimated tax pay-ments if the total tax for the year is $500 ormore. In addition, there are several otherrules that apply. These include:

1) Restrictions on self-dealing between pri-vate foundations and their substantialcontributors and other disqualified per-sons,

2) Requirements that the foundation annu-ally distribute income for charitable pur-poses,

3) Limits on their holdings in private busi-nesses,

4) Provisions that investments must notjeopardize the carrying out of exemptpurposes, and

5) Provisions to assure that expendituresfurther exempt purposes.

Violations of these provisions give rise totaxes and penalties against the private foun-dation and, in some cases, its managers, itssubstantial contributors, and certain relatedpersons.

Governing instrument. A private foundationcannot be tax exempt nor will contributions toit be deductible as charitable contributionsunless its governing instrument containsspecial provisions in addition to those thatapply to all organizations described in section501(c)(3).

Sample governing instruments. Thefollowing samples of governing instrumentprovisions illustrate the special charter re-quirements that apply to private foundations.Draft A is a sample of provisions in articlesof incorporation, Draft B, a trust indenture.

Draft A

General

1) The corporation will distribute its incomefor each tax year at a time and in amanner as not to become subject to thetax on undistributed income imposed bysection 4942 of the Internal RevenueCode, or the corresponding section ofany future federal tax code.

2) The corporation will not engage in anyact of self-dealing as defined in section4941(d) of the Internal Revenue Code,or the corresponding section of any fu-ture federal tax code.

3) The corporation will not retain any ex-cess business holdings as defined insection 4943(c) of the Internal RevenueCode, or the corresponding section ofany future federal tax code.

4) The corporation will not make any in-vestments in a manner as to subject itto tax under section 4944 of the InternalRevenue Code, or the correspondingsection of any future federal tax code.

5) The corporation will not make any taxa-ble expenditures as defined in section4945(d) of the Internal Revenue Code,or the corresponding section of any fu-ture federal tax code.

Draft BAny other provisions of this instrument

notwithstanding, the trustees shall distributeits income for each tax year at a time and ina manner as not to become subject to the taxon undistributed income imposed by section4942 of the Internal Revenue Code, or thecorresponding section of any future federaltax code.

Any other provisions of this instrumentnotwithstanding, the trustees will not engagein any act of self-dealing as defined in section4941(d) of the Internal Revenue Code, or thecorresponding section of any future federaltax code; nor retain any excess businessholdings as defined in section 4943(c) of theInternal Revenue Code, or the correspondingsection of any future federal tax code; normake any investments in a manner as to incurtax liability under section 4944 of the InternalRevenue Code, or the corresponding sectionof any future federal tax code; nor make anytaxable expenditures as defined in section4945 (d) of the Internal Revenue Code, or thecorresponding section of any future federaltax code.

Effect of state law. A private foundation'sgoverning instrument will be considered tomeet these charter requirements if valid pro-visions of state law have been enacted that:

1) Require it to act or refrain from acting soas not to subject the foundation to thetaxes imposed on prohibited trans-actions, or

2) Treat the required provisions as con-tained in the foundation's governing in-strument.

The IRS has published a list of states withthis type of law. The list is in Revenue Ruling75–38, 1975-1 CB 161(or later update).

Public Charities A private foundation is any organization de-scribed in section 501(c)(3), unless it falls intoone of the categories specifically excludedfrom the definition of that term in section509(a), which lists four basic categories ofexclusions. These categories are discussedunder the Section 509(a) headings that followthis introduction.

If your organization falls into one of thesecategories, it is not a private foundation andyou should state this in Part III of your appli-cation for recognition of exemption (Form1023).

If your organization does not fall into oneof these categories, it is a private foundationand is subject to the applicable rules and re-strictions until it terminates its private foun-dation status. Some private foundations alsoqualify as private operating foundations;these are discussed near the end of thischapter.

Generally speaking, a large class of or-ganizations excluded under section 509(a)(1)and all organizations excluded under section509(a)(2) depend upon a support test. Thistest is used to assure a minimum percentageof broad-based public support in the organ-ization's total support pattern. Thus, in thefollowing discussions, when the one-thirdsupport test (see Qualifying As PubliclySupported, later) is referred to, it means thefollowing fraction normally must equal at leastone-third:

Including items of support in qualifying sup-port (the numerator of the fraction) or ex-cluding items of support from total support(the denominator of the fraction) may decidewhether an organization is excluded from thedefinition of a private foundation, and thusfrom the liability for certain excise taxes. Soit is very important to classify items of supportcorrectly.

Excise tax on excess benefit transactions.A person who benefits from an excess benefittransaction such as compensation, fringebenefits, or contract payments from a section501(c)(3) or 501(c)(4) organization may haveto pay an excise tax under section 4958. Amanager of the organization may also haveto pay an excise tax under section 4958.These taxes are reported on Form 4720,Return of Certain Excise Taxes on Charitiesand Other Persons Under Chapters 41 and42 of the Internal Revenue Code.

The excise taxes are imposed if an appli-cable tax-exempt organization provides anexcess benefit to a disqualified person andthat benefit exceeds the value of the benefitan organization received in the exchange.

There are three taxes under section 4958.Disqualified persons are liable for the first twotaxes and certain organization managers areliable for the third tax.

Taxes imposed on excess benefit trans-actions apply to transactions occurring on orafter September 14, 1995. However, thesetaxes do not apply to a transaction pursuantto a written contract that was binding onSeptember 13, 1995, and at all times there-after before the transaction occurred.

Tax on disqualified persons. An excisetax equal to 25% of the excess benefit is im-posed on each excess benefit transactionbetween an applicable tax-exempt organiza-tion and a disqualified person. The disqual-

Qualifying supportTotal support

Chapter 3 Section 501(c)(3) Organizations Page 25

ified person who benefitted from the trans-action is liable for the tax. If the 25% tax isimposed and the excess benefit transactionis not corrected within the taxable period, anadditional excise tax equal to 200% of theexcess benefit is imposed.

If a disqualified person makes a paymentof less than the full correction amount, the200% tax is imposed only on the unpaid por-tion of the correction amount. if more than onedisqualified person received an excess ben-efit from an excess benefit transaction, allsuch disqualified persons are jointly and se-verally liable for the taxes.

To avoid the 200% tax, a disqualifiedperson must correct the excess benefittransaction during the taxable period. Thetaxable period begins on the date the trans-action occurs and ends on the earlier of thedate the statutory notice of deficiency is is-sued or the section 4958 taxes are assessed.The 200% tax is abated (refunded if collected)if the excess benefit transaction is correctedwithin a 90-day correction period beginningon the date a statutory notice of deficiency isissued.

Tax on organization managers. An ex-cise tax equal to 10% of the excess benefitis imposed on an organization manager whoknowingly participated in an excess benefittransaction, unless such participation was notwillful and was due to reasonable cause. Thistax may not exceed $10,000 with respect toany single excess benefit transaction. Thereis also joint and several liability for this tax.A person may be liable for both the tax paidby the disqualified person and the organiza-tion manager tax.

An organization manager is any officer,director, or trustee of an applicable tax-exempt organization, or any individual havingpowers or responsibilities similar to officers,directors, or trustees of the organization, re-gardless of title. An organization manager isnot considered to have participated in an ex-cess benefit transaction where the managerhas opposed the transaction in a mannerconsistent with the fulfillment of the manag-er's responsibilities to the organization. Forexample, a director who votes against givingan excess benefit would ordinarily not besubject to the 10% tax.

A person participates in a transactionknowingly if the person has actual knowledgeof sufficient facts so that, based solely uponsuch facts, the transaction would be an ex-cess benefit transaction. Knowing does notmean having reason to know. The organiza-tion manager ordinarily will not be consideredknowing if, after full disclosure of the factualsituation to an appropriate professional, theorganization manager relied on the profes-sional's reasoned written opinion on matterswithin the professional's expertise or if themanager relied on the fact that the require-ments for the rebuttable presumption of rea-sonableness have been satisfied. Partici-pation by an organization manager is willfulif it is voluntary, conscious, and intentional.An organization manager's participation isdue to reasonable cause if the manager hasexercised responsibility on behalf of the or-ganization with ordinary business care andprudence.

Excess benefit transaction. An excessbenefit transaction is a transaction in whichan economic benefit is provided by an appli-cable tax-exempt organization, directly or in-directly, to or for the use of any disqualifiedperson, and the value of the economic benefitprovided by the organization exceeds the

value of the consideration (including the per-formance of services) received for providingsuch benefit.

To determine whether an excess benefittransaction has occurred, all considerationand benefits exchanged between a disqual-ified person and the applicable tax-exemptorganization, and all entities it controls, aretaken into account. For purposes of deter-mining the value of economic benefits, thevalue of property, including the right to useproperty, is the fair market value. Fair marketvalue is the price at which property, or theright to use property, would change handsbetween a willing buyer and a willing seller,neither being under any compulsion to buy,sell or transfer property or the right to useproperty, and both having reasonable knowl-edge of relevant facts.

Correcting the excess benefit. An ex-cess benefit transaction is corrected by un-doing the excess benefit to the extent possi-ble, and by taking any additional measuresnecessary to place the organization in a fi-nancial position not worse than that in whichit would be if the disqualified person weredealing under the highest fiduciary standards.

A disqualified person corrects an excessbenefit by making a payment in cash or cashequivalents, excluding payment by apromissory note, equal to the correctionamount to the applicable tax-exempt organ-ization. The correction amount equals theexcess benefit plus the interest on the excessbenefit. The interest rate may be no lowerthan the applicable federal rate.

A disqualified person may, with theagreement of the applicable tax-exempt or-ganization, make a payment by returning thespecific property previously transferred in theexcess transaction. In this case, the dis-qualified person is treated as making a pay-ment equal to the lesser of:

• The fair market value of the property onthe date the property is returned to theorganization, or

• The fair market value of the property onthe date the excess benefit transactionoccurred.

If the payment resulting from the return ofproperty is less than the correction amount,the disqualified person must make an addi-tional cash payment to the organization equalto the difference.

If the payment resulting from the return ofthe property exceeds the correction amountdescribed above, the organization may makea cash payment to the disqualified personequal to the difference.

Applicable tax-exempt organization.An applicable tax-exempt organization is asection 501(c)(3) or 501(c)(4) organizationthat is tax-exempt under section 501(a), orwas such an organization at any time duringa five-year period ending on the day of theexcess benefit transaction.

An applicable tax-exempt organizationdoes not include:

• A private foundation as defined in section509(a),

• A governmental entity that is exempt from(or not subject to) taxation without regardto section 501(a), or

• A foreign organization, recognized by theIRS or by treaty, that receives substan-tially all of its support (other than gross

investment income) from sources outsidethe United States.

An organization is not treated as a section501(c)(3) or 501(c)(4) organization for anyperiod covered by a final determination thatthe organization was not tax-exempt undersection 501(a), but only if the determinationwas not based on private inurement or oneor more excess benefit transactions.

Disqualified person. A disqualified per-son is any person, with respect to any trans-action, in a position to exercise substantialinfluence over the affairs of the applicabletax-exempt organization at any time during afive-year period ending on the date of thetransaction. Persons who hold certain pow-ers, responsibilities, or interests are amongthose who are in a position to exercise sub-stantial influence over the affairs of the or-ganization. This includes, for example, votingmembers of the governing body, and personsholding the power of:

• Presidents, chief executives, or chief op-erating officers.

• Treasurers and chief financial officers.

A disqualified person also includes certainfamily members of a disqualified person, and35% controlled entities of a disqualified per-son.

Family members. Family members of adisqualified person include a disqualified per-son's spouse, brothers or sisters (whether bywhole or half-blood), spouses of brothers orsisters (whether by whole or half-blood), an-cestors, children (including a legally adoptedchild), grandchildren, great grandchildren,and spouses of children, grandchildren, andgreat grandchildren (whether by whole orhalf-blood).

35% controlled entity. The term 35%controlled entity means:

1) A corporation in which a disqualifiedperson owns more than 35% of the totalcombined voting power,

2) A partnership in which such persons ownmore than 35% of the profits interest, or

3) A trust or estate in which such personsown more than 35% of the beneficial in-terest.

In determining the holdings of a businessenterprise, any stock or other interest owneddirectly or indirectly shall apply.

Persons not considered to have sub-stantial influence. Persons who are notconsidered to be in a position to exercisesubstantial influence over the affairs of anorganization include:

• An employee who receives benefits thattotal less than the highly compensatedamount in section 414(q)(1)(B)(i) and whodoes not hold the executive or votingpowers mentioned earlier in the dis-cussion on Disqualified person, is not afamily member of a disqualified person,and is not a substantial contributor,

• Tax-exempt organizations described insection 501(c)(3), and

• Section 501(c)(4) organizations with re-spect to transactions engaged in withother section 501(c)(4) organizations.

Facts and circumstances. The determi-nation of whether a person has substantialinfluence over the affairs of an organization

Page 26 Chapter 3 Section 501(c)(3) Organizations

is based on all the facts and circumstances.Facts and circumstances that show a personhas substantial influence over the affairs ofan organization include, but are not limited to,the following.

• The person founded the organization.

• The person is a substantial contributor tothe organization under the section507(d)(2)(A) definition, only taking intoaccount contributions to the organizationfor the past 5 years.

• The person's compensation is primarilybased on revenues derived from activitiesof the organization that the person con-trols.

• The person has or shares authority tocontrol or determine a substantial portionof the organization's capital expenditures,operating budget, or compensation foremployees.

• The person manages a discrete segmentor activity of the organization that repre-sents a substantial portion of the activ-ities, assets, income, or expenses of theorganization, as compared to the organ-ization as a whole.

• The person owns a controlling interest(measured by either vote or value) in acorporation, partnership, or trust that is adisqualified person.

• The person is a non-stock organizationcontrolled directly or indirectly by one ormore disqualified persons.

Facts and circumstances tending to showthat a person does not have substantial in-fluence over the affairs of an organization in-clude, but are not limited to, the following.

• The person has taken a vow of poverty.

• The person is an independent contractorwhose sole relationship to the organiza-tion is providing professional advice(without having decision-making author-ity) with respect to transactions fromwhich the independent contractor will noteconomically benefit.

• Any preferential treatment the person re-ceives based on the size of the person'sdonation is also offered to others makingcomparable widely solicited donations.

• The direct supervisor of the person is nota disqualified person.

• The person does not participate in anymanagement decisions affecting the or-ganization as a whole or a discrete seg-ment of the organization that representsa substantial portion of the activities, as-sets, income, or expenses of the organ-ization, as compared to the organizationas a whole.

In the case of multiple affiliated organiza-tions, the determination of whether a persondoes or does not have substantial influenceis made separately for each applicable tax-exempt organization. A person may be adisqualified person with respect to trans-actions with more than one organization.

Date excess benefit transaction occurs.An excess benefit transaction occurs on thedate the disqualified person receives theeconomic benefit from the organization forfederal income tax purposes. However, whena single contractual arrangement provides for

a series of compensation payments or otherpayments to a disqualified person during thedisqualified person's tax year (or part of a taxyear), any excess benefit transaction with re-spect to these payments occurs on the lastday of the tax year (or if the payments con-tinue for part of the year, the date of the lastpayment in the series).

In the case of benefits provided to aqualified pension, profit-sharing, or stock bo-nus plan, the transaction occurs on the datethe benefit is vested. In the case of thetransfer of property subject to a substantialrisk of forfeiture, or in the case of rights tofuture compensation or property, the trans-action occurs on the date of the property, orthe rights to future compensation or property,is not subject to a substantial risk of forfeiture.Where the disqualified person elects to in-clude an amount in gross income in the taxyear of transfer under section 83(b), the ex-cess benefit transaction occurs on the datethe disqualified person receives the economicbenefit for federal income tax purposes.

Reasonable compensation. Reason-able compensation is the value that wouldordinarily be paid for like services by like en-terprises under like circumstances. The sec-tion 162 standard will apply in determining thereasonableness of compensation. The factthat a bonus or revenue-sharing arrangementis subject to a cap is a relevant factor in de-termining reasonableness of compensation.

To determine the reasonableness ofcompensation, all items of compensationprovided by an applicable tax-exempt organ-ization in exchange for performance of ser-vices are taken into account in determiningthe value of compensation (except for eco-nomic benefits that are disregarded under thediscussion, Disregarded benefits, later).Items of compensation include:

• All forms of cash and noncash compen-sation, including salary, fees, bonuses,severance payments, and deferred com-pensation that is earned and vested,whether or not funded and whether or notpaid under a deferred compensation planthat is a qualified plan under section401(a),

• The payment of liability insurance premi-ums for, or the payment or reimburse-ment by the organization of taxes or cer-tain expenses under section 4958, unlessexcludable from income as a de minimisfringe benefit under section 132(a)(4),

• All other compensatory benefits, whetheror not included in gross income for in-come tax purposes,

• Taxable and nontaxable fringe benefits,except fringe benefits described in sec-tion 132, and

• Foregone interest on loans.

An economic benefit is not treated asconsideration for the performance of servicesunless the organization providing the benefitclearly indicates its intent to treat the benefitas compensation when the benefit is paid.

An applicable tax-exempt organization (orentity that it controls) is treated as clearly in-dicating its intent to provide an economicbenefit as compensation for services only ifthe organization provides written substanti-ation that is contemporaneous with thetransfer of the economic benefits under con-sideration. Ways to provide contemporaneouswritten substantiation of its intent to provide

an economic benefit as compensation in-clude:

• The organization produces a signed writ-ten employment contract,

• The organization reports the benefit ascompensation on an original Form W-2,Form 1099 or Form 990, or on anamended form filed before starting anIRS examination, or

• The disqualified person reports the ben-efit as income on the person's originalForm 1040 or on an amended form filedbefore starting an IRS examination.Exception. If the economic benefit isexcluded from the disqualified person'sgross income for income tax purposes,the applicable tax-exempt organization isnot required to indicate its intent to pro-vide an economic benefit as compen-sation for services.

Rebuttable presumption that a trans-action is not an excess benefit trans-action. Payments under a compensation ar-rangement are presumed to be reasonableand the transfer of property (or right to useproperty) is presumed to be at fair marketvalue, if the following three conditions aremet.

• The transaction is approved by an au-thorized body of the organization (or anentity it controls) which is composed ofindividuals who do not have a conflict ofinterest concerning the transaction.

• Before making its determination, the au-thorized body obtained and relied uponappropriate data as to comparability.(There is a special safe harbor for smallorganizations. If the organization hasgross receipts of less than $1 million,appropriate comparability data includesdata on compensation paid by threecomparable organizations in the same orsimilar communities for similar services.)

• The authorized body adequately docu-ments the basis for its determinationconcurrently with making that determi-nation. The documentation should in-clude:

1) The terms of the approved transactionand the date approved,

2) The members of the authorized bodywho were present during debate on thetransaction that was approved and thosewho voted on it,

3) The comparability data obtained and re-lied upon by the authorized body andhow the data was obtained,

4) Any actions by a member of the author-ized body having conflict of interest, and

5) Documentation of the basis of the de-termination before the later of the nextmeeting of the authorized body or 60days after the final actions of the au-thorized body are taken, and approvalof records as reasonable, accurate andcomplete within a reasonable timethereafter.

Disregarded benefits. The followingeconomic beneifts are disregarded for section4958 purposes.

• Nontaxable fringe benefits that are ex-cluded from income under section 132.

Chapter 3 Section 501(c)(3) Organizations Page 27

• Benefits provided to a volunteer for theorganization if the benefit is provided tothe general public in exchange for amembership fee or contribution of $75 orless.

• Benefits provided to a member of an or-ganization due to the payment of amembership fee or to a donor as a resultof a deductible contribution, if a signif-icant number of disqualified personsmake similar payments or contributionsand are offered a similar economic ben-efit.

• Benefits provided to a person solely asa member of a charitable class that theapplicable tax-exempt organization in-tends to benefit as part of the accom-plishment of its exempt purpose.

• A transfer of an economic benefit to or forthe use of a governmental unit, as de-fined in section 170(c)(1), if exclusivelyfor public purposes.

Special exception for initial contracts.Section 4958 does not apply to any fixedpayment made to a person under an initialcontract.

A fixed payment is an amount of cash orother property specified in the contract, ordetermined by a fixed formula that is specifiedin the contract, which is to be part of ortransferred in exchange for the provision ofspecified services or property.

A fixed formula may, generally, incorpo-rate an amount that depends upon futurespecified events or contingencies, as long asno one has discretion when calculating theamount of a payment or deciding whether tomake a payment (such as a bonus).

An initial contract is a binding writtencontract between an applicable tax-exemptorganization and a person who was not adisqualified person immediately before enter-ing into the contract.

A binding written contract providing it maybe terminated or cancelled by the applicabletax-exempt organization without the otherparty's consent (except as a result of sub-stantial nonperformance) and without sub-stantial penalty, is treated as a new contract,as of the earliest date any termination orcancellation would be effective. Also, if theparties make a material change to a contract,which includes an extension or renewal of thecontract (except for an extension or renewalresulting from the exercise of an option by thedisqualified person), or a more than incidentalchange to the amount payable under thecontract, it is treated as a new contract as ofthe effective date of the material change.

More information. For more information,see the instructions to Forms 990 and 4720.

Organizations that are not private founda-tions. The following kinds of organizationsare excluded from the definition of a privatefoundation.

Section 509(a)(1) OrganizationsSection 509(a)(1) organizations include:

1) A church or a convention or associationof churches,

2) An educational organization such as aschool or college,

3) A hospital or medical research organ-ization operated in conjunction with ahospital,

4) Endowment funds operated for the ben-efit of certain state and municipal col-leges and universities,

5) A governmental unit, and

6) A publicly supported organization.

Church. The characteristics of a church arediscussed earlier in this chapter under Reli-gious Organizations.

Educational organizations. An educationalorganization is one whose primary function isto present formal instruction, that normallymaintains a regular faculty and curriculum,and that normally has a regularly enrolledbody of pupils or students in attendance at theplace where it regularly carries on its educa-tional activities. The term includes institutionssuch as primary, secondary, preparatory, orhigh schools, and colleges and universities.It includes federal, state, and other publiclysupported schools that otherwise come withinthe definition. It does not include organiza-tions engaged in both educational and non-educational activities, unless the latter aremerely incidental to the educational activities.A recognized university that incidentally op-erates a museum or sponsors concerts is aneducational organization. However, the oper-ation of a school by a museum does notnecessarily qualify the museum as an edu-cational organization.

An exempt organization that operates atutoring service for students on a one-to-onebasis in their homes, maintains a small centerto test students to determine their need fortutoring, and employs tutors on a part-timebasis is not an educational organization forthese purposes. Nor is an exempt organiza-tion that conducts an internship program byplacing college and university students withcooperating government agencies an educa-tional organization.

Hospitals and medical research organiza-tions. A hospital is an organization whoseprincipal purpose or function is to providehospital or medical care or either medicaleducation or medical research. A rehabili-tation institution, outpatient clinic, or commu-nity mental health or drug treatment centermay qualify as a hospital if its principal pur-pose or function is providing hospital ormedical care. If the accommodations of anorganization qualify as being part of a skillednursing facility, that organization may qual-ify as a hospital if its principal purpose orfunction is providing hospital or medical care.A cooperative hospital service organiza-tion that meets the requirements of section501(e) will qualify as a hospital.

The term hospital does not includeconvalescent homes, homes for children orthe aged, or institutions whose principal pur-pose or function is to train handicapped indi-viduals to pursue a vocation. An organizationthat mainly provides medical education ormedical research will not be considered ahospital, unless it is also actively engaged inproviding medical or hospital care to patientson its premises or in its facilities, on an in-patient or out-patient basis, as an integral partof its medical education or medical researchfunctions.

Hospitals participating in provider-sponsored organizations. An organizationcan be treated as organized and operatedexclusively for a charitable purpose even if itowns and operates a hospital that participatesin a provider-sponsored organization, whether

or not the provider-sponsored organization istax exempt. For section 501(c)(3) purposes,any person with a material financial interestin the provider-sponsored organization istreated as a private shareholder or individualwith respect to the hospital.

Medical research organization. A med-ical research organization must be directlyengaged in the continuous active conduct ofmedical research in conjunction with a hospi-tal, and that activity must be the organiza-tion's principal purpose or function.

Publicly supported. A hospital or med-ical research organization that wants the ad-ditional classification of a publicly-supportedorganization (described later in this chapterunder Qualifying As Publicly Supported) mayspecifically request that classification. Theorganization must establish that it meets thepublic support requirements of section170(b)(1)(A)(vi).

Endowment funds. Organizations operatedfor the benefit of certain state and municipalcolleges and universities are endowmentfunds. They are organized and operated ex-clusively to:

1) Receive, hold, invest, and administerproperty for a college or university, and

2) Make expenditures to or for the benefitof a college or university.

The college or university must be:

1) An agency or instrumentality of a stateor political subdivision, or

2) Owned or operated by:

a) A state or political subdivision, or

b) An agency or instrumentality of oneor more states or political subdivi-sions.

The phrase expenditures to or for thebenefit of a college or university includesexpenditures made for any one or more of thenormal functions of a college or university.These expenditures include those for:

1) Acquiring and maintaining real propertycomprising part of the campus area,

2) Erecting (or participating in erecting)college or university buildings,

3) Acquiring and maintaining equipmentand furnishings used for, or in conjunc-tion with, normal functions of collegesand universities,

4) Libraries,

5) Scholarships, and

6) Student loans.

The organization must normally receive asubstantial part of its support from the UnitedStates or any state or political subdivision, orfrom direct or indirect contributions from thegeneral public, or from a combination of thesesources.

Support. Support does not include in-come received in the exercise or performanceby the organization of its charitable, educa-tional, or other purpose or function constitut-ing the basis for exemption.

In determining the amount of support re-ceived by an organization for a contributionof property when the value of the contributionby the donor is subject to reduction for certainordinary income and capital gain property, thefair market value of the property is taken into

Page 28 Chapter 3 Section 501(c)(3) Organizations

account. For more information, see the dis-cussion of Support on page 30.

Indirect contribution. An example of anindirect contribution from the public is the re-ceipt by the organization of its share of theproceeds of an annual collection campaignof a community chest, community fund, orunited fund.

Governmental units. A governmental unitincludes a state, a possession of the UnitedStates, or a political subdivision of either ofthe foregoing, or the United States or theDistrict of Columbia.

Publicly-supported organizations. An or-ganization is a publicly-supported organiza-tion if it is one that normally receives a sub-stantial part of its support from agovernmental unit or from the general public.

Types of organizations that generallyqualify are:

• Museums of history, art, or science,

• Libraries,

• Community centers to promote the arts,

• Organizations providing facilities for thesupport of an opera, symphony orchestra,ballet, or repertory drama, or for someother direct service to the general public,and

• Organizations such as the American RedCross or the United Way.

Qualifying As Publicly Supported

An organization will qualify as publicly sup-ported if it passes the one-third supporttest. If it fails that test, it may qualify under thefacts and circumstances test.

One-third support test. An organizationwill qualify as publicly supported if it normallyreceives at least one-third of its total supportfrom governmental units, from contributionsmade directly or indirectly by the generalpublic, or from a combination of thesesources. For a definition of support, seeSupport, later.

Definition of normally for one-thirdsupport test. An organization will be con-sidered as normally meeting the one-thirdsupport test for its current tax year and thenext tax year if, for the 4 tax years imme-diately before the current tax year, the or-ganization meets the one-third support teston an aggregate basis. See also Specialcomputation period for new organizations,later, in this discussion.

Facts and circumstances test. The factsand circumstances test is for organizationsfailing to meet the one-third support test. Ifyour organization fails to meet the one-thirdsupport test, it may still be treated as apublicly-supported organization if it normallyreceives a substantial part of its support fromgovernmental units, from direct or indirectcontributions from the general public, or froma combination of these sources. To qualify,an organization must meet the ten-percent-of-support requirement and the attractionof public support requirement. These re-quirements establish, under all the facts andcircumstances, that an organization normallyreceives a substantial part of its support fromgovernmental units or from direct or indirectcontributions from the general public. The or-

ganization also must be in the nature of apublicly-supported organization, taking intoaccount five different factors. See Additionalrequirements (the five public support factors),on pages 29–30.

Ten-percent-of-support requirement.The percentage of support normally receivedby an organization from governmental units,from contributions made directly or indirectlyby the general public, or from a combinationof these sources must be substantial . Anorganization will not be treated as normallyreceiving a substantial amount of govern-mental or public support unless the totalamount of governmental and public supportnormally received is at least 10% of the totalsupport normally received by that organiza-tion. For a definition of support, see Support,later.

Attraction of public support require-ment. An organization must be organizedand operated in a manner to attract new andadditional public or governmental support ona continuous basis. An organization will meetthis requirement if it maintains a continuousand bona fide program for solicitation of fundsfrom the general public, community, or mem-bership group involved, or if it carries on ac-tivities designed to attract support from gov-ernmental units or other charitableorganizations described in section 509(a)(1).In determining whether an organizationmaintains a continuous and bona fide pro-gram for solicitation of funds from the generalpublic or community, consideration will begiven to whether the scope of its fundraisingactivities is reasonable in light of its charitableactivities. Consideration also will be given tothe fact that an organization may, in its earlyyears of existence, limit the scope of its so-licitation to persons who would be most likelyto provide seed money sufficient to enable itto begin its charitable activities and expandits solicitation program.

Definition of normally for facts and cir-cumstances test. An organization willnormally meet the requirements of the factsand circumstances test for its current tax yearand the next tax year if, for the 4 tax yearsimmediately before the current tax year, theorganization meets the ten-percent-of-supportand the attraction of public support require-ments on an aggregate basis and satisfies asufficient combination of the factors dis-cussed later. The combination of factors thatan organization normally must meet does nothave to be the same for each 4-year periodas long as a sufficient combination of factorsexists to show compliance. See also Specialcomputation period for new organizations,later, in this discussion.

Special rule. The fact that an organiza-tion has normally met the one-third supporttest requirements for a current tax year, butis unable normally to meet the requirementsfor a later tax year, will not in itself prevent theorganization from meeting the requirementsof the facts and circumstances test for thelater tax year.

Example. X organization meets the one-third support test in its 1999 tax year on thebasis of support received during 1995, 1996,1997, and 1998. It therefore normally meetsthe requirements for both 1999 and 2000. Forthe 2000 tax year, X is unable to meet theone-third support test on the basis of supportreceived during 1996, 1997, 1998, and 1999.If X can meet the facts and circumstances teston the basis of those years, X will normallymeet the requirements for 2001 (the tax year

immediately after 2000). However, if on thebasis of both 4-year periods (1996 through1999 and 1997 through 2000), X fails to meetboth the one-third and the facts and circum-stances tests, X will not be a publicly-supported organization for 2001.

However, X will not be disqualified as apublicly-supported organization for the 2000tax year because it normally met the one-thirdsupport test requirements on the basis of thetax years 1995 through 1998 unless the pro-visions governing the Exception for materialchanges in sources of support (discussedlater) become applicable.

Additional requirements (the five publicsupport factors). In addition to the two re-quirements of the facts and circumstancestest, the following five public support fac-tors will be considered in determiningwhether an organization is publicly supported.However, an organization generally does nothave to satisfy all of the factors. The factorsrelevant to each case and the weight ac-corded to any one of them may differ de-pending upon the nature and purpose of theorganization and the length of time it has ex-isted. The combination of factors that an or-ganization normally must meet does not haveto be the same for each 4-year period as longas a sufficient combination of factors existsto show that the organization is publicly sup-ported.

1. Percentage of financial support fac-tor. When an organization normally receivesat least 10% but less than one-third of its totalsupport from public or governmental sources,the percentage of support received fromthose sources will be considered in deter-mining whether the organization is publiclysupported. As the percentage of support frompublic or governmental sources increases,the burden of establishing the publicly sup-ported nature of the organization throughother factors decreases, while the lower thepercentage, the greater the burden.

If the percentage of the organization'ssupport from the general public or govern-mental sources is low because it receives ahigh percentage of its total support from in-vestment income on its endowment funds, theorganization will be treated as complying withthis factor if the endowment fund was ori-ginally contributed by a governmental unit orby the general public. However, if the en-dowment funds were originally contributed bya few individuals or members of their families,this fact will increase the burden on the or-ganization of establishing compliance withother factors. Facts pertinent to years beforethe 4 tax years immediately before the currenttax year also may be considered.

2. Sources of support factor. If an or-ganization normally receives at least 10% butless than one-third of its total support frompublic or governmental sources, the fact thatit receives the support from governmentalunits or directly or indirectly from a represen-tative number of persons, rather than receiv-ing almost all of its support from the membersof a single family, will be considered in de-termining whether the organization is publiclysupported. In determining what is a repre-sentative number of persons, considerationwill be given to the type of organization in-volved, the length of time it has existed, andwhether it limits its activities to a particularcommunity or region or to a special field thatcan be expected to appeal to a limited num-ber of persons. Facts pertinent to years be-

Chapter 3 Section 501(c)(3) Organizations Page 29

fore the 4 tax years immediately before thecurrent tax year also may be considered.

3. Representative governing body fac-tor. The fact that an organization has agoverning body that represents the broad in-terests of the public rather than the personalor private interest of a limited number of do-nors will be considered in determiningwhether the organization is publicly sup-ported.

An organization will meet this requirementif it has a governing body composed of:

1) Public officials acting in their public ca-pacities,

2) Individuals selected by public officialsacting in their public capacities,

3) Persons having special knowledge orexpertise in the particular field or disci-pline in which the organization is oper-ating, and

4) Community leaders, such as elected orappointed officials, members of theclergy, educators, civic leaders, or othersuch persons representing a broadcross-section of the views and interestsof the community.

In a membership organization, the govern-ing body also should include individualselected by a broadly based membership ac-cording to the organization's governing in-strument or bylaws.

4. Availability of public facilities orservices factor. The fact that an organiza-tion generally provides facilities or servicesdirectly for the benefit of the general publicon a continuing basis, is evidence that theorganization is publicly supported. Examplesare:

• A museum or library that is open to thepublic,

• A symphony orchestra that gives publicperformances,

• A conservation organization that provideseducational services to the public throughthe distribution of educational materials,or

• An old-age home that providesdomiciliary or nursing services for mem-bers of the general public.

The fact that an educational or research in-stitution regularly publishes scholarly studieswidely used by colleges and universities orby members of the general public is also evi-dence that the organization is publicly sup-ported.

Similarly, the following factors are alsoevidence that an organization is publicly sup-ported.

1) Participating in, or sponsoring of, theprograms of the organization by mem-bers of the public having special knowl-edge or expertise, public officials, or civicor community leaders.

2) Maintaining a definitive program by theorganization to accomplish its charitablework in the community, such as slumclearance or developing employmentopportunities.

3) Receiving a significant part of its fundsfrom a public charity or governmentalagency to which it is in some way held

accountable as a condition of the grant,contract, or contribution.

5. Additional factors pertinent to mem-bership organizations. The following areadditional factors in determining whether amembership organization is publicly sup-ported.

1) Whether the solicitation for dues-payingmembers is designed to enroll a sub-stantial number of persons in the com-munity or area, or in a particular profes-sion or field of special interest (takinginto account the size of the area and thenature of the organization's activities).

2) Whether membership dues for individual(rather than institutional) members havebeen fixed at rates designed to makemembership available to a broad crosssection of the interested public, ratherthan to restrict membership to a limitednumber of persons.

3) Whether the activities of the organizationwill be likely to appeal to persons havingsome broad common interest or pur-pose, such as educational activities inthe case of alumni associations, musicalactivities in the case of symphony soci-eties, or civic affairs in the case ofparent-teacher associations.

Exception for material changes in sourcesof support. If for the current tax year sub-stantial and material changes occur in an or-ganization's sources of support other thanchanges arising from unusual grants (dis-cussed later, under Unusual grants), then inapplying either the one-third or the facts andcircumstances test, the 4-year computationperiod applicable to that year, either as animmediately following tax year or as a currenttax year, will not apply. Instead of using thesecomputation periods, a computation periodof 5 years will apply. The 5-year period con-sists of the current tax year and the 4 taxyears immediately before that year.

For example, if substantial and materialchanges occur in an organization's sourcesof support for the 1999 tax year, then, eventhough the organization meets the one-thirdor the facts and circumstances test using acomputation period of tax years 1994–1997or 1995–1998, the organization will not meeteither test unless it meets the test using acomputation period of tax years 1995–1999(substituted period).

Substantial and material change. Anexample of a substantial and material changeis the receipt of an unusually large contribu-tion or bequest that does not qualify as anunusual grant.

Effect on grantor or contributor. If asa result of this substituted period, an organ-ization is not able to meet either the one-thirdsupport or the facts and circumstances testfor its current tax year, its status with respectto a grantor or contributor will not be affecteduntil notice of change of status is made to thepublic (such as by publication in the InternalRevenue Bulletin). This does not apply,however, if the grantor or contributor was re-sponsible for or was aware of the substantialand material change or acquired knowledgethat the IRS had given notice to the organ-ization that it would be deleted from classi-fication as a publicly-supported organization.

A grantor or contributor (other than oneof the organization's founders, creators, or

foundation managers) will not be consideredresponsible for, or aware of, the substantialand material change, if the grantor or con-tributor made the grant or contribution relyingupon a written statement by the grantee or-ganization that the grant or contribution wouldnot result in the loss of the organization'sclassification as a publicly-supported organ-ization. The statement must be signed by aresponsible officer of the grantee organizationand must give enough information, includinga summary of the pertinent financial data forthe 4 preceding years, to assure a reasonablyprudent person that the grant or contributionwould not result in the loss of the grantee or-ganization's classification as a publicly-supported organization. If a reasonable doubtexists as to the effect of the grant or contri-bution, or, if the grantor or contributor is oneof the organization's founders, creators, orfoundation managers, the grantee organiza-tion may request a ruling from the EO areamanager before accepting the grant or con-tribution for the protection of the grantor orcontributor.

If there is no written statement, a grantoror contributor will not be considered respon-sible for a substantial and material change ifthe total gifts, grants, or contributions re-ceived from that grantor or contributor for atax year are 25% or less of the total supportreceived by the organization from all sourcesfor the 4 tax years immediately before the taxyear. (If the organization has not qualified aspublicly supported for those 5 years, seeSpecial computation period for new organ-izations, next.) For this purpose, total supportdoes not include support received from thatparticular grantor or contributor. The grantoror contributor cannot be a person who is in aposition of authority, such as a foundationmanager, or who obtains a position of au-thority or the ability to exercise control overthe organization because of the grant orcontribution.

Special computation period for new or-ganizations. Organizations that have beenin existence for at least 1 tax year consistingof at least 8 months, but for fewer than 5 taxyears, can substitute the number of tax yearsthey have been in existence before their cur-rent tax year to determine whether they meetthe one-third support test or the facts andcircumstances test, discussed earlier.

First tax year at least 8 months. Theinitial status determination of a newly createdorganization whose first tax year is at least 8months is based on a computation period ofeither the first tax year or the first and secondtax years.

First tax year shorter than 8 months.The initial status determination of a newlycreated organization whose first tax year isless than 8 months is based on a computationperiod of either the first and second tax yearsor the first, second, and third tax years.

5-year advance ruling period. If an or-ganization has received an advance ruling,the computation is based on all the years inthe 5-year advance ruling period. Advancerulings are described later, under Advancerulings to newly created organizations—Initialdetermination of status.

However, if the advance ruling period isterminated by the IRS, the computation periodwill be based on the period described aboveunder First tax year at least 8 months andFirst tax year shorter than 8 months, or if theperiod is greater, the number of years towhich the advance ruling applies.

Page 30 Chapter 3 Section 501(c)(3) Organizations

Support. For purposes of publicly-supportedorganizations, the term support includes (butis not limited to):

1) Gifts, grants, contributions, or member-ship fees,

2) Net income from unrelated business ac-tivities, whether or not those activitiesare carried on regularly as a trade orbusiness,

3) Gross investment income,

4) Tax revenues levied for the benefit of anorganization and either paid to or spenton behalf of the organization, and

5) The value of services or facilities fur-nished by a governmental unit to an or-ganization without charge (except ser-vices or facilities generally furnished tothe public without charge).

Amounts that are not support. The termsupport does not include:

1) Any amount received from the exerciseor performance by an organization of thepurpose or function constituting the basisfor its exemption (in general, theseamounts include amounts received fromany activity the conduct of which is sub-stantially related to the furtherance of theexempt purpose or function, other thanthrough the production of income), or

2) Contributions of services for which adeduction is not allowed.

These amounts are excluded from both thenumerator and the denominator of the frac-tions in determining compliance with theone-third support test and ten-percent-of-support requirement. The following discussesan exception to this general rule.

Organizations dependent primarily ongross receipts from related activities. Or-ganizations will not satisfy the one-third sup-port test or the ten-percent-of-support re-quirement if they receive:

1) Almost all support from gross receiptsfrom related activities, and

2) An insignificant amount of support fromgovernmental units (without regard toamounts referred to in (3) in the list ofitems included in support) and contribu-tions made directly or indirectly by thegeneral public.

Example. X, an organization describedin section 501(c)(3), is controlled by ThomasBlue, its president. X received $500,000 dur-ing the 4 tax years immediately before itscurrent tax year under a contract with theDepartment of Transportation, under which Xengaged in research to improve a particularvehicle used primarily by the federal govern-ment. During the same period, the only othersupport received by X was $5,000 in smallcontributions primarily from X's employeesand business associates. The $500,000 issupport under (1) above. Under these cir-cumstances, X meets the conditions of (1)and (2) above and so does not meet theone-third support test or the ten-percent-of-support requirement.

For the rules that apply to organizationsthat fail to qualify as section 509(a)(1)publicly-supported organizations because ofthese provisions, see Section 509(a)(2) Or-ganizations, later. See also Gross receipts

from a related activity in the discussion onsection 509(a)(2) organizations.

Membership fees. Membership fees areincluded in the term support if they are paidto provide support for the organization ratherthan to buy admissions, merchandise, ser-vices, or the use of facilities.

Support from a governmental unit. Forpurposes of the one-third support test and theten-percent-of-support requirement, the termsupport from a governmental unit includesany amounts received from a governmentalunit, including donations or contributions andamounts received on a contract entered intowith a governmental unit for the performanceof services, or from a government researchgrant. However, these amounts are not sup-port from a governmental unit for these pur-poses if they constitute amounts receivedfrom the exercise or performance of the or-ganization's exempt functions.

Any amount paid by a governmental unitto an organization will not be treated as re-ceived from the exercise or performance of itsexempt function if the purpose of the paymentis primarily to enable the organization to pro-vide a service to, or maintain a facility for, thedirect benefit of the public (regardless ofwhether part of the expense of providing theservice or facility is paid for by the public),rather than to serve the direct and immediateneeds of the payor. This includes:

1) Amounts paid to maintain library facilitiesthat are open to the public,

2) Amounts paid under government pro-grams to nursing homes or homes forthe aged to provide health care ordomiciliary services to residents of thesefacilities, and

3) Amounts paid to child placement or childguidance organizations under govern-ment programs for services rendered tochildren in the community.

These payments are mainly to enable the re-cipient organization to provide a service ormaintain a facility for the direct benefit of thepublic, rather than to serve the direct andimmediate needs of the payor. Furthermore,any amount received from a governmentalunit under circumstances in which the amountwould be treated as a grant will generallyconstitute support from a governmental unit.See the discussion of Grants on page 37.

Medicare and Medicaid payments.Medicare and Medicaid payments are re-ceived from contracts entered into with stateand federal governmental units. However,payments are made for services already pro-vided to eligible individuals, rather than toencourage or enable an organization to pro-vide services to the public. The individualpatient, not a governmental unit, actuallycontrols the ultimate recipient of these pay-ments by selecting the health care organiza-tion. As a result, these payments are notconsidered support from a governmental unit.Medicare and Medicaid payments are grossreceipts derived from the exercise or per-formance of exempt activities and, therefore,are not included in the term support.

Support from the general public. In deter-mining whether the one-third support test orthe ten-percent-of-support requirement ismet, include in your computation support fromdirect or indirect contributions from the gen-eral public. This includes contributions from

an individual, trust, or corporation but only tothe extent that the total contributions from theindividual, trust, or corporation, during the4-year period immediately before the currenttax year (or substituted computation period)are not more than 2% of the organization'stotal support for the same period.

Thus, a contribution by any one individualwill be included in full in the denominator ofthe fraction used in the one-third support testor the ten-percent-of-support requirement.However, the contribution will be included inthe numerator only to the extent that it is notmore than 2% of the denominator. In apply-ing the 2% limit, all contributions made by adonor and by any person in a special re-lationship to the donor (certain Disqualifiedpersons discussed on page 39) are consid-ered made by one person. The 2% limit doesnot apply to support received from govern-mental units or to contributions from otherpublicly supported charities, except as pro-vided under Grants from public charities,later.

Indirect contributions. The term indi-rect contributions from the general publicincludes contributions received by the organ-ization from organizations (such as publicly-supported organizations) that normally re-ceive a substantial part of their support fromdirect contributions from the general public,except as provided under Grants from publiccharities, next.

Grants from public charities. Contribu-tions received from a governmental unit orfrom a publicly-supported organization (in-cluding a church that meets the requirementsfor being publicly supported) are not subjectto the 2% limit unless the contributions rep-resent amounts either expressly or impliedlyearmarked by a donor to the governmentalunit or publicly-supported organization as be-ing for, or for the benefit of, the particular or-ganization claiming a publicly-supported sta-tus.

Example 1. M, a national foundation forthe encouragement of the musical arts, is apublicly-supported organization. GeorgeSpruce gives M a donation of $5,000 withoutimposing any restrictions or conditions uponthe gift. M later makes a $5,000 grant to X,an organization devoted to giving public per-formances of chamber music. Since the grantto X is treated as being received from M, it isfully includible in the numerator of X's supportfraction for the tax year of receipt.

Example 2. Assume M is the same or-ganization described in Example 1. TomGrove gives M a donation of $10,000, butrequires that M spend the money to supportorganizations devoted to the advancement ofcontemporary American music. M has com-plete discretion as to the organizations of thetype described to which it will make a grant.M decides to make grants of $5,000 each toY and Z, both being organizations describedin section 501(c)(3) and devoted to furtheringcontemporary American music. Since thegrants to Y and Z are treated as having beenreceived from M, Y, and Z each may includeone of the $5,000 grants in the numerator ofits support fraction. Although the donation toM was conditioned upon the use of the fundsfor a particular purpose, M was free to selectthe ultimate recipient.

Example 3. N is a national foundation forthe encouragement of art and is a publicly-supported organization. Grants to N are per-mitted to be earmarked for particular pur-

Chapter 3 Section 501(c)(3) Organizations Page 31

poses. O, which is an art workshop devotedto training young artists and which is claimingstatus as a publicly-supported organization,persuades C, a private foundation, to makea grant of $25,000 to N. C is a disqualifiedperson with respect to O. C makes the grantto N with the understanding that N would bebound to make a grant to O in the sum of$25,000, in addition to a matching grant ofN's funds to O in the sum of $25,000. Onlythe $25,000 received directly from N is con-sidered a grant from N. The other $25,000 isan indirect contribution from C to O and is tobe excluded from the numerator of O's sup-port fraction to the extent it exceeds the 2%limit.

Unusual grants. In applying the 2% limit todetermine whether the one-third support testor the ten-percent-of-support requirement ismet, exclude contributions that are consid-ered unusual grants from both the numeratorand denominator of the appropriate percent-of-support fraction. Generally, unusual grantsare substantial contributions or bequests fromdisinterested parties if the contributions:

1) Are attracted by the publicly-supportednature of the organization,

2) Are unusual or unexpected in amount,and

3) Would adversely affect, because of thesize, the status of the organization asnormally being publicly supported. (Theorganization must otherwise meet thesupport test in that year without benefitof the grant or contribution.)

For a grant (see the description of Grants onpage 37) that meets the requirements for ex-clusion, if the terms of the granting instrumentrequire that the funds be paid to the recipientorganization over a period of years, theamount received by the organization eachyear under the terms of the grant may beexcluded for that year. However, no item ofgross investment income (defined underSection 509(a)(2) Organizations, later) maybe excluded under this rule. These provisionsallow exclusion of unusual grants made dur-ing any of the applicable periods previouslydiscussed under Special computation periodfor new organizations and to periods de-scribed in Advance rulings to newly createdorganizations—Initial determination of status,later.

Characteristics of an unusual grant. Agrant or contribution will be considered anunusual grant if the above three factors applyand if it has all of the following characteristics.If these factors and characteristics apply, theneven without the benefit of an advance ruling,grantors or contributors have assurance thatthey will not be considered responsible forsubstantial and material changes in the or-ganization's sources of support.

1) The grant or contribution is not made bya person (or related person) who createdthe organization or was a substantialcontributor to the organization before thegrant or contribution.

2) The grant or contribution is not made bya person (or related person) who is in aposition of authority, such as a founda-tion manager, or who otherwise has theability to exercise control over the or-ganization. Similarly, the grant or contri-bution is not made by a person (or re-lated person) who, because of the grant

or contribution, obtains a position of au-thority or the ability to otherwise exercisecontrol over the organization.

3) The grant or contribution is in the formof cash, readily marketable securities,or assets that directly further the organ-ization's exempt purposes, such as a giftof a painting to a museum.

4) The donee-organization has receivedeither an advance or final ruling or de-termination letter classifying it as apublicly-supported organization and, ex-cept for an organization operating underan advance ruling or determination letter,the organization is actively engaged ina program of activities in furtherance ofits exempt purpose.

5) No material restrictions or conditionshave been imposed by the grantor orcontributor upon the organization inconnection with the grant or contribution.

6) If the grant or contribution is intended foroperating expenses, rather than capitalitems, the terms and amount of the grantor contribution are expressly limited toone year's operating expenses.

Ruling request. Before any grant orcontribution is made, a potential grantee or-ganization may request a ruling as to whetherthe grant or contribution may be excluded.This request may be filed by the grantee or-ganization with the EO area manager for itsarea. The organization must submit all infor-mation necessary to make a determination,including information relating to the factorsand characteristics listed in the precedingparagraphs. If a favorable ruling is issued, theruling may be relied upon by the grantor orcontributor of the particular contribution inquestion. The issuance of the ruling will beat the sole discretion of the IRS. The potentialgrantee organization should follow the proce-dures set out in Revenue Procedure 2001–4(or later update) to request a ruling.

Grants and contributions that result insubstantial and material changes in the or-ganization and that fail to qualify for exclusionwill affect the way the support tests are ap-plied. See Exception for material changes insources of support, earlier.

If a ruling is requested, in addition to thecharacteristics listed earlier under Character-istics of an unusual grant, the following fac-tors may be considered by the IRS in deter-mining if the grant or contribution is anunusual grant.

1) Whether the contribution was a bequestor a transfer while living. A bequest willbe given more favorable considerationthan a transfer while living.

2) Whether, before the receipt of the con-tribution, the organization has carried onan active program of public solicitationand exempt activities and has been ableto attract a significant amount of publicsupport.

3) Whether, before the year of contribution,the organization met the one-third sup-port test without benefit of any exclu-sions of unusual grants.

4) Whether the organization may reason-ably be expected to attract a significantamount of public support after the con-tribution. Continued reliance on unusualgrants to fund an organization's current

operating expenses (as opposed to pro-viding new endowment funds) may beevidence that the organization cannotreasonably be expected to attract futuresupport from the general public.

5) Whether the organization has a repre-sentative governing body.

Advance rulings to newly created organ-izations — Initial determination of status.Many newly created organizations cannotmeet either the 4-year normally publicly sup-ported provisions or the provisions for newlycreated organizations to qualify as normallypublicly supported because they have notbeen in existence long enough. However, anewly created organization may qualify for anadvance ruling that it will be treated as anorganization described in section170(b)(1)(A)(vi) during an advance ruling pe-riod long enough to enable it to develop anadequate support history on which to basean initial determination as to foundation sta-tus.

Generally, the type of newly created or-ganization that would qualify for an advanceruling is one that can show that its organiza-tional structure, proposed programs and ac-tivities, and intended method of operation arelikely to attract the type of broadly basedsupport from the general public, public chari-ties, and governmental units that is necessaryto meet the public support requirements dis-cussed earlier, under Qualifying As PubliclySupported.

An advance ruling or determination willprovide that an organization will be treatedas an organization described in section170(b)(1)(A)(vi) for an advance ruling periodof 5 years.

5-year advance ruling period. A newlycreated organization may request a ruling ordetermination letter that it will be treated asa section 170(b)(1)(A)(vi) organization for itsfirst 5 tax years. The request must be ac-companied by a consent to extend the statute(on Form 872–C) that, in effect, states theorganization will be subject to the taxes im-posed under section 4940 if it fails to qualifyas an organization excluded as a privatefoundation during the 5-year advance rulingperiod. The organization's first tax year, re-gardless of length, will count as the first yearin the 5-year period. The advance ruling pe-riod will end on the last day of the organiza-tion's 5th tax year.

Between 30 and 45 days before the endof the advance ruling period, the EO areamanager will contact the organization andrequest the financial support informationnecessary to make a final determination offoundation status. In general, this is the in-formation requested in Part IV, A of Form1023.

Failure to obtain advance ruling. If anewly created organization has not obtainedan advance ruling or determination letter, itcannot rely upon the possibility that it willmeet the public support requirements dis-cussed earlier. Thus, in order to avoid the riskof being classified as a private foundation, theorganization may comply with the rules gov-erning private foundations by paying any ap-plicable private foundation taxes. If the or-ganization later meets the public supportrequirements for the applicable period, it willbe treated as a section 170(b)(1)(A)(vi) or-ganization from its inception and any privatefoundation tax that was imposed may be re-funded.

Page 32 Chapter 3 Section 501(c)(3) Organizations

Reliance period. The newly created or-ganization will be treated as a publicly-supported organization for all purposes otherthan sections 507(d) (relating to total taxbenefit resulting from exempt status) and4940 (relating to tax on net investment in-come) for the period beginning with its in-ception and ending 90 days after its advanceruling period expires. The period will be ex-tended until a final determination is made ofan organization's status only if the organiza-tion submits, within the 90-day period, infor-mation needed to determine whether it meetseither of the support tests for its advance rul-ing period (even if the organization fails tomeet either test). However, this reliance pe-riod does not apply to the excise tax imposedon net investment income. If it is later deter-mined that the organization was a privatefoundation from its inception, that excise taxwill be due without regard to the advanceruling or determination letter. Consequently,if any amount of the tax is not paid on or be-fore the last date prescribed for payment, theorganization is liable for interest on the taxdue for years in the advance ruling period.However, since any failure to pay the taxduring the period is due to reasonable cause,the penalty imposed for failure to pay the taxwill not apply.

If an advance ruling or determinationletter is terminated by the IRS before theexpiration of the reliance period, the statusof grants or contributions with respect tograntors or contributors to the organizationwill not be affected until notice of change ofstatus of the organization is made to thepublic (such as by publication in the InternalRevenue Bulletin). However, this will not ap-ply if the grantor or contributor was responsi-ble for, or aware of, the act or failure to actthat resulted in the organization's loss ofclassification as a publicly-supported organ-ization.

Also, it will not apply if the grantor orcontributor knew that the IRS had given no-tice to the organization that it would be de-leted from this classification. Before any grantor contribution is made, a potential granteeorganization may request a ruling onwhether the grant or contribution may bemade without loss of classification as apublicly-supported organization.

The ruling request may be filed by thegrantee organization with the EO area man-ager. The issuance of the ruling will be at thesole discretion of the IRS. The organizationmust submit all information necessary tomake a determination on the support factorspreviously discussed. If a favorable ruling isissued, the ruling may be relied upon by thegrantor or contributor of the particular contri-bution in question. The grantee organizationalso may rely on the ruling for excluding un-usual grants.

Comprehensive Examples

Example 1. For the years 1995 through1998, M organization received support of$600,000 from the following sources.

For 1999, on the basis of the above support,M is considered to have normally receivedmore than one-third of its support from agovernmental unit and from direct and indirectcontributions from the general public com-puted as follows.

Since M's support from governmental unitsand from direct and indirect contributions fromthe general public normally is more thanone-third of M's total support for the applica-ble period (1995–1998), M meets the one-third support test and satisfies the require-ments for classification as apublicly-supported organization for 1999 and2000. (This remains in effect if no substantialand material changes took place in the or-ganization's character, purposes, methods ofoperation, or sources of support in theseyears.)

Example 2. N organization was createdto maintain public gardens containing plantspecimens and displaying works of art. Thefacilities, art, and a large endowment wereall contributed by a single contributor. Themembers of the governing body of the or-ganization are unrelated to its creator. Thegardens are open to the public without chargeand attract many visitors each year. For the4 tax years immediately before the current taxyear, 95% of the organization's total supportwas received from investment income from itsoriginal endowment. N also maintains amembership society that is supported bymembers of the general public who wish tocontribute to the upkeep of the gardens bypaying a small annual membership fee. Overthe 4-year period in question, these fees fromthe general public constituted the remaining5% of the organization's total support. Underthese circumstances, N does not meet theone-third support test for its current tax year.Furthermore, since only 5% was receivedfrom the general public, N does not satisfy theten-percent-of-support requirement of thefacts and circumstances test. For its currenttax year, N therefore is not a publicly-supported organization. Since N failed tosatisfy the ten-percent-of-support require-ment, none of the other requirements or fac-tors can be considered in determiningwhether N qualifies as a publicly-supportedorganization.

Example 3. In 1980, O organization wasfounded in Y City by the members of a singlefamily to collect, preserve, interpret, and dis-play to the public important works of art. O isgoverned by a Board of Trustees that ori-ginally consisted almost entirely of membersof the founding family.

However, since 1990, members of thefounding family or persons related to mem-bers of the family have annually been lessthan 20% of the Board of Trustees. The re-maining board members are citizens of Y City

from a variety of professions and occupationswho represent the interests and views of thepeople of Y City in the activities carried onby the organization rather than the personalor private interests of the founding family.

O solicits contributions from the generalpublic and for each of its 4 most recent taxyears has received total contributions (insmall sums of less than $100, none of whichis more than 2% of O's total support for theperiod) of more than $10,000. These contri-butions from the general public are 25% of theorganization's total support for the 4-year pe-riod. For this same period, investment in-come from several large endowment fundshas been 75% of its total support. O spendssubstantially all of its annual income for itsexempt purposes and thus depends upon thefunds it annually solicits from the public aswell as its investment income to carry out itsactivities on a normal and continuing basisand to acquire new works of art. For the entireperiod of its existence, O has been open tothe public and more than 300,000 people(from Y City and elsewhere) have visited themuseum in each of its 4 most recent taxyears.

Under these circumstances, O does notmeet the one-third support test for its currentyear since it has received only 25% of its totalsupport for the applicable 4-year period fromthe general public. However, O has met theten-percent-of-support requirement as well asthe attraction of public support requirementand the factors to be considered, under thefacts and circumstances test, in determiningwhether an organization is publicly supported.Therefore, O is classified as a publicly-supported organization for its current tax yearand the next tax year.

Example 4. In 1990, the P PhilharmonicOrchestra was organized in Z City by a localmusic society and a local women's club topresent to the public a wide variety of musicalprograms intended to foster music appreci-ation in the community. The orchestra iscomposed of professional musicians who arepaid by the association. Twelve perform-ances, open to the public, are scheduled eachyear. A small admission charge is made foreach of these performances. In addition,several performances are staged annuallywithout charge.

During its 4 most recent tax years, P re-ceived separate contributions of $200,000each from Amanda Green and Jackie White(not members of a single family) and supportof $120,000 from the Z Community Chest, apublic federated fundraising organization op-erating in Z City. P depends on these fundsto carry out its activities and will continue todepend on contributions of this type to bemade in the future. P has also begun afundraising campaign in an attempt to expandits activities for the coming years.

P is governed by a Board of Directorscomposed of five individuals. A facultymember of a local college, the president of alocal music society, the head of a local bank,a prominent doctor, and a member of thegoverning body of the local Chamber ofCommerce currently serve on the Board andrepresent the interests and views of thecommunity in the activities carried on by P.

For P's current tax year, its sources ofsupport are computed on the basis of the 4immediately preceding years, as follows.

One-third of total support ......................... $200,000

Support from a governmental unit ........... $40,000Indirect contributions from the generalpublic (United Way) ................................. 40,000Contributions by various donors (no onehaving made contributions that total morethan $12,000—2% of total support) ........ 50,000Six contributions (each in excess of$12,000 —2% of total support) 6 ×$12,000 .................................................... 72,000

$202,000

Investment Income .................................. $300,000City Y ....................................................... 40,000United Way .............................................. 40,000Contributions ............................................ 220,000Total support ............................................ $600,000

Chapter 3 Section 501(c)(3) Organizations Page 33

P's support from the general public, directlyand indirectly, does not meet the one-thirdsupport test ($140,800/$520,000 = 27% oftotal support). However, it meets the ten-percent-of-support requirement. P also meetsthe requirement of the attraction of publicsupport. As a result of satisfying these re-quirements and the public support factors, Pis considered to be a publicly-supported or-ganization.

If P were a newly created organization, itcould obtain a ruling that it is a publicly-supported organization by reason of its pur-poses, organizational structure, and proposedmethod of operation. Even if P had initiallybeen founded by the contributions of a fewindividuals, this would not, in and of itself,disqualify P from receiving the ruling.

Example 5. Q is a philanthropic organ-ization founded in 1985 by Anne Elm for thepurpose of making annual contributions toworthy charities. Anne created Q as a chari-table trust by transferring $500,000 worth ofappreciated securities to Q.

Under the trust agreement, Anne and twoother family members are the sole trusteesand are vested with the right to appoint suc-cessor trustees. In each of its 4 most recenttax years, Q received $15,000 in investmentincome from its original endowment. Eachyear Q solicits funds by operating a charityball at Anne's home. Guests are invited andasked to make contributions of $100 percouple. During the 4-year period involved,$15,000 was received from the proceeds ofthese events. Anne and the family have alsomade contributions to Q of $25,000 over thecourse of the organization's 4 most recent taxyears. Q makes disbursements each year ofsubstantially all of its net income to the publiccharities chosen by the trustees.

For Q's current tax year, Q's sources ofsupport are computed on the basis of the 4immediately preceding years as follows.

Q's support from the general public does notmeet the one-third support test($17,000/$100,000 = 17% of total support).Even though it does meet the ten-percent-of-support requirement, its method of solicitationmakes it questionable whether Q satisfies theattraction of public support requirement. Be-cause of its method of operating, Q also hasa greater burden of establishing its publiclysupported nature under the percentage of fi-nancial support factor. Based on these factsand on Q's failure to receive favorable con-sideration under the remaining factors, Qdoes not qualify as a publicly-supported or-ganization.

Contributions ............................................ $520,000 Community Trusts Community trusts are often established to at-tract large contributions of a capital or en-dowment nature for the benefit of a particularcommunity or area. Often these contributionscome initially from a small number of donors.While the community trust generally has agoverning body composed of representativesof the particular community or area, its con-tributions are often received and maintainedin the form of separate trusts or funds that aresubject to varying degrees of control by thegoverning body.

To qualify as a publicly-supported organ-ization, a community trust must meet theone-third support test, explained, earlier, un-der Qualifying As Publicly Supported. If itcannot meet that test, it must be organizedand operated so as to attract new and addi-tional public or governmental support on acontinuous basis sufficient to meet the factsand circumstances test, also explained ear-lier. Community trusts are generally able tosatisfy the attraction of public support re-quirement (as contained in the facts and cir-cumstances test) if they seek gifts and be-quests from a wide range of potential donorsin the community or area served, throughbanks or trust companies, through attorneysor other professional persons, or in other ap-propriate ways that call attention to the com-munity trust as a potential recipient of giftsand bequests made for the benefit of thecommunity or area served. A community trust,however, does not have to engage in peri-odic, community-wide, fundraising campaignsdirected toward attracting a large number ofsmall contributions in a manner similar tocampaigns conducted by a community chestor a united fund.

Separate trusts or funds. Any communitytrust may be treated as a single entity, ratherthan as an aggregation of separate funds, inwhich case all qualifying funds associatedwith that organization (whether a trust, not-for-profit corporation, unincorporated associ-ation, or a combination thereof) will be treatedas component parts of the organization.

Single entity. To be treated as a singleentity, a community trust must meet all of thefollowing requirements.

1) The organization must be commonlyknown as a community trust, fund, foun-dation, or other similar name conveyingthe concept of a capital or endowmentfund to support charitable activities in thecommunity or area it serves.

2) All funds of the organization must besubject to a common governing instru-ment (or a master trust or agencyagreement) that may be embodied in asingle (or several) document(s) contain-ing common language.

3) The organization must have a commongoverning body (or distribution commit-tee) that either directs or, in the case ofa fund designated for specified benefi-ciaries, monitors the distribution of allfunds exclusively for charitable pur-poses. The governing body must havethe power in the governing instrument,the instrument of transfer, the resolutionsor bylaws of the governing body, a writ-ten agreement, or otherwise—

a) To modify any restriction or condi-tion on the distribution of funds for

any specified charitable purposesor to specified organizations if in thesole judgment of the governingbody (without the necessity of theapproval of any participating trus-tee, custodian, or agent), the re-striction or condition becomes, ineffect, unnecessary, incapable offulfillment, or inconsistent with thecharitable needs of the communityor area served,

b) To replace any participating trustee,custodian, or agent for breach offiduciary duty under state law, and

c) To replace any participating trustee,etc., for failure to produce a rea-sonable return of net income overa reasonable period of time. (Thegoverning body will determine whatis reasonable.)

4) The organization must prepare periodicfinancial reports treating all of the fundsthat are held by the community trust, ei-ther directly or in component parts, asfunds of the organization.

A community trust can meet the require-ment in (3) above even if its exercise of thepowers in (3)(a), (b), or (c) is reviewable byan appropriate state authority.

Component part. To be treated as acomponent part of a community trust (ratherthan as a separate trust or a not-for-profitcorporation), a trust or fund:

1) Must be created by gift, bequest, legacy,devise, or other transfer to a communitytrust that is treated as a single entity(described above), and

2) May not be directly subjected by thetransferor to any material restriction orcondition with respect to the transferredassets.

Grantors and contributors. Grantors, con-tributors, or distributors to a community trustmay rely on the public charity status, whichthe organization has claimed in a timely filednotice, on or before the date the IRS informsthe public (through such means as publicationin the Internal Revenue Bulletin) that suchreliance has expired. However, if the grantor,contributor, or distributor acquires knowledgethat the IRS has notified the community trustthat it has failed to establish that it is a publiccharity, then reliance on the claimed statusexpires at the time such knowledge is ac-quired.

Section 509(a)(2) Organizations Section 509(a)(2) excludes certain types ofbroadly, publicly-supported organizationsfrom private foundation status. Generally, anorganization described in section 509(a)(2)may also fit the description of a publicly-supported organization under section509(a)(1). There are, however, two basic dif-ferences.

1) For section 509(a)(2) organizations, theterm support includes items of supportdiscussed earlier (under Support, in thediscussion of Section 509(a)(1) Organ-izations) and income from activities di-rectly related to their exempt function.This income is not included in meetingthe support test for a publicly-supportedorganization under section 509(a)(1).

Receipts from performances ................... 100,000$620,000

Less:Receipts from performances (excluded,see Support) ............................................ 100,000

Total support ........................................ $520,000

Z Community Chest (indirect support fromthe general public) ................................... $120,000Two contributions (each over$10,400—2% of total support) 2 ×$10,400 .................................................... 20,800Total support from general public ............ $140,800

Investment income ................................... $60,000Contributions ............................................ 40,000

Total support ........................................ $100,000

Contributions from the general public ..... $15,000

One contribution (over $2,000—2% oftotal support) 1 × $2,000 ......................... 2,000Total support from general public ............ $17,000

Page 34 Chapter 3 Section 501(c)(3) Organizations

2) Section 509(a)(2) places a limit on thetotal gross investment income and unre-lated business taxable income (in excessof the unrelated business tax) an organ-ization may have, while section 509(a)(1)does not.

To be excluded from private foundationtreatment under section 509(a)(2), an organ-ization must meet two support tests.

1) The one-third support test.

2) The not-more-than-one-third supporttest.

Both these tests are designed to insurethat an organization excluded from privatefoundation treatment is responsive to thegeneral public, rather than to the private in-terests of a limited number of donors or otherpersons.

One-third support test. The one-third sup-port test will be met if an organizationnormally receives more than one-third of itssupport in each tax year from any combina-tion of:

1) Gifts, grants, contributions, or member-ship fees, and

2) Gross receipts from admissions, salesof merchandise, performance of ser-vices, or furnishing facilities in an activitythat is not an unrelated trade or busi-ness, subject to certain limits, discussedbelow under Limit on gross receipts.

For this purpose, the support must be frompermitted sources, which include:

• Section 509(a)(1) organizations, de-scribed earlier,

• Governmental units, described on page28 under Section 509(a)(1) Organiza-tions, and

• Persons other than Disqualified persons(defined on page 39 under Section509(a)(3) Organizations).

Limit on gross receipts. In computingthe amount of support received from grossreceipts under (2) above, gross receipts fromrelated activities received from any person orfrom any bureau or similar agency of a gov-ernmental unit are includible in any tax yearonly to the extent the gross receipts are notmore than the greater of $5,000 or 1% of theorganization's total support in that year.

Not-more-than-one-third support test. Thistest will be met if an organization normallyreceives no more than one-third of its supportin each tax year from the total of:

1) Gross investment income, and

2) The excess (if any) of unrelated businesstaxable income from unrelated trades orbusinesses acquired after June 30, 1975over the tax imposed on that income.

Gross investment income. Gross in-vestment income means the gross amountof income from interest, dividends, paymentswith respect to securities loans, rents, androyalties, but it does not include any incomethat would be included in computing tax onunrelated business income from trades orbusinesses.

Definition of normally. Both supporttests are computed on the basis of the natureof the organization's normal sources of sup-

port. An organization will be considered tohave normally met both tests for its currenttax year and the tax year immediately follow-ing, if it meets those tests on the basis of thetotal support received for the 4 tax years im-mediately before the current tax year.

Exception for material changes in sourcesof support. If during the current tax yearthere are substantial and material changes inan organization's sources of support otherthan changes arising from unusual grants(discussed, later, under Unusual grants), nei-ther the 4-year computation period for thecurrent year as an immediately following taxyear, nor the 4-year computation period forthat year as a current tax year applies. In-stead, the normal sources of support will bedetermined on the basis of a 5-year periodconsisting of the current tax year and the 4preceding tax years.

For example, if material changes occur insupport for the year 1999, then even thoughthe organization meets the requirements ofthe support tests based on the years1994–1997 or 1995–1998, it does not meetthese tests unless it meets the requirementsbased on the 5-year computation period of1995–1999. An example of a substantial andmaterial change is the receipt of an unusuallylarge contribution that does not qualify as anunusual grant.

Effect on grantor or contributor. If anorganization is not able to meet either of thesupport tests because of a substantial ormaterial change in the sources of support, itsstatus with respect to a grantor or contributorwill not be affected until notice of a change instatus is made to the public (such as bypublication in the Internal Revenue Bulletin).

However, this rule does not apply to anygrantor or contributor who:

1) Was responsible for the substantial ormaterial change,

2) Was aware of it, or

3) Has acquired knowledge that the IRSgave notice to the organization that itwould no longer be classified as a sec-tion 509(a)(2) organization.

A grantor or contributor (other than oneof the organization's founders, creators, orfoundation managers) is not considered re-sponsible for, or aware of, the substantial andmaterial change if the grantor or contributormade the grant or contribution relying upona written statement by the grantee organiza-tion that the grant or contribution would notresult in the loss of the organization's classi-fication as an organization that is not a privatefoundation. The statement must be signed bya responsible officer of the grantee organiza-tion and must give enough information, in-cluding a summary of the pertinent financialdata for the 4 preceding years, to assure areasonably prudent person that the grant orcontribution would not result in the loss of thegrantee organization's classification as not aprivate foundation. If a reasonable doubt ex-ists as to the effect of the grant or contribu-tion, or if the grantor or contributor is one ofthe organization's founders, creators, orfoundation managers, the grantee organiza-tion may request a ruling from its EO areamanager for the protection of the grantor orcontributor.

If there is no written statement, a grantoror contributor will not be considered respon-sible for a substantial and material change if

the total gifts, grants, or contributions re-ceived from that grantor or contributor for atax year are 25% or less of the total supportreceived by the organization from all sourcesfor the 4 tax years immediately before the taxyear. (If the organization has not qualified aspublicly supported for those 5 years, seeSpecial computation period for new organ-izations, next.) For this purpose, total supportdoes not include support received from thatparticular grantor or contributor. The grantoror contributor cannot be a person who is in aposition of authority, such as a foundationmanager, or who obtains a position of au-thority or the ability to exercise control overthe organization because of the grant orcontribution.

Special computation period for new or-ganizations. A newly created organizationmay need several years to establish itsnormal sources of support. Organizationsgenerally are allowed a 5-year period to es-tablish that they meet the section 509(a)(2)support test. This is called the advance rulingperiod. If an organization can reasonably beexpected to meet the support test by the endof its advance ruling period, the IRS may is-sue it an advance ruling or determination let-ter. See Advance rulings for newly createdorganizations, later. This will permit the or-ganization to be treated as a section509(a)(2) organization for its advance rulingperiod.

An advance ruling or determination is nota ruling that the organization will meet therequirements of section 509(a)(2) during theadvance ruling period. An organization thatreceives an advance ruling or determinationletter must, at the expiration of the advanceruling period, establish that it satisfies thesection 509(a)(2) support requirements forthe years covered by the advance ruling, orthe organization will be presumed to be aprivate foundation under section 508(b).

Unusual grants. An unusual grant may beexcluded from the support test computationif it:

1) Was attracted by the publicly supportednature of the organization,

2) Was unusual or unexpected in amount,and

3) Would, because of its size, adverselyaffect the status of the organization asnormally meeting the one-third supporttest. (The organization must otherwisemeet the test in that year without benefitof the grant or contribution.)

Characteristics of an unusual grant. Agrant or contribution will be considered anunusual grant if the above 3 factors apply andit has all of the following characteristics. Ifthese factors and characteristics apply, theneven without the benefit of an advance ruling,grantors or contributors have assurance thatthey will not be considered responsible forsubstantial and material changes in the or-ganization's sources of support.

1) The grant or contribution is not made bya person (or related person) who createdthe organization or was a substantialcontributor to the organization before thegrant or contribution.

2) The grant or contribution is not made bya person (or related person) who is in aposition of authority, such as a founda-

Chapter 3 Section 501(c)(3) Organizations Page 35

tion manager, or who otherwise has theability to exercise control over the or-ganization. Similarly, the grant or contri-bution is not made by a person (or re-lated person) who, because of the grantor contribution, obtains a position of au-thority or the ability to otherwise exercisecontrol over the organization.

3) The grant or contribution is in the formof cash, readily marketable securities,or assets that directly further the organ-ization's exempt purposes, such as a giftof a painting to a museum.

4) The donee organization has receivedeither an advance or final ruling or de-termination letter classifying it as apublicly-supported organization and, ex-cept for an organization operating underan advance ruling or determination letter,the organization is actively engaged ina program of activities in furtherance ofits exempt purpose.

5) No material restrictions or conditionshave been imposed by the grantor orcontributor upon the organization inconnection with the grant or contribution.

6) If the grant or contribution is intended foroperating expenses, rather than capitalitems, the terms and amount of the grantor contribution are expressly limited toone year's operating expenses.

Ruling request. If there is any doubt thata grant or contribution may be excluded asan unusual grant, the grantee organizationmay request a ruling, submitting all of thenecessary information for making a determi-nation to its EO area manager. The IRS hasthe sole discretion of issuing a ruling, but if afavorable ruling is issued, it may be relied onby the grantor or contributor for purposes ofa charitable contributions deduction and bythe organization for purposes of the exclusionfor unusual grants. The organization shouldfollow the procedures set out in RevenueProcedure 2001–4 (or later update).

In addition to the characteristics listedabove, the following factors may be consid-ered by the IRS in determining if the grant orcontribution is an unusual grant.

1) Whether the contribution was a bequestor a transfer while living. A bequest willordinarily be given more favorable con-sideration than a transfer while living.

2) Whether, before the contribution, the or-ganization carried on an actual programof public solicitation and exempt activ-ities and was able to attract a significantamount of public support.

3) Whether the organization may reason-ably be expected to attract a significantamount of public support after the con-tribution. Continued reliance on unusualgrants to fund an organization's currentoperating expenses may be evidencethat the organization cannot attract fu-ture support from the general public.

4) Whether the organization met the one-third support test in the past without thebenefit of any exclusions of unusualgrants.

5) Whether the organization has a repre-sentative governing body.

Example 1. In 1995, Y, an organizationdescribed in section 501(c)(3), was createdby Marshall Pine, the holder of all the com-mon stock in M corporation, Lisa, Marshall'swife, and Edward Forest, Marshall's businessassociate. Each of the three creators madesmall cash contributions to Y to enable it tobegin operations. The purpose of Y was tosponsor and equip athletic teams composedof underprivileged children of the community.Between 1995 and 1998, Y was able to raisesmall amounts of contributions throughfundraising drives and selling admission tosome of the sponsored sporting events.

For its first year of operations, it was de-termined that Y was excluded from the defi-nition of private foundation under the pro-visions of section 509(a)(2). Marshall madesmall contributions to Y from time to time. Atall times, the operations of Y were carried outon a small scale, usually being restricted tothe sponsorship of two to four baseball teamsof underprivileged children.

In 1999, M recapitalized and created a firstand second class of 6% nonvoting preferredstock, most of which was held by Marshalland Lisa. Marshall then contributed 49% ofhis common stock in M to Y. Marshall, Lisa,and Edward continued to be active partic-ipants in the affairs of Y from its creationthrough 1999. Marshall's contribution of M'scommon stock was 90% of Y's total supportfor 1999. Although Y could satisfy the one-third support test on the basis of the 4 taxyears before 1999, a combination of the factsand circumstances preclude Marshall's con-tribution of M's common stock in 1999 frombeing excluded as an unusual grant.Marshall's contribution in 1999 was a sub-stantial and material change in Y's sourcesof support and on the basis of the 5-year pe-riod (1995 to 1999), Y would not be consid-ered as normally meeting the one-third sup-port test for the tax years 1999 (the currenttax year) and 2000 (the immediately followingtax year).

Example 2. M, an organization describedin section 501(c)(3), was organized to pro-mote the appreciation of ballet in a particularregion of the United States. Its principal ac-tivities will consist of erecting a theater for theperformance of ballet and the organizationand operation of a ballet company. The gov-erning body of M consists of nine prominentunrelated citizens living in the region whohave either an expertise in ballet or a stronginterest in encouraging appreciation of ballet.To provide sufficient capital for M to begin itsactivities, X, a private foundation, makes agrant of $500,000 in cash to M. AlthoughAlbert Cedar, the creator of X, is one of thenine members of M's governing body, wasone of M's original founders, and continuesto lend his prestige to M's activities andfundraising efforts, Albert does not, directlyor indirectly, exercise any control over M. Bythe close of its first tax year, M also has re-ceived a significant amount of support froma number of smaller contributions andpledges from members of the general public.Upon the opening of its first season of balletperformances, M expects to charge admis-sion to the general public. Under these cir-cumstances, the grant by X to M may be ex-cluded as an unusual grant.

Advance rulings for newly created organ-izations. Newly created organizations gen-erally are allowed an advance ruling periodof 5 years.

An organization that is claiming on itsForm 1023 (or other section 508(b) notice) tobe described under section 509(a)(2) musthave operated for at least 1 tax year consist-ing of at least 8 months before the IRS willmake a final determination of its status.However, if an organization can show that itcan reasonably be expected to qualify undersection 509(a)(2), the IRS will issue an ad-vance ruling or determination letter on theorganization's private foundation status.Generally, an advance ruling or determinationprovides that an organization will be treatedas an organization described in section509(a)(2) for an advance ruling period of 5years.

A newly created organization may requesta ruling or determination that it will be treatedas a section 509(a)(2) organization for its first5 tax years. This request must be filed witha consent to extend the statute (Form 872–C)that in effect states the organization will besubject to private foundation taxes (undersection 4940) if it fails to qualify as not a pri-vate foundation during the 5-year advanceruling period.

In determining whether an organizationcan meet the support tests, the basic consid-eration is whether its organizational structure,proposed programs or activities, and intendedmethod of operation will attract the type ofbroadly based support from the general pub-lic, public charities, and governmental unitsthat is necessary to meet the tests. The factsthat are relevant to this determination and theweight accorded each fact may differ fromcase to case. A favorable determination willnot be made when the facts indicate that anorganization is likely to receive less thanone-third of its support from permittedsources or to receive more than one-third ofits support from gross investment income andunrelated business taxable income.

All pertinent facts and circumstances aretaken into account in determining whether theorganizational structure, programs or activ-ities, and method of operation of an organ-ization will enable it to meet the tests for itsadvance ruling period (discussed earlier).Some pertinent factors considered are:

1) Whether the organization has or willhave a governing body that is composedof persons having special knowledge inthe particular field in which the organ-ization is operating or of communityleaders, such as elected officials, mem-bers of the clergy, and educators, or, inthe case of a membership organization,of individuals elected under the organ-ization's governing instrument or bylawsby a broadly based membership,

2) Whether a substantial part of the organ-ization's initial funding is to be providedby the general public, by public charities,or by government grants rather than bya limited number of grantors or contrib-utors who are disqualified persons withrespect to the organization,

3) Whether a substantial proportion of theorganization's initial funds are placed,or will remain, in an endowment andwhether the investment of those funds isunlikely to result in more than one-thirdof its total support being received fromgross investment income and from un-related business taxable income in ex-cess of the tax imposed on that income,

Page 36 Chapter 3 Section 501(c)(3) Organizations

4) Whether an organization that carries onfundraising activities has developed aconcrete plan for solicitation of funds ona community or area-wide basis,

5) Whether an organization that carries oncommunity service activities has a con-crete program to carry out its work in thecommunity,

6) Whether membership dues for individual(rather than institutional) members of anorganization that carries on educationor other exempt activities for or on behalfof members have been fixed at ratesdesigned to make membership availableto a broad cross section of the publicrather than to restrict membership to alimited number of persons, and

7) Whether an organization that providesgoods, services, or facilities is or will berequired to make its services, facilities,performances, or products available (re-gardless of whether a fee is charged) tothe general public, public charities, orgovernmental units rather than to a lim-ited number of persons or organizations.

Reliance period. The reliance period fora ruling or determination letter begins with theinception of the organization and ends 90days after the advance ruling period. The re-liance period will be extended until a finaldetermination is made of the organization'sstatus only if the organization submits, withinthe 90-day period, the necessary informationto determine whether it meets the require-ments for a section 509(a)(2) organization.

However, this reliance period does notapply to the section 4940 excise tax on netinvestment income. Therefore, if it is laterdetermined that the organization was a pri-vate foundation from its inception, the tax onnet investment income will be due withoutregard to the ruling or determination letter.

Grantors or contributors. If a ruling ordetermination letter is terminated before theexpiration of the reliance period, the statusof a charitable contribution deduction of agrantor or contributor will not be affected untilnotice of change of status is made public(such as by publication in the Internal Reve-nue Bulletin).

However, this rule will not apply if thegrantor or contributor is responsible for, oraware of, the act or failure to act that resultedin the organization's loss of section 509(a)(2)status, or if a grantor or contributor acquiresknowledge that the IRS had given notice ofthe loss of status to the organization.

Failure to obtain advance ruling. Seethe corresponding discussion under Failureto obtain advance ruling on page 32.

Gifts, contributions, and grants distin-guished from gross receipts. In deter-mining whether an organization normally re-ceives more than one-third of its support frompermitted sources, include all gifts, contribu-tions, and grants received from permittedsources in the numerator of the support frac-tion in each tax year. However, gross receiptsfrom admissions, sales of merchandise, per-formance of services, or furnishing facilities,in an activity that is not an unrelated trade orbusiness, are includible in the numerator ofthe support fraction in any tax year only to theextent that the amounts received from anyperson or from any bureau or similar agencyof a governmental unit are not more than thegreater of $5,000 or 1% of support.

Gifts and contributions. Any paymentof money or transfer of property without ade-quate consideration is considered a gift orcontribution. When payment is made orproperty is transferred as consideration foradmissions, sales of merchandise, perform-ance of services, or furnishing facilities to thedonor, the status of the payment or transferunder section 170(c) determines whether andto what extent the payment or transfer is agift or contribution as distinguished from grossreceipts from related activities.

The amount includible in computing sup-port from gifts, grants, or contributions ofproperty or use of property is the fair marketor rental value of the property at the date ofthe gift or contribution.

Example. P is a local agricultural cluband is an organization described in section501(c)(3). It makes awards at its annual fairfor outstanding specimens of produce andlivestock to encourage interest and profi-ciency by young people in farming and raisinglivestock. Most of these awards are cash orother property donated by local businessmen.When the awards are made, the donors aregiven recognition for their donations by beingidentified as the donor of the award. Therecognition given to donors is merely inci-dental to the making of the award to worthyyoungsters. For these reasons, the donationsare contributions. The amount includible incomputing support is equal to the cash con-tributed or the fair market value of otherproperty on the dates contributed.

Grants. Grants often contain certainterms and conditions imposed by the grantor.Because of the imposition of terms and con-ditions, the frequent similarity of public pur-poses of grantor and grantee, and the possi-bility of benefit to the grantor, amountsreceived as grants for carrying on exemptactivities are sometimes difficult to distinguishfrom amounts received as gross receiptsfrom carrying on exempt activities.

In distinguishing the term gross receiptsfrom the term grants, the term gross receiptsmeans amounts received from an activity thatis not an unrelated trade or business, if aspecific service, facility, or product is providedto serve the direct and immediate needs ofthe payor rather than primarily to confer a di-rect benefit on the general public. In general,payments made primarily to enable the payorto realize or receive some economic orphysical benefit as a result of the service, fa-cility, or product obtained will be treated asgross receipts by the payee.

For example, a profit-making organization,primarily for its own betterment, contracts witha nonprofit organization for a service from thatorganization. Any payments received by thenonprofit organization (whether from theprofit-making organization or from anothernonprofit) for similar services are primarily forthe benefit of the payor and are thereforegross receipts, rather than grants.

Research leading to the development oftangible products for the use or benefit of apayor generally will be treated as a serviceprovided to serve the direct and immediateneeds of the payor, while basic research orstudies carried on in the physical or socialsciences generally will be treated as primarilyto confer a direct benefit upon the generalpublic.

Medicare and Medicaid payments aregross receipts from the exercise or perform-ance of an exempt function. The individual

patient, not a governmental unit, actuallycontrols the ultimate recipient of these pay-ments. Therefore, Medicare and Medicaidreceipts for services provided each patientare included as gross receipts to the extentthey are not more than the greater of $5,000or 1% of the organization's total support forthe tax year.

Membership fees distinguished fromgross receipts. The fact that a membershiporganization provides services, admissions,facilities, or merchandise to its members aspart of its overall activities will not, in itself,result in the classification of fees receivedfrom members as gross receipts subject tothe $5,000 or 1% limit rather than member-ship fees. However, if an organization usesmembership fees as a means of selling ad-missions, merchandise, services, or the useof facilities to members of the general publicwho have no common goal or interest (otherthan the desire to buy the admissions, mer-chandise, services, or use of facilities), thefees are not membership fees but are grossreceipts.

On the other hand, to the extent the basicpurpose of the payment is to provide supportfor the organization rather than to buy ad-missions, merchandise, services, or the useof facilities, the payment is a membership fee.

Bureau defined. The term any bureau orsimilar agency of a governmental unit fordetermining amounts subject to the $5,000or 1% limit means a specialized operating unitof the executive, judicial, or legislative branchof government in which business is conductedunder certain rules and regulations. Since theterm bureau refers to a unit functioning at theoperating, as distinct from the policy-making,level of government, it normally means asubdivision of a department of government.The term would not usually include thoselevels of government that are basicallypolicy-making or administrative, such as theoffice of the Secretary or Assistant Secretaryof a department, but would consist of thehighest operational level under the policy-making or administrative levels.

Amounts received from a unit functioningat the policy-making or administrative levelof government are treated as received fromone bureau or similar agency of the unit. Unitsof a governmental agency above the operat-ing level are combined and considered aseparate bureau for this purpose. Thus, anorganization that has gross receipts from botha policy-making or administrative unit and anoperational unit of a department will betreated as having gross receipts from twobureaus. For this purpose, the Departmentsof Air Force, Army, and Navy are separatedepartments and each has its own policy-making, administrative, and operating units.

Example 1. The Bureau for Africa and theBureau for Latin America are consideredseparate bureaus. Each is an operating unitunder the Administrator of the Agency forInternational Development, a policy-makingofficial. If an organization had gross receiptsfrom both of these bureaus, the amount ofgross receipts from each would be subject tothe greater of $5,000 or the 1% limit.

Example 2. A bureau is an operating unitunder the administrative office of the Execu-tive Director. The subdivisions of the bureauare Geographic Areas and Project Develop-ment Staff. If an organization had gross re-

Chapter 3 Section 501(c)(3) Organizations Page 37

ceipts from these subdivisions, the total grossreceipts from these subdivisions would beconsidered gross receipts from the same bu-reau and would be subject to the greater of$5,000 or the 1% limit.

Grants from public charities. For purposesof the one-third support test, grants receivedfrom a section 509(a)(1) organization (publiccharity) are generally includible in full incomputing the numerator of the support frac-tion for that tax year.

However, if the amount received is con-sidered an indirect contribution from one ofthe public charity's donors, it will retain itscharacter as a contribution from the donor,and if, for example, the donor is a substantialcontributor to the ultimate recipient, theamount is excluded from the numerator of thesupport fraction. If a public charity makes bothan indirect contribution from its donor and anadditional grant to the ultimate recipient, theindirect contribution is treated as made first.

An indirect contribution is one that is ex-pressly or impliedly earmarked by the donoras being for, or for the benefit of, a particularrecipient rather than for a particular purpose.

Method of accounting. An organization'ssupport is determined solely on the cash re-ceipts and disbursements method of ac-counting. For example, if a grantor makes agrant to an organization payable over a termof years, the grant will be includible in thesupport fraction of the grantee organizationonly when and to the extent amounts payableunder the grant are received by the grantee.

Gross receipts from a related activity.When the charitable purpose of an organiza-tion described in section 501(c)(3) is accom-plished through furnishing facilities for a rentalfee or loans to a particular class of persons,such as aged, sick, or needy persons, thesupport received from those persons will beconsidered gross receipts from a related ex-empt activity rather than gross investment in-come or unrelated business taxable income.

However, if the organization also furnishesfacilities or loans to persons who are notmembers of a particular class and furnishingthe facilities or funds does not contribute im-portantly to accomplishing the organization'sexempt purposes, the support received fromfurnishing the facilities or funds will be con-sidered rents or interest and will be treatedas gross investment income or unrelatedbusiness taxable income.

Example. X, an organization describedin section 501(c)(3), is organized and oper-ated to provide living facilities for needy wid-ows of deceased servicemen. X charges thewidows a small rental fee for the use of thefacilities. Since X is accomplishing its exemptpurpose through the rental of the facilities, thesupport received from the widows is consid-ered gross receipts from a related exemptactivity. However, if X rents part of its facilitiesto persons having no relationship to X's ex-empt purpose, the support received fromthese rentals will be considered gross invest-ment income or unrelated business taxableincome.

Section 509(a)(3) Organizations Section 509(a)(3) excludes from the definitionof private foundation those organizations thatmeet all of the three following requirements.

1) The organization must be organized and

at all times thereafter operated exclu-sively for the benefit of, to perform thefunctions of, or to carry out the purposesof one or more specified organizations(which can be either domestic or foreign)as described in section 509(a)(1) or509(a)(2). These section 509(a)(1) and509(a)(2) organizations are commonlycalled publicly-supported organiza-tions.

2) The organization must be operated,supervised, or controlled by or in con-nection with one or more of the organ-izations described in section 509(a)(1)or 509(a)(2).

3) The organization must not be controlleddirectly or indirectly by disqualified per-sons (defined later) other than founda-tion managers and other than one ormore organizations described in section509(a)(1) or 509(a)(2).

Section 509(a)(3) differs from the otherprovisions of section 509 that describe apublicly-supported organization. Instead ofdescribing an organization that conducts aparticular kind of activity or that receives fi-nancial support from the general public, sec-tion 509(a)(3) describes organizations thathave established certain relationships in sup-port of section 509(a)(1) or 509(a)(2) organ-izations. Thus, an organization may qualifyas other than a private foundation eventhough it may be funded by a single donor,family, or corporation. This kind of fundingordinarily would indicate private foundationstatus, but a section 509(a)(3) organizationhas limited purposes and activities and givesup a significant degree of independence.

The requirement in (2) above provides thata supporting (section 509(a)(3)) organizationhave one of three types of relationships withone or more publicly- supported (section509(a)(1) or 509(a)(2)) organizations. It mustbe:

1) Operated, supervised, or controlled by apublicly-supported organization,

2) Supervised or controlled in connectionwith a publicly-supported organization,or

3) Operated in connection with one or morepublicly-supported organizations.

More than one type of relationship may existbetween a supporting organization and apublicly-supported organization. Any relation-ship, however, must insure that the support-ing organization will be responsive to theneeds or demands of, and will be an integralpart of or maintain a significant involvementin, the operations of one or more publicly-supported organizations.

The first two relationships, operated,supervised, or controlled by and super-vised or controlled in connection with, arebased on an existence of majority control ofthe governing body of the supporting organ-ization by the publicly-supported organization.They have the same rules for meeting thetests under requirement (1) and are dis-cussed as Category one in the following dis-cussion. The operated in connection withrelationship requires that the supporting or-ganization be responsive to and have opera-tional relationships with publicly-supportedorganizations. This third relationship has dif-ferent rules for meeting the requirement (1)

tests and is discussed separately as Categorytwo, later.

Category one. This category includes or-ganizations either operated, supervised, orcontrolled by or supervised or controlledin connection with organizations describedin section 509(a)(1) or 509(a)(2).

These kinds of organizations have a gov-erning body that either includes a majority ofmembers elected or appointed by one ormore publicly-supported organizations or thatconsists of the same persons that control ormanage the publicly-supported organizations.If an organization is to qualify under this cat-egory, it also must meet an organizationaltest, an operational test, and not be controlledby disqualified persons. These requirementsare covered later in this discussion.

Operated, supervised, or controlled by.Each of these terms, as used for supportingorganizations, presupposes a substantial de-gree of direction over the policies, programs,and activities of a supporting organization byone or more publicly-supported organizations.The relationship required under any one ofthese terms is comparable to that of a parentand subsidiary, in which the subsidiary is un-der the direction of and is accountable or re-sponsible to the parent organization. This re-lationship is established when a majority ofthe officers, directors, or trustees of the sup-porting organization are appointed or electedby the governing body, members of the gov-erning body, officers acting in their officialcapacity, or the membership of one or morepublicly-supported organizations.

A supporting organization may be oper-ated, supervised, or controlled by one or morepublicly-supported organizations even thoughits governing body is not made up of repre-sentatives of the specified publicly-supportedorganizations for whose benefit it is operated.This occurs only if it can be demonstrated thatthe purposes of the publicly-supported or-ganizations are carried out by benefiting thespecified publicly-supported organizations(discussed, later, under Specified organiza-tions).

Supervised or controlled in connectionwith. The control or management of thesupporting organization must be vested in thesame persons that control or manage thepublicly-supported organization. In order foran organization to be supervised or controlledin connection with a publicly-supported or-ganization, common supervision or control bythe persons supervising or controlling bothorganizations must exist to insure that thesupporting organization will be responsive tothe needs and requirements of the publicly-supported organization.

An organization will not be consideredsupervised or controlled in connection withone or more publicly-supported organizationsif it merely makes payments (mandatory ordiscretionary) to the publicly-supported or-ganizations. This is true even if the obligationto make payments is legally enforceable andthe organization's governing instrument con-tains provisions requiring the distribution.These arrangements do not provide a suffi-cient connection between the payor organ-ization and the needs and requirements of thepublicly-supported organizations to constitutesupervision or control in connection with theorganizations.

Organizational and operational tests. Toqualify as a section 509(a)(3) organization(supporting organization), the organization

Page 38 Chapter 3 Section 501(c)(3) Organizations

must be both organized and operated ex-clusively for the purposes set out in require-ment (1) at the beginning of this section. Ifan organization fails to meet either the or-ganizational or the operational test, it cannotqualify as a supporting organization.

In the case of supporting organizationscreated before 1970, the organizational andoperational tests apply as of January 1, 1970.Therefore, even though the original articlesof organization did not limit its purposes tothose in requirement (1), and even though itoperated before 1970 for some purpose otherthan those in requirement (1), an organizationwill satisfy the organizational and operationaltests if, on January 1, 1970, and at all timesthereafter, it is so constituted as to complywith these tests.

Organizational test. An organization isorganized exclusively for one or more of thepurposes specified in requirement (1) only ifits articles of organization:

1) Limit the purposes of the organization toone or more of those purposes,

2) Do not expressly empower the organ-ization to engage in activities that are notin furtherance of those purposes,

3) Specify (as explained, later, underSpecified organizations) the publicly-supported organizations on whose be-half the organization is operated, and

4) Do not expressly empower the organ-ization to operate to support or benefitany organization other than the onesspecified in item (3).

In meeting the organizational test, the or-ganization's purposes as stated in its articlesmay be as broad as, or more specific than,the purposes set forth in requirement (1) atthe beginning of the discussion of Section509(a)(3) Organizations. Therefore, an or-ganization that by the terms of its articles isformed for the benefit of one or more spec-ified publicly-supported organizations will, if itotherwise meets the other requirements, beconsidered to have met the organizationaltest.

For example, articles stating that an or-ganization is formed to perform the publishingfunctions of a specified university are enoughto comply with the organizational test. An or-ganization operated, supervised, or controlledby, or supervised or controlled in connectionwith, one or more publicly-supported organ-izations to carry out the purposes of thoseorganizations, will be considered to have metthese requirements if the purposes set forthin its articles are similar to but no broaderthan the purposes set forth in the articles ofits controlling organizations. If, however, theorganization by which it is operated, super-vised, or controlled is a publicly-supportedsection 501(c)(4), 501(c)(5), or 501(c)(6) or-ganization, the supporting organization willbe considered to have met these require-ments if its articles require it to carry oncharitable, etc., activities within the meaningof section 170(c)(2).

Limits. An organization is not organizedexclusively for the purposes specified in re-quirement (1) if its articles expressly permit itto operate, to support, or to benefit any or-ganization other than the specified publicly-supported organizations. It will not meet theorganizational test even though the actualoperations of the organization have been ex-clusively for the benefit of the specifiedpublicly-supported organizations.

Specified organizations. In order to meetrequirement (1), an organization must be or-ganized and operated exclusively to supportor benefit one or more specified publicly-supported organizations. The manner inwhich the publicly-supported organizationsmust be specified in the articles will dependon whether the supporting organization isoperated, supervised, or controlled by orsupervised or controlled in connectionwith the organizations or whether it is oper-ated in connection with the organizations.

Generally, the articles of the supportingorganization must designate each of thespecified organizations by name, unless:

1) The supporting organization is operated,supervised, or controlled by orsupervised or controlled in con-nection with one or more publicly-supported organizations and the articlesof organization of the supporting organ-ization require that it be operated tosupport or benefit one or more benefi-ciary organizations that are designatedby class or purpose and include:

a) The publicly-supported organiza-tions referred to above (withoutdesignating the organizations byname), or

b) Publicly-supported organizationsthat are closely related in purposeor function to those publicly-supported organizations, or

2) A historic and continuing relationshipexists between the supporting organiza-tion and the publicly-supported organ-izations, and because of this relation-ship, a substantial identity of interestshas developed between the organiza-tions.

If a supporting organization is operated,supervised, or controlled by, or is supervisedor controlled in connection with, one or morepublicly-supported organizations, it will not failthe test of being organized for the benefit ofspecified organizations solely because its ar-ticles:

1) Permit the substitution of one publicly-supported organization within a desig-nated class for another publicly-supported organization either in thesame or a different class designated inthe articles,

2) Permit the supporting organization tooperate for the benefit of new or addi-tional publicly-supported organizationsof the same or a different class desig-nated in the articles, or

3) Permit the supporting organization tovary the amount of its support amongdifferent publicly-supported organiza-tions within the class or classes of or-ganizations designated by the articles.

See also the rules considered under the Or-ganizational test, in the later discussion fororganizations in Category two.

Operational test — permissible benefi-ciaries. A supporting organization will beregarded as operated exclusively to supportone or more specified publicly-supported or-ganizations only if it engages solely in activ-ities that support or benefit the specified or-ganizations. These activities may includemaking payments to or for the use of, or pro-viding services or facilities for, individual

members of the charitable class benefited bythe specified publicly-supported organization.

For example, a supporting organizationmay make a payment indirectly through an-other unrelated organization to a member ofa charitable class benefited by a specifiedpublicly-supported organization, but only if thepayment is a grant to an individual rather thana grant to an organization. Similarly, an or-ganization will be regarded as operated ex-clusively to support or benefit one or morespecified publicly-supported organizations ifit supports or benefits a section 501(c)(3) or-ganization, other than a private foundation,that is operated, supervised, or controlled di-rectly by or in connection with a publicly-supported organization, or an organizationthat is a publicly-owned college or university.However, an organization will not be regardedas one that is operated exclusively to supportor benefit a publicly-supported organization ifany part of its activities is in furtherance of apurpose other than supporting or benefitingone or more specified publicly-supported or-ganizations.

Operational test — permissible activ-ities. A supporting organization does nothave to pay its income to the publicly-supported organizations to meet the opera-tional test. It may satisfy the test by using itsincome to carry on an independent activityor program that supports or benefits thespecified publicly-supported organizations.All such support, however, must be limited topermissible beneficiaries described earlier.The supporting organization also may engagein fundraising activities, such as solicitations,fundraising dinners, and unrelated trade orbusiness, to raise funds for the publicly-supported organizations or for the permissiblebeneficiaries.

Absence of control by disqualified per-sons. The third requirement an organizationmust meet to qualify as a supporting organ-ization requires that the organization not becontrolled directly or indirectly by one or moredisqualified persons (other than foundationmanagers or one or more publicly-supportedorganizations).

Disqualified persons. For the purposesof the rules discussed in this publication, thefollowing persons are considered disqualifiedpersons:

1) All substantial contributors to the foun-dation.

2) All foundation managers of the founda-tion.

3) An owner of more than 20% of:

a) The total combined voting power ofa corporation that is (during suchownership) a substantial contributorto the foundation,

b) The profits interest of a partnershipthat is (during such ownership) asubstantial contributor to the foun-dation, or

c) The beneficial interest of a trust orunincorporated enterprise that is(during such ownership) a substan-tial contributor to the foundation.

4) A member of the family of any of the in-dividuals just listed.

5) A corporation of which more than 35%of the total combined voting power isowned by persons just listed.

Chapter 3 Section 501(c)(3) Organizations Page 39

6) A partnership of which more than 35%of the profits interest is owned by per-sons described in (1), (2), (3), or (4).

7) A trust, or estate, of which more than35% of the beneficial interest is ownedby persons described in (1), (2), (3), or(4).

Remember, however, that foundation man-agers and publicly-supported organizationsare not disqualified persons for purposes ofthe third requirement under section 509(a)(3).

If a person who is a disqualified personwith respect to a supporting organization,such as a substantial contributor, is appointedor designated as a foundation manager of thesupporting organization by a publicly-supported beneficiary organization to serveas the representative of the publicly-supported organization, that person is still adisqualified person, rather than a represen-tative of the publicly-supported organization.

An organization is considered controlledfor this purpose if the disqualified persons,by combining their votes or positions of au-thority, may require the organization to per-form any act that significantly affects its op-erations or may prevent the organization fromperforming the act. This includes, but is notlimited to, the right of any substantial contrib-utor or spouse to designate annually the re-cipients from among the publicly-supportedorganizations of the income from his or hercontribution. Except as explained under Proofof independent control, next, a supporting or-ganization will be considered to be controlleddirectly or indirectly by one or more disqual-ified persons if the voting power of thosepersons is 50% or more of the total votingpower of the organization's governing body,or if one or more of those persons have theright to exercise veto power over the actionsof the organization.

Thus, if the governing body of a founda-tion is composed of five trustees, none ofwhom has a veto power over the actions ofthe foundation, and no more than two trusteesare at any time disqualified persons, thefoundation is not considered controlled di-rectly or indirectly by one or more disqualifiedpersons by reason of this fact alone. How-ever, all pertinent facts and circumstances(including the nature, diversity, and incomeyield of an organization's holdings, the lengthof time particular stocks, securities, or otherassets are retained, and its manner of exer-cising its voting rights with respect to stocksin which members of its governing body alsohave some interest) are considered in deter-mining whether a disqualified person does infact indirectly control an organization.

Proof of independent control. An or-ganization is permitted to establish to thesatisfaction of the IRS that disqualified per-sons do not directly or indirectly control it. Forexample, in the case of a religious organiza-tion operated in connection with a church, thefact that the majority of the organization'sgoverning body is composed of lay personswho are substantial contributors to the or-ganization will not disqualify the organizationunder section 509(a)(3) if a representative ofthe church, such as a bishop or other official,has control over the policies and decisionsof the organization.

Category two. This category includes or-ganizations operated in connection withone or more organizations described in sec-tion 509(a)(1) or 509(a)(2).

This kind of section 509(a)(3) organizationis one that has certain types of operationalrelationships. If an organization is to qualifyas a section 509(a)(3) organization becauseit is operated in connection with one ormore publicly-supported organizations, itmust not be controlled by disqualified persons(as described earlier) and it must meet anorganizational test, a responsiveness test, anintegral-part test, and an operational test.

Organizational test. This test requires thatthe organization, in its governing instrument:

1) Limit its purposes to supporting one ormore publicly-supported organizations,

2) Designate the organizations operated,supervised, or controlled by, and

3) Not have express powers inconsistentwith these purposes.

These tests apply to all supporting organiza-tions.

In the case of an organization that is op-erated in connection with one or morepublicly-supported organizations, however,the designation requirement under the or-ganizational test can be satisfied using eitherof the following two methods.

Method one. If an organization is organ-ized and operated to support one or morepublicly-supported organizations and it is op-erated in connection with that type of or-ganization or organizations, then, its articlesof organization must designate the specifiedorganizations by name to satisfy the test. Buta supporting organization that has one ormore specified organizations designated byname in its articles will not fail the organiza-tional test solely because its articles:

1) Permit a publicly-supported organization,that is designated by class or purposerather than by name, to be substitutedfor the publicly-supported organizationor organizations designated by name inthe articles, but only if the substitution isconditioned upon the occurrence of anevent that is beyond the control of thesupporting organization, such as loss ofexemption, substantial failure or aban-donment of operations, or dissolution ofthe organization or organizations desig-nated in the articles,

2) Permit the supporting organization tooperate for the benefit of an organizationthat is not a publicly-supported organ-ization, but only if the supporting organ-ization is currently operating for thebenefit of a publicly-supported organiza-tion and the possibility of its operating forthe benefit of other than a publicly-supported organization is remote, or

3) Permit the supporting organization tovary the amount of its support betweendifferent designated organizations, aslong as it meets the requirements of theintegral-part test (discussed later) withrespect to at least one beneficiary or-ganization.

If the beneficiary organization referred toin (2) is not a publicly-supported organization,the supporting organization will not meet theoperational test. Therefore, if a supportingorganization substituted a beneficiary otherthan a publicly-supported organization andoperated in support of that beneficiary, thesupporting organization would not be onedescribed in section 509(a)(3).

Method two. If a historic and continuingrelationship exists between the supportingorganization and the publicly-supported or-ganizations, and because of this relationship,a substantial identity of interests has devel-oped between the organizations, then the ar-ticles of organization will not have to desig-nate the specified organization by name.

Responsiveness test. An organization willmeet this test if it is responsive to the needsor demands of the publicly-supported organ-izations. To meet this test, either of the fol-lowing must be satisfied.

1) The publicly-supported organizationsmust elect, appoint, or maintain a closeand continuous working relationship withthe officers, directors, or trustees of thesupporting organization. (Consequently,the officers, directors, or trustees of thepublicly-supported organizations have asignificant voice in the investment poli-cies of the supporting organization, thetiming of grants and the manner ofmaking them, the selection of recipients,and generally the use of the income orassets of the supporting organization.)

2) The supporting organization is a chari-table trust under state law, each speci-fied publicly-supported organization is anamed beneficiary under the trust'sgoverning instrument, and the benefi-ciary organization has the power to en-force the trust and compel an accountingunder state law.

For an organization that was supportingor benefiting one or more publicly-supportedorganizations before November 20, 1970,additional facts and circumstances, such asa historic and continuing relationship betweenorganizations, may be taken into account inaddition to the factors described earlier toestablish compliance with the responsivenesstest.

Integral-part test. The organization will meetthis test if it maintains a significant involve-ment in the operations of one or morepublicly-supported organizations and theseorganizations are in turn dependent upon thesupporting organization for the type of supportthat it provides. To meet this test, either ofthe following must be satisfied (unless transi-tional rules, discussed later, apply):

1) The activities engaged in for, or on be-half of, the publicly-supported organiza-tions are activities to perform the func-tions of or to carry out the purposes ofthe organizations, and, but for the in-volvement of the supporting organiza-tion, would normally be engaged in bythe publicly-supported organizationsthemselves, or

2) The supporting organization makes pay-ments of substantially all of its income to,or for the use of, publicly-supported or-ganizations, and the amount of supportreceived by one or more of thesepublicly-supported organizations isenough to insure the attentiveness ofthese organizations to the operations ofthe supporting organization.

If item (2) is being relied on, a substantialamount of the total support of the supportingorganization also must go to those publicly-supported organizations that meet theattentiveness requirement with respect to the

Page 40 Chapter 3 Section 501(c)(3) Organizations

supporting organization. Except as explainedin the next paragraph, the amount of supportreceived by a publicly-supported organizationmust represent a large enough part of theorganization's total support to insure suchattentiveness. In applying this, if the support-ing organization makes payments to, or forthe use of, a particular department or schoolof a university, hospital, or church, the totalsupport of the department or school must besubstituted for the total support of the benefi-ciary organization.

Even when the amount of support re-ceived by a publicly-supported beneficiaryorganization does not represent a largeenough part of the beneficiary organization'stotal support, the amount of support receivedfrom a supporting organization may be largeenough to meet the requirements of item (2)of the integral-part test if it can be demon-strated that, in order to avoid the interruptionof a particular function or activity, the benefi-ciary organization will be sufficiently attentiveto the operations of the supporting organiza-tion. This may occur when either the sup-porting organization or the beneficiary organ-ization earmarks the support received fromthe supporting organization for a particularprogram or activity, even if the program oractivity is not the beneficiary organization'sprimary program or activity, as long as theprogram or activity is a substantial one.

All factors, including the number of ben-eficiaries, the length and nature of the re-lationship between the beneficiary and sup-porting organization, and the purpose towhich the funds are put, will be considered indetermining whether the amount of supportreceived by a publicly-supported beneficiaryorganization is large enough to insure theattentiveness of the organization to the oper-ations of the supporting organization.

Normally, the attentiveness of a benefi-ciary organization is motivated by theamounts received from the supporting organ-ization. Thus, the more substantial theamount involved, in terms of a percentage ofthe publicly-supported organization's totalsupport, the greater the likelihood that therequired degree of attentiveness will bepresent. However, in determining whether theamount received from the supporting organ-ization is large enough to insure theattentiveness of the beneficiary organizationto the operations of the supporting organiza-tion (including attentiveness to the nature andyield of the supporting organization's invest-ments), evidence of actual attentiveness bythe beneficiary organization is of almost equalimportance.

Imposing this requirement is merely oneof the factors in determining whether a sup-porting organization is complying with theattentiveness test. The absence of this re-quirement will not preclude an organizationfrom classification as a supporting organiza-tion if it complies with the other factors.

However, when none of the beneficiaryorganizations are dependent upon the sup-porting organization for a large enoughamount of their support, the requirements ofitem (2) of the integral-part test will not besatisfied, even though the beneficiary organ-izations have enforceable rights against thesupporting organization under state law.

If an organization cannot meet the re-quirements of item (2) of the integral-part testfor its current tax year solely because theamount received by one or more of the ben-eficiaries from the supporting organization isno longer large enough, it can still qualify

under the integral-part test if it can establishthat it has met the requirements of item (2)of the integral-part test for any 5-year periodand that there has been an historic and con-tinuing relationship of support between theorganizations between the end of the 5-yearperiod and the tax year in question.

Transitional rule. A charitable trust cre-ated before November 20, 1970, will meet theintegral-part test if for tax years beginning af-ter October 16, 1972, the trustee makes an-nual written reports to all publicly-supportedbeneficiary organizations giving a descriptionof the trust assets (including a detailed list ofthe assets and the income produced by them)and if the following five conditions have beenmet continuously since November 20, 1970.

1) All the unexpired interests in the trust aredevoted to charitable purposes.

2) The trust did not receive any grant, con-tribution, bequest, or other transfer onor after November 20, 1970.

3) The trust is required by its governing in-strument to distribute all its net incomecurrently to designated publicly-supported beneficiary organizations.

4) The trustee does not have discretion tovary either the beneficiaries or theamounts payable to the beneficiaries.

5) None of the trustees would be disqual-ified persons (other than foundationmanagers) with respect to the trust if thetrust were treated as a private founda-tion.

Operational test. The requirements formeeting the operational test for organizationsoperated, supervised, or controlled bypublicly-supported organizations (discussedearlier, beginning on page 29, under Qualify-ing As Publicly Supported) have limited ap-plicability to organizations operated in con-nection with one or more publicly-supportedorganizations. This is because the operationalrequirements of the integral-part test, justdiscussed, generally are more specific thanthe general rules found for the operationaltest in the preceding category. However, asupporting organization can fail both theintegral-part test and the operational test if itconducts activities of its own that do notconstitute activities or programs that would,but for the supporting organization, have beenconducted by any publicly-supported organ-ization named in the supporting organization'sgoverning instrument. A similar result occursfor such activities or programs that would nothave been conducted by an organization withwhich the supporting organization has estab-lished an historic and continuing relationship.

An organization operated in conjunctionwith a social welfare organization, labor oragricultural organization, business league,chamber of commerce, or other organizationdescribed in section 501(c)(4), 501(c)(5), or501(c)(6), may qualify as a supporting or-ganization under section 509(a)(3) andtherefore not be classified as a private foun-dation if both the following conditions are met.

1) The supporting organization must meetall the requirements previously specified(the organizational tests, the operationaltest, and the requirement that it be op-erated, supervised, or controlled by or inconnection with one or more specifiedorganizations, and not be controlled bydisqualified persons).

2) The section 501(c)(4), 501(c)(5), or501(c)(6) organization would be de-scribed in section 509(a)(2) if it was acharitable organization described insection 501(c)(3). This provision allowsseparate charitable funds of certainnoncharitable organizations to be de-scribed in section 509(a)(3) if the non-charitable organizations receive theirsupport and otherwise operate in themanner specified by section 509(a)(2).

Special rules of attribution. To determinewhether an organization meets the not-more-than-one-third support test in section509(a)(2), amounts received by the organ-ization from an organization that seeks to bea section 509(a)(3) organization because ofits support of the organization are gross in-vestment income (rather than gifts or contri-butions) to the extent they are gross invest-ment income of the distributing organization.(This rule also applies to amounts receivedfrom a charitable trust, corporation, fund, as-sociation, or similar organization that is re-quired by its governing instrument or other-wise to distribute, or that normally doesdistribute, at least 25% of its adjusted net in-come to the organization, and whose distri-bution normally comprises at least 5% of itsadjusted net income.) All income that is grossinvestment income of the distributing organ-ization will be considered distributed first bythat organization. If the supporting organiza-tion makes distributions to more than one or-ganization, the amount of gross investmentincome considered distributed will be proratedamong the distributees.

Also, treat amounts paid by an organiza-tion to provide goods, services, or facilities forthe direct benefit of an organization seekingsection 509(a)(2) status (rather than for thedirect benefit of the general public) in thesame manner as amounts received by thelatter organization. These amounts will betreated as gross investment income to theextent they are gross investment income ofthe organization spending the amounts. Anorganization seeking section 509(a)(2) statusmust file a separate statement with its annualinformation return, Form 990 or 990–EZ, list-ing all amounts received from supporting or-ganizations.

Relationships created for avoidance pur-poses. If a relationship between an organ-ization seeking section 509(a)(3) status andan organization seeking section 509(a)(2)status is established or availed of after Octo-ber 9, 1969, and one of the purposes of es-tablishing or using the relationship is to avoidclassification as a private foundation with re-spect to either organization, then the charac-ter and amount of support received by thesection 509(a)(3) organization will be attri-buted to the section 509(a)(2) organization forpurposes of determining whether the lattermeets the support tests under section509(a)(2). If this type of relationship is estab-lished or used between an organizationseeking 509(a)(3) status and two or more or-ganizations seeking 509(a)(2) status, theamount and character of support received bythe former organization will be proratedamong the latter organizations.

In determining whether a relationship ex-ists between an organization seeking509(a)(3) status (supporting organization) andone or more organizations seeking 509(a)(2)status (beneficiary organizations) for the pur-pose of avoiding private foundation status, all

Chapter 3 Section 501(c)(3) Organizations Page 41

pertinent facts and circumstances will betaken into account. The following facts maybe used as evidence that such a relationshipwas not established or availed of to avoidclassification as a private foundation.

1) The supporting organization is operatedto support or benefit several specifiedbeneficiary organizations.

2) The beneficiary organization has a sub-stantial number of dues-paying memberswho have an effective voice in the man-agement of both the supporting and thebeneficiary organizations.

3) The beneficiary organization is com-posed of several membership organiza-tions, each of which has a substantialnumber of members, and the member-ship organizations have an effectivevoice in the management of the sup-porting and beneficiary organizations.

4) The beneficiary organization receives asubstantial amount of support from thegeneral public, public charities, or gov-ernmental grants.

5) The supporting organization uses itsfunds to carry on a meaningful programof activities to support or benefit thebeneficiary organization and, if the sup-porting organization were a privatefoundation, this use would be sufficientto avoid the imposition of the tax on fail-ure to distribute income.

6) The operations of the beneficiary andsupporting organizations are managedby different persons, and each organ-ization performs a different function.

7) The supporting organization is not ableto exercise substantial control or influ-ence over the beneficiary organizationbecause the beneficiary organization re-ceives support or holds assets that aredisproportionately large in comparisonwith the support received or assets heldby the supporting organization.

Effect on 509(a)(3) organizations. If abeneficiary organization fails to meet eitherof the support tests of section 509(a)(2) dueto these provisions, and the beneficiary or-ganization is one for whose support the or-ganization seeking section 509(a)(3) status isoperated, then the supporting organizationwill not be considered to be operated exclu-sively to support or benefit one or more sec-tion 509(a)(1) or 509(a)(2) organizations andtherefore would not qualify for section509(a)(3) status.

Classification under section 509(a). If anorganization is described in section 509(a)(1),and is also described in either section509(a)(2) or 509(a)(3), it will be treated as asection 509(a)(1) organization.

Reliance by grantors and contributors. Once an organization has received a finalruling or determination letter classifying it asan organization described in section509(a)(1), 509(a)(2), or 509(a)(3), the treat-ment of grants and contributions and the sta-tus of grantors and contributors to the organ-ization will generally not be affected byreason of a later revocation by the IRS of theorganization's classification until the date onwhich notice of change of status is made tothe public (generally by publication in theInternal Revenue Bulletin) or another appli-

cable date, if any, specified in the public no-tice. In appropriate cases, however, thetreatment of grants and contributions and thestatus of grantors and contributors to an or-ganization described in section 509(a)(1),509(a)(2), or 509(a)(3) may be affectedpending verification of the continued classi-fication of the organization. Notice to this ef-fect will be made in a public announcementby the IRS. In these cases, the effect ofgrants and contributions made after the dateof the announcement will depend on thestatutory qualification of the organization asan organization described in section509(a)(1), 509(a)(2), or 509(a)(3).

CAUTION!

The preceding paragraph shall notapply if the grantor or contributor:

1) Had knowledge of the revocationof the ruling or determinationletter classifying the organizationas an organization described insection 509(a)(1), 509(a)(2), or509(a)(3), or

2) Was in part responsible for, orwas aware of, the act, the failureto act, or the substantial andmaterial change on the part ofthe organization that gave rise tothe revocation.

Section 509(a)(4) Organizations Section 509(a)(4) excludes from classificationas private foundations those organizationsthat qualify under section 501(c)(3) as or-ganized and operated for the purpose oftesting products for public safety. Gener-ally, these organizations test consumer pro-ducts to determine their acceptability for useby the general public.

Private OperatingFoundations Some private foundations qualify as privateoperating foundations. These are types ofprivate foundations that, although lackinggeneral public support, make qualifying dis-tributions directly for the active conduct oftheir educational, charitable, and religiouspurposes, as distinct from merely makinggrants to other organizations for these pur-poses.

Most of the restrictions and requirementsthat apply to private foundations also apply toprivate operating foundations. However,there are advantages to being classified as aprivate operating foundation. For example, aprivate operating foundation (as compared toa private foundation) can be the recipient ofgrants from a private foundation without hav-ing to distribute the funds received currentlywithin 1 year, and the funds nevertheless maybe treated as qualifying distributions by thedonating private foundation; charitable contri-butions to a private operating foundationqualify for a higher charitable deduction limiton the donor's tax return; and the excise taxon net investment income does not apply toan exempt operating foundation.

Private operating foundation means anyprivate foundation that meets the assets test,the support test, or the endowment test, andmakes qualifying distributions directly, for theactive conduct of its activities for which it wasorganized, of substantially all (85% or more)of the lesser of its:

1) Adjusted net income, or

2) Minimum investment return.

Assets test. A private foundation willmeet the assets test if substantially more thanhalf (65% or more) of its assets are:

1) Devoted directly to the active conduct ofits exempt activity, to a functionally re-lated business, or to a combination of thetwo,

2) Stock of a corporation that is controlledby the foundation (by ownership of atleast 80% of the total voting power of allclasses of stock entitled to vote and atleast 80% of the total shares of all otherclasses of stock) and substantially all (atleast 85%) the assets of which are de-voted as provided above, or

3) Any combination of (1) and (2).

This test is intended to apply to organizationssuch as museums and libraries.

Support test. A private foundation willmeet the support test if:

1) Substantially all (at least 85%) of itssupport (other than gross investment in-come) is normally received from thegeneral public and five or more unrelatedexempt organizations,

2) Not more than 25% of its support (otherthan gross investment income) isnormally received from any one exemptorganization, and

3) Not more than 50% of its support isnormally received from gross investmentincome.

This test is intended to apply to special-purpose foundations, such as learned societ-ies and associations of libraries.

Endowment test. A foundation will meetthe endowment test if it normally makesqualifying distributions directly for the activeconduct of its exempt function of at leasttwo-thirds of its minimum investment return.

The minimum investment return for anyprivate foundation for any tax year is 5% ofthe excess of the total fair market value of allassets of the foundation (other than thoseused directly in the active conduct of its ex-empt purpose) over the amount of indebt-edness incurred to acquire those assets.

In determining whether the amount ofqualifying distributions is at least two-thirdsof the organization's minimum investment re-turn, the organization is not required to tracethe source of the expenditures to determinewhether they were derived from investmentincome or from contributions.

This test is intended to apply to organiza-tions such as research organizations that ac-tively conduct charitable activities but whosepersonal services are so great in relationshipto charitable assets that the cost of thoseservices cannot be met out of small endow-ments.

Exempt operating foundations. Theexcise tax on net investment income does notapply to an exempt operating foundation. Anexempt operating foundation for the tax yearis any private foundation that:

1) Is an operating foundation, as describedpreviously,

2) Has been publicly supported for at least10 tax years or was an operating foun-

Page 42 Chapter 3 Section 501(c)(3) Organizations

dation on January 1, 1983, or for its lasttaxable year ending before January 1,1983,

3) Has a governing body that, at all timesduring the tax year, is broadly represen-tative of the general public and consistsof individuals no more than 25% ofwhom are disqualified individuals, and

4) Does not have any officer, at any timeduring the tax year, who is a disqualifiedindividual.

The foundation must obtain a ruling letterfrom the IRS recognizing this special status.

New organization. If you are applying forrecognition of exemption as an organizationdescribed in section 501(c)(3) and you wishto establish that your organization is a privateoperating foundation, you should completeSchedule E of your exemption application(Form 1023).

LobbyingExpenditures In general, if a substantial part of the activitiesof your organization consists of carrying onpropaganda or otherwise attempting to in-fluence legislation, your organization's ex-emption from federal income tax will be de-nied. However, a public charity (other than achurch, an integrated auxiliary of a church orof a convention or association of churches,or a member of an affiliated group of organ-izations that includes a church, etc.) mayavoid this result. Such a charity can elect toreplace the substantial part of activities testwith a limit defined in terms of expendituresfor influencing legislation. Private foundationscannot make this election.

Making the election. Use Form 5768,Election/Revocation of Election By an EligibleSection 501(c)(3) Organization To Make Ex-penditures To Influence Legislation, to makethe election. The form must be signed andpostmarked within the first tax year to whichit applies. If the form is used to revoke theelection, it must be signed and postmarkedbefore the first day of the tax year to which itapplies.

Eligible section 501(c)(3) organizationsthat have made the election to be subject tothe limits on lobbying expenditures must usePart VI – A of Schedule A (Form 990) to figurethese limits.

Attempting to influence legislation. At-tempting to influence legislation, for this pur-pose, means:

1) Any attempt to influence any legislationthrough an effort to affect the opinionsof the general public or any segmentthereof (grass roots lobbying), and

2) Any attempt to influence any legislationthrough communication with any mem-ber or employee of a legislative body orwith any government official or employeewho may participate in the formulationof legislation (direct lobbying).

However, the term attempting to influencelegislation does not include the followingactivities.

1) Making available the results of nonparti-san analysis, study, or research.

2) Examining and discussing broad social,economic, and similar problems.

3) Providing technical advice or assistance(where the advice would otherwise con-stitute the influencing of legislation) to agovernmental body or to a committee orother subdivision thereof in response toa written request by that body or subdi-vision.

4) Appearing before, or communicatingwith, any legislative body about a possi-ble decision of that body that might affectthe existence of the organization, itspowers and duties, its tax-exempt status,or the deduction of contributions to theorganization.

5) Communicating with a government offi-cial or employee, other than:

a) A communication with a memberor employee of a legislative body(when the communication wouldotherwise constitute the influencingof legislation), or

b) A communication with the principalpurpose of influencing legislation.

Also excluded are communications betweenan organization and its bona fide membersabout legislation or proposed legislation ofdirect interest to the organization and themembers, unless these communications di-rectly encourage the members to attempt toinfluence legislation or directly encourage themembers to urge nonmembers to attempt toinfluence legislation, as explained earlier.

Lobbying expenditures limits. If a publiccharitable organization makes the election tobe subject to the lobbying expenditures limitsrules (instead of the substantial part of activ-ities test), it will not lose its tax-exempt statusunder section 501(c)(3), unless it normallymakes lobbying expenditures that are morethan 150% of the lobbying nontaxableamount for the organization for each tax yearor normally makes grass roots expendi-tures that are more than 150% of the grassroots nontaxable amount for the organiza-tion for each tax year. See Tax on excessexpenditures to influence legislation, later, inthis section.

Lobbying expenditures. These are anyexpenditures that are made for the purposeof attempting to influence legislation, as dis-cussed earlier under Attempting to influencelegislation.

Grass roots expenditures. This termrefers only to those lobbying expendituresthat are made to influence legislation by at-tempting to affect the opinions of the generalpublic or any segment thereof.

Lobbying nontaxable amount. The lob-bying nontaxable amount for any organizationfor any tax year is the lesser of $1,000,000or:

1) 20% of the exempt purpose expendi-tures if the exempt purpose expendi-tures are not over $500,000,

2) $100,000 plus 15% of the excess of theexempt purpose expenditures over$500,000 if the exempt purpose expen-ditures are over $500,000 but not over$1,000,000,

3) $175,000 plus 10% of the excess of theexempt purpose expenditures over$1,000,000 if the exempt purpose ex-penditures are over $1,000,000 but notover $1,500,000, or

4) $225,000 plus 5% of the excess of theexempt purpose expenditures over$1,500,000 if the exempt purpose ex-penditures are over $1,500,000.

The term exempt purpose expendituresmeans the total of the amounts paid or in-curred (including depreciation and amorti-zation, but not capital expenditures) by anorganization for the tax year to accomplish itsexempt purposes. In addition, it includes:

1) Administrative expenses paid or incurredfor the organization's exempt purposes,and

2) Amounts paid or incurred for the purposeof influencing legislation, whether or notthe legislation promotes the organiza-tion's exempt purposes.

Exempt purpose expenditures do not in-clude amounts paid or incurred to or for:

1) A separate fundraising unit of the or-ganization, or

2) One or more other organizations, if theamounts are paid or incurred primarilyfor fundraising.

Grass roots nontaxable amount. Thegrass roots nontaxable amount for any or-ganization for any tax year is 25% of the lob-bying nontaxable amount for the organizationfor that tax year.

Years for which election is effective. Oncean organization elects to come under theseprovisions, the election will be in effect for alltax years that end after the date of theelection and begin before the organizationrevokes this election.

Note. These elective provisions for lob-bying activities by public charities do not ap-ply to a church, an integrated auxiliary of achurch or of a convention or association ofchurches, or a member of an affiliated groupof organizations that includes a church, etc.,or a private foundation. Moreover, these pro-visions will not apply to any organization forwhich an election is not in effect.

Expenditures of affiliated organizations.If two or more section 501(c)(3) organizationsare members of an affiliated group of organ-izations and at least one of these organiza-tions has made the election regarding thetreatment of certain lobbying expenditures,then the determination as to whether excesslobbying expenditures have been made andthe determination as to whether the expendi-ture limits, described earlier, have been ex-ceeded by more than 150% will be made asthough the affiliated group is one organiza-tion.

If the group has excess lobbying expen-ditures, each organization for which theelection is effective for the year will be treatedas an organization that has excess lobbyingexpenditures in an amount that equals theorganization's proportionate share of thegroup's excess lobbying expenditures. Fur-ther, if the expenditure limits, described in thissection, are exceeded by more than 150%,each organization for which the election is

Chapter 3 Section 501(c)(3) Organizations Page 43

effective for that year will lose its tax-exemptstatus under section 501(c)(3).

Two organizations will be consideredmembers of an affiliated group of organiza-tions if:

1) The governing instrument of one of theorganizations requires it to be bound bydecisions of the other organization onlegislative issues, or

2) The governing board of one of the or-ganizations includes persons who:

a) Are specifically designated repre-sentatives of the other organizationor are members of the governingboard, officers, or paid executivestaff members of the other organ-ization, and

b) Have enough voting power to causeor prevent action on legislative is-sues by the controlled organizationby combining their votes.

Tax on excess expenditures to influencelegislation. If an election for a tax year is ineffect for an organization and that organiza-tion exceeds the lobbying expenditures limits,an excise tax of 25% of the excess lobbyingexpenditures for the tax year will be imposed.Excess lobbying expenditures for a tax year,in this case, means the greater of:

1) The amount by which the lobbying ex-penditures made by the organizationduring the tax year are more than thelobbying nontaxable amount for the or-ganization for that tax year, or

2) The amount by which the grass rootsexpenditures made by the organizationduring the tax year are more than thegrass roots nontaxable amount for theorganization for that tax year.

Eligible organizations that have made theelection to be subject to the limits on lobbyingexpenditures and that owe the tax on excesslobbying expenditures (as computed in PartVI – A of Schedule A (Form 990)) must fileForm 4720, Return of Certain Excise Taxeson Charities and Other Persons UnderChapters 41 and 42 of the Internal RevenueCode, to report and pay the tax.

Organization that no longer qualifies.An organization that no longer qualifies forexemption under section 501(c)(3) becauseof substantial lobbying activities will not at anytime thereafter be treated as an organizationdescribed in section 501(c)(4). This provision,however, does not apply to certain organiza-tions (churches, etc.) that cannot make theelection discussed earlier.

Tax on disqualifying lobbying expendi-tures. The law imposes a tax on certain or-ganizations if they no longer qualify undersection 501(c)(3) by reason of having madedisqualifying lobbying expenditures. An addi-tional tax may be imposed on the managersof those organizations.

Tax on organization. Organizations thatlose their exemption under section 501(c)(3)due to lobbying activities generally will besubject to an excise tax of 5% of the lobbyingexpenditures. The tax does not apply to pri-vate foundations. Also, the tax does not applyto organizations that have elected the lobby-ing limits of section 501(h) or to churches orchurch-related organizations that cannot electthese limits. This tax must be paid by the or-ganization.

Tax on managers. Managers may alsobe liable for a 5% tax on the lobbying expen-ditures that result in the disqualification of theorganization. For the tax to apply, a managerwould have to agree to the expendituresknowing that the expenditures were likely toresult in the organization's not being de-scribed in section 501(c)(3). No tax will beimposed if the manager's agreement is notwillful and is due to reasonable cause.

Excise taxes on political expenditures. The law imposes an excise tax on the politicalexpenditures of section 501(c)(3) organiza-tions. A two-tier tax is imposed on both theorganizations and the managers of those or-ganizations.

Taxes on organizations. An initial taxof 10% of certain political expenditures is im-posed on a charitable organization. A secondtax of 100% of the expenditure is imposed ifthe political expenditure that resulted in theimposition of the initial (first-tier) tax is notcorrected within a specified period. Thesetaxes must be paid by the organization.

Taxes on managers. An initial tax of21 / 2% of the amount of certain political ex-penditures (up to $5,000 for each expendi-ture) is imposed on a manager of an organ-ization who agrees to such expendituresknowing that they are political expenditures.No tax will be imposed if the manager'sagreement was not willful and was due toreasonable cause. A second tax of 50% of theexpenditures (up to $10,000 for each ex-penditure) is imposed on a manager if he orshe refuses to agree to a correction of theexpenditures that resulted in the impositionof the initial (first-tier) tax. For purposes ofthese taxes, an organization manager isgenerally an officer, director, trustee, or anyemployee having authority or responsibilityconcerning the organization's political expen-ditures. These taxes must be paid by themanager of the organization.

Political expenditures. Generally, poli-tical expenditures that will trigger these taxesare amounts paid or incurred by a section501(c)(3) organization in any participation orintervention in any political campaign for oragainst any candidate for public office. Poli-tical expenditures include publication or dis-tribution of statements for these purposes.Political expenditures also include certain ex-penditures by organizations that are formedprimarily to promote the candidacy (or pro-spective candidacy) of an individual for publicoffice and by organizations that are effectivelycontrolled by a candidate and are used pri-marily to promote that candidate.

Correction of expenditure. A correctionof a political expenditure is the recovery, ifpossible, of all or part of the expenditure andthe establishment of safeguards to preventfuture political expenditures.

Status after loss of exemption for lobbyingor political activities. As explained earlier,an organization can lose its tax-exempt statusunder section 501(c)(3) of the Code becauseof lobbying activities or participation or inter-vention in a political campaign on behalf ofor in opposition to a candidate for public of-fice. If this happens to an organization, itcannot later qualify for exemption under sec-tion 501(c)(4) of the Code.

Page 44 Chapter 3 Section 501(c)(3) Organizations

4.Other Section501(c)Organizations

IntroductionThis chapter contains specific information forcertain organizations described in section501(c), other than those organizations thatare described in section 501(c)(3). Section501(c)(3) organizations are covered in chap-ter 3 of this publication.

The Table of Contents at the beginningof this publication, as well as the OrganizationReference Chart on page 57, may help youlocate at a glance the type of organizationdiscussed in this chapter.

501(c)(4) —Civic Leagues andSocial WelfareOrganizations If your organization is not organized for profitand will be operated only to promote socialwelfare, you should file Form 1024 to applyfor recognition of exemption from federal in-come tax under section 501(c)(4). The dis-cussion that follows describes the informationyou must provide when applying. For appli-cation procedures, see chapter 1.

To qualify for exemption under section501(c)(4), the organization's net earningsmust be devoted only to charitable, educa-tional, or recreational purposes. In addition,no part of the organization's net earnings maybenefit any private shareholder or individual.If the organization provides an excess ben-efit to certain persons, an excise tax may beimposed. See Excise tax on excess benefittransactions under Public Charities in chapter3 for more information about this tax.

Examples. Types of organizations that areconsidered to be social welfare organizationsare civic associations and volunteer firecompanies.

Nonprofit operation. You must submit evi-dence that your organization is organized andwill be operated on a nonprofit basis. How-ever, such evidence, including the fact thatyour organization is organized under a statelaw relating to nonprofit corporations, will notin itself establish a social welfare purpose.

Social welfare. To establish that your or-ganization is organized exclusively to pro-mote social welfare, you should submit evi-dence with your application showing that yourorganization will operate primarily to further(in some way) the common good and generalwelfare of the people of the community (such

as by bringing about civic betterment andsocial improvements).

An organization that restricts the use of itsfacilities to employees of selected corpo-rations and their guests is primarily benefitinga private group rather than the community.It therefore does not qualify as a section501(c)(4) organization. Similarly, an organ-ization formed to represent member-tenantsof an apartment complex does not qualify,since its activities benefit the member-tenantsand not all tenants in the community. How-ever, an organization formed to promote thelegal rights of all tenants in a particular com-munity may qualify under section 501(c)(4)as a social welfare organization.

Political activity. Promoting social welfaredoes not include direct or indirect participationor intervention in political campaigns on be-half of or in opposition to any candidate forpublic office. However, if you submit proofthat your organization is organized exclu-sively to promote social welfare, it may stillobtain exemption even if it participates legallyin some political activity on behalf of or inopposition to candidates for public office. Seethe discussion in chapter 2 under PoliticalOrganization Income Tax Return.

Social activity. If social activities will be theprimary purpose of your organization, youshould not file an application for exemptionas a social welfare organization but should filefor exemption as a social club described insection 501(c)(7).

Retirement benefit program. An organiza-tion established by its members that has asits primary activity providing supplementalretirement benefits to its members or deathbenefits to their beneficiaries does not qualifyas an exempt social welfare organization. Itmay qualify under another paragraph of sec-tion 501(c) depending on all the facts.

However, a nonprofit association that isestablished, maintained, and funded by a lo-cal government to provide the only retirementbenefits to a class of employees may qualifyas a social welfare organization under section501(c)(4).

Tax treatment of donations. Donations tovolunteer fire companies are deductible onthe donor's federal income tax return, but onlyif made for exclusively public purposes. Con-tributions to civic leagues or other section501(c)(4) organizations generally are notdeductible as charitable contributions for fed-eral income tax purposes. They may bedeductible as trade or business expenses, ifordinary and necessary in the conduct of thetaxpayer's business. However, see Deductionnot allowed for dues used for political or leg-islative activities on page 46 for more infor-mation.

Specific OrganizationsThe following information should be containedin the application form and accompanyingstatements of certain types of civic leaguesor social welfare organizations.

Volunteer fire companies. If your organ-ization wishes to obtain exemption as a vol-unteer fire company or similar organization,you should submit evidence that its members

are actively engaged in fire fighting and simi-lar disaster assistance, whether it actuallyowns the fire fighting equipment, and whetherit provides any assistance for its members,such as death and medical benefits in caseof injury to them.

If your organization does not have an in-dependent social purpose, such as providingrecreational facilities for members, it may beexempt under section 501(c)(3). In this event,your organization should file Form 1023.

Homeowners' associations. A membershiporganization formed by a real estate devel-oper to own and maintain common greenareas, streets, and sidewalks and to enforcecovenants to preserve the appearance of thedevelopment should show that it is operatedfor the benefit of all the residents of thecommunity. The term community generallyrefers to a geographical unit recognizable asa governmental subdivision, unit, or districtthereof. Whether a particular associationmeets the requirement of benefiting a com-munity depends on the facts and circum-stances of each case. Even if an area repre-sented by an association is not a community,the association can still qualify for exemptionif its activities benefit a community.

The association should submit evidencethat areas such as roadways and park landthat it owns and maintains are open to thegeneral public and not just its own members.It also must show that it does not engage inexterior maintenance of private homes.

A homeowners' association that is notexempt under section 501(c)(4) and that is acondominium management association, aresidential real estate management associ-ation, or a timeshare association generallymay elect under the provisions of section 528to receive certain tax benefits that, in effect,permit it to exclude its exempt function in-come from its gross income.

Other organizations. Other nonprofit organ-izations that qualify as social welfare organ-izations include:

• An organization operating an airport thatis on land owned by a local government,which supervises the airport's operation,and that serves the general public in anarea with no other airport,

• A community association that works toimprove public services, housing andresidential parking, publishes a freecommunity newspaper, sponsors a com-munity sports league, holiday programsand meetings, and contracts with a pri-vate security service to patrol the com-munity,

• A community association devoted topreserving the community's traditions,architecture, and appearance by repre-senting it before the local legislature andadministrative agencies in zoning, traffic,and parking matters,

• An organization that tries to encourageindustrial development and relieve un-employment in an area by making loansto businesses so they will relocate to thearea, and

• An organization that holds an annualfestival of regional customs and tradi-tions.

Chapter 4 Other Section 501(c) Organizations Page 45

501(c)(5) —Labor, Agricultural,and HorticulturalOrganizationsIf you are a member of an organization thatwants to obtain recognition of exemption fromfederal income tax as a labor, agricultural, orhorticultural organization, you should submitan application on Form 1024. You must indi-cate in your application for exemption andaccompanying statements that your organ-ization will not have any net earnings bene-fiting any member. In addition, you shouldfollow the procedure for obtaining recognitionof exempt status described in chapter 1.Submit any additional information that maybe required, as described in this section.

Tax treatment of donations. Contributionsto labor, agricultural, and horticultural organ-izations are not deductible as charitable con-tributions on the donor's federal income taxreturn. However, such payments may bedeductible as business expenses if they areordinary and necessary in the conduct of thetaxpayer's trade or business. For more infor-mation about certain limits affecting the de-ductibility of these business expenses, seeDeduction not allowed for dues used for poli-tical or legislative activities on page 46.

Labor OrganizationsA labor organization is an association ofworkers who have combined to protect andpromote the interests of the members bybargaining collectively with their employers tosecure better working conditions.

To show that your organization has thepurpose of a labor organization, you shouldinclude in the articles of organization or ac-companying statements (submitted with yourexemption application) information establish-ing that the organization is organized to betterthe conditions of workers, improve the gradeof their products, and develop a higher de-gree of efficiency in their respective occupa-tions. In addition, no net earnings of the or-ganization may benefit any member.

Composition of membership. While a labororganization generally is composed of em-ployees or representatives of the employees(in the form of collective bargaining agents)and similar employee groups, evidence thatan organization's membership consistsmainly of workers does not in itself indicatean exempt purpose. You must show in yourapplication that your organization has thepurposes described in the preceding para-graph. These purposes may be accomplishedby a single labor organization acting alone orby several organizations acting togetherthrough a separate organization.

Benefits to members. The payment by alabor organization of death, sick, accident,and similar benefits to its individual memberswith funds contributed by its members, ifmade under a plan to better the conditionsof the members, does not preclude exemptionas a labor organization. However, an organ-ization does not qualify for exemption as alabor organization if it has no authority torepresent members in job-related matters,

even if it provides weekly income to itsmembers in the event of a lawful strike by themembers' union, in return for an annual pay-ment by the member.

Agricultural andHorticultural Organizations

Agricultural and horticultural organizations areconnected with raising livestock, forestry,cultivating land, raising and harvesting cropsor aquatic resources, cultivating useful or or-namental plants, and similar pursuits.

For the purpose of these provisions,aquatic resources include only animal orvegetable life, but not mineral resources. Theterm harvesting, in this case, includes fishingand related pursuits.

Agricultural organizations may be quasi-public in character and are often designed toencourage the development of better agricul-tural and horticultural products through asystem of awards, using income from entryfees, gate receipts, and donations to meet thenecessary expenses of upkeep and opera-tion. When the activities are directed towardthe improvement of marketing or other busi-ness conditions in one or more lines of busi-ness, rather than the improvement of pro-duction techniques or the betterment of theconditions of persons engaged in agriculture,the organization must qualify for exemptionas a business league, board of trade, or otherorganization, as discussed next in the sectionon 501(c)(6) organizations.

The primary purpose of exempt agricul-tural and horticultural organizations must beto better the conditions of those engaged inagriculture or horticulture, develop more effi-ciency in agriculture or horticulture, or im-prove the products.

The following list contains some exam-ples of activities that show an agricultural orhorticultural purpose.

1) Promoting various cooperative agricul-tural, horticultural, and civic activitiesamong rural residents by a state andcounty farm and home bureau.

2) Exhibiting livestock, farm products, andother characteristic features of agricul-ture and horticulture.

3) Testing soil for members and nonmem-bers of the farm bureau on a cost basis,the results of the tests and other recom-mendations being furnished to the com-munity members to educate them in soiltreatment.

4) Guarding the purity of a specific breedof livestock.

5) Encouraging improvements in the pro-duction of fish on privately-owned fishfarms.

6) Negotiating with processors for the priceto be paid to members for their crops.

501(c)(6) —Business Leagues,Etc. If your association wants to apply for recog-nition of exemption from federal income tax

as a nonprofit business league, chamber ofcommerce, real estate board, board of trade,or professional football league (whether or notadministering a pension fund for footballplayers), it should file Form 1024. For a dis-cussion of the procedure to follow, see chap-ter 1.

Your organization must indicate in its ap-plication form and attached statements thatno part of its net earnings will benefit anyprivate shareholder or individual and that it isnot organized for profit or organized to en-gage in an activity ordinarily carried on forprofit (even if the business is operated on acooperative basis or produces only sufficientincome to be self-sustaining).

In addition, your organization must be pri-marily engaged in activities or functions thatare the basis for its exemption. It must beprimarily supported by membership dues andother income from activities substantially re-lated to its exempt purpose.

A business league, in general, is an as-sociation of persons having some commonbusiness interest, the purpose of which is topromote that common interest and not to en-gage in a regular business of a kind ordinarilycarried on for profit. Trade associations andprofessional associations are consideredbusiness leagues.

Chamber of commerce. A chamber ofcommerce usually is composed of the mer-chants and traders of a city.

Board of trade. A board of trade often con-sists of persons engaged in similar lines ofbusiness. For example, a nonprofit organiza-tion formed to regulate the sale of a specifiedagricultural commodity to assure equal treat-ment of producers, warehouse workers, andbuyers is a board of trade.

Chambers of commerce and boards oftrade usually promote the common economicinterests of all the commercial enterprises ina given trade community.

Real estate board. A real estate board con-sists of members interested in improving thebusiness conditions in the real estate field. Itis not organized for profit and no part of thenet earnings benefits any private shareholderor individual.

General purpose. You must indicate in thematerial submitted with your application thatyour organization will be devoted to the im-provement of business conditions of one ormore lines of business as distinguished fromthe performance of particular services for in-dividual persons. It must be shown that theconditions of a particular trade or the interestsof the community will be advanced. Merelyindicating the name of the organization or theobject of the local statute under which it iscreated is not enough to demonstrate the re-quired general purpose.

Line of business. This term generallyrefers either to an entire industry or to allcomponents of an industry within a ge-ographic area. It does not include a groupcomposed of businesses that market a par-ticular brand within an industry.

Common business interest. A commonbusiness interest of all members of the or-ganization must be established by the appli-cation documents.

Page 46 Chapter 4 Other Section 501(c) Organizations

Examples. Activities that would tend toillustrate a common business interest are:

1) Promotion of higher business standardsand better business methods and en-couragement of uniformity and cooper-ation by a retail merchants association,

2) Education of the public in the use ofcredit,

3) Establishment of uniform casualty ratesand compilation of statistical informationby an insurance rating bureau operatedby casualty insurance companies,

4) Establishment and maintenance of theintegrity of a local commercial market,

5) Operation of a trade publication primarilyintended to benefit an entire industry,and

6) Encouragement of the use of goods andservices of an entire industry (such as alawyer referral service whose main pur-pose is to introduce individuals to theuse of the legal profession in the hopethat they will enter into lawyer-client re-lationships on a paying basis as a re-sult).

Improvement of business conditionsGenerally, this must be shown to be the pur-pose of the organization. This is not estab-lished by evidence of particular services thatprovide a convenience or economy to indi-vidual members in their businesses, such asadvertising that carries the name of members,interest-free loans, assigning exclusive fran-chise areas, operation of a real estate multi-ple listing system, or operation of a credit re-porting agency.

Stock or commodity exchange. A stock orcommodity exchange is not a businessleague, chamber of commerce, real estateboard, or board of trade and is not exemptunder section 501(c)(6).

Legislative activity. An organization that isexempt under section 501(c)(6) may work forthe enactment of laws to advance the com-mon business interests of the organization'smembers.

Deduction not allowed for dues used forpolitical or legislative activities. A taxpayercannot deduct the part of dues or other pay-ments to a business league, trade associ-ation, labor union, or similar organization thatis for any of the following activities.

1) Influencing legislation.

2) Participating or intervening in a politicalcampaign for, or against, any candidatefor public office.

3) Trying to influence the general public,or part of the general public, with respectto elections, legislative matters, or refer-endums (also known as grassrootslobbying).

4) Communicating directly with certainexecutive branch officials to try to influ-ence their official actions or positions.

See Dues Used for Lobbying or Political Ac-tivities under Required Disclosures in chapter2 for more information.

Exception for local legislation. Mem-bers may deduct dues (or assessments) toan organization that are for expenses of:

1) Appearing before, submitting statementsto, or sending communications to mem-bers of a local council or similar govern-ing body with respect to legislation orproposed legislation of direct interest tothe member, or

2) Communicating information between themember and the organization with re-spect to local legislation or proposedlegislation of direct interest to the or-ganization or the member.

Legislation or proposed legislation is of directinterest to a taxpayer if it will, or may rea-sonably be expected to, affect the taxpayer'strade or business.

De minimis exception. In-house expen-ditures of $2,000 or less for the year for ac-tivities (1) – (4) listed earlier will not preventa deduction for dues, if the dues meet allother tests to be deductible as a businessexpense.

Grassroots lobbying. A tax-exempttrade association, labor union, or similar or-ganization is considered to be engaging ingrassroots lobbying if it contacts prospectivemembers or calls upon its own members tocontact their employees and customers forthe purpose of urging such persons to com-municate with their elected state or Congres-sional representatives to support the pro-motion, defeat, or repeal of legislation that isof direct interest to the organization. Any duesor assessments directly related to such ac-tivities are not deductible by the taxpayer,since the individuals being contacted, who arenot members of the organization, are a seg-ment of the general public.

Tax treatment of donations. Contributionsto organizations described in this section arenot deductible as charitable contributions onthe donor's federal income tax return. Theymay be deductible as trade or business ex-penses if ordinary and necessary in the con-duct of the taxpayer's business.

501(c)(7) —Social andRecreation Clubs If your club is organized for pleasure, recre-ation, and other similar nonprofitable pur-poses and substantially all of its activities arefor these purposes, it should file Form 1024to apply for recognition of exemption fromfederal income tax.

In applying for recognition of exemption,you should submit the information describedin this section. Also see chapter 1 for theprocedures to follow.

Typical organizations that should file forrecognition of exemption as social clubs in-clude:

• College alumni associations that are notdescribed in chapter 3 under Alumni as-sociation,

• College fraternities or sororities operatingchapter houses for students,

• Country clubs,

• Amateur hunting, fishing, tennis, swim-ming, and other sport clubs,

• Dinner clubs that provide a meetingplace, library, and dining room for mem-bers,

• Hobby clubs,

• Garden clubs, and

• Variety clubs.

Discrimination prohibited. Your organiza-tion will not be recognized as tax exempt if itscharter, bylaws, or other governing instru-ment, or any written policy statement providesfor discrimination against any person on thebasis of race, color, or religion.

However, a club that in good faith limits itsmembership to the members of a particularreligion to further the teachings or principlesof that religion and not to exclude individualsof a particular race or color will not be con-sidered as discriminating on the basis of reli-gion. Also, the restriction on religious dis-crimination does not apply to a club that isan auxiliary of a fraternal beneficiary society(discussed later) if that society is describedin section 501(c)(8) and exempt from tax un-der section 501(a) and limits its membershipto the members of a particular religion.

Private benefit prohibited. No part of theorganization's net earnings may benefit anyperson having a personal and private interestin the activities of the organization. For pur-poses of this requirement, it is not necessarythat net earnings be actually distributed.Even undistributed earnings can benefitmembers. Examples of this include a de-crease in membership dues or an increase inthe services the club provides to its memberswithout a corresponding increase in dues orother fees paid for club support. However,fixed-fee payments to members who bringnew members into the club are not aninurement of the club's net earnings, if thepayments are reasonable compensation forperformance of a necessary administrativeservice.

Purposes. To show that your organizationpossesses the characteristics of a club withinthe meaning of the exemption law, you shouldsubmit evidence with your application thatpersonal contact, commingling, and fellow-ship exist among members. You must showthat members are bound together by a com-mon objective of pleasure, recreation, andother nonprofitable purposes.

Fellowship need not be present betweeneach member and every other member of aclub if it is a material part in the life of theorganization. A statewide or nationwide or-ganization that is made up of individualmembers, but is divided into local groups,satisfies this requirement if fellowship is amaterial part of the life of each local group.

The term other nonprofitable purposesmeans other purposes similar to pleasure andrecreation. For example, a club that, in addi-tion to its social activities, has a plan for thepayment of sick and death benefits is notoperating exclusively for pleasure, recreation,and other nonprofitable purposes.

Limited membership. The membershipin a social club must be limited. To show thatyour organization has a purpose that wouldcharacterize it as a club, you should submitevidence with your application that there arelimits on admission to membership consistentwith the character of the club.

A social club that issues corporatemembership is dealing with the generalpublic in the form of the corporation's em-ployees. Corporate members of a club are notthe kind of members contemplated by the law.

Chapter 4 Other Section 501(c) Organizations Page 47

Gross receipts from these members wouldbe a factor in determining whether the clubqualifies as a social club. See Gross receiptsfrom nonmembership sources, later. Bonafide individual memberships paid for by acorporation would not have an effect on thegross receipts source.

The fact that a social club may have anassociate (nonvoting) class of member-ship will not be, in and of itself, a cause fornonrecognition of exemption. However, if onemembership class pays substantially lowerdues and fees than another membershipclass, although both classes enjoy the samerights and privileges in using the club facili-ties, there may be an inurement of income tothe benefited class, resulting in a denial of theclub's exemption.

Support. In general, your club should besupported solely by membership fees, dues,and assessments. However, if otherwise en-titled to exemption, your club will not be dis-qualified because it raises revenue frommembers through the use of club facilities orin connection with club activities.

Business activities. If your club will engagein business, such as selling real estate, tim-ber, or other products or services, it generallywill be denied exemption. However, evidencesubmitted with your application form that yourorganization will provide meals, refreshments,or services related to its exempt purposesonly to its own members or their dependentsor guests will not cause denial of exemption.

Facilities open to public. Evidence thatyour club's facilities will be open to the gen-eral public (persons other than members ortheir dependents or guests) may cause denialof exemption. This does not mean, however,that any dealing with outsiders will automat-ically deprive a club of exemption.

Gross receipts from nonmembershipsources. A section 501(c)(7) organizationmay receive up to 35% of its gross receipts,including investment income, from sourcesoutside of its membership without losing itstax-exempt status. Of the 35%, up to 15% ofthe gross receipts may be derived from theuse of the club's facilities or services by thegeneral public or from other activities not fur-thering social or recreational purposes formembers. If an organization has outside in-come that is more than these limits, all thefacts and circumstances will be taken intoaccount in determining whether the organ-ization qualifies for exempt status.

Gross receipts. Gross receipts, for thispurpose, are receipts from the normal andusual (traditionally conducted) activities of theclub. These receipts include charges, admis-sions, membership fees, dues, assessments,investment income, and normal recurringcapital gains on investments. Receipts do notinclude initiation fees and capital contribu-tions. Unusual amounts of income, such asfrom the sale of a clubhouse or similar facility,are not included in gross receipts or in figuringthe percentage limits.

Fraternity foundations. If your organizationis a foundation formed for the exclusive pur-pose of acquiring and leasing a chapterhouse to a local fraternity chapter or sororitychapter maintained at an educational institu-tion and does not engage in any social activ-ities, it may be a title holding corporation(discussed, later, under section 501(c)(2) or-ganizations and under section 501(c)(25) or-ganizations) rather than a social club.

Tax treatment of donations. Donations toexempt social and recreation clubs are notdeductible as charitable contributions on thedonor's federal income tax return.

501(c)(8) and501(c)(10) — FraternalBeneficiary Societiesand DomesticFraternal Societies This section describes the information to beprovided upon application for recognition ofexemption by two types of fraternal societies:beneficiary and domestic. The major dis-tinction is that fraternal beneficiary societiesprovide for the payment of life, sick, accident,or other benefits to their members or theirdependents, while domestic fraternal societ-ies do not provide these benefits but ratherdevote their earnings to fraternal, religious,charitable, etc., purposes. The procedures tofollow in applying for recognition of exemptionare described in chapter 1.

If your organization is controlled by acentral organization, you should check withyour controlling organization to determinewhether your unit has been included in agroup exemption letter or may be added. Ifso, your organization need not apply for indi-vidual recognition of exemption. For more in-formation see Group Exemption Letter inchapter 1 of this publication.

Tax treatment of donations. Donations byan individual to a domestic fraternal benefi-ciary society or a domestic fraternal societyoperating under the lodge system aredeductible as charitable contributions only ifused exclusively for religious, charitable, sci-entific, literary, or educational purposes or forthe prevention of cruelty to children or ani-mals.

Fraternal BeneficiarySocieties (501(c)(8)) A fraternal beneficiary society, order, or as-sociation should file an application for recog-nition of exemption from federal income taxon Form 1024. The application and accom-panying statements should establish that theorganization:

1) Is a fraternal organization,

2) Operates under the lodge system or forthe exclusive benefit of the members ofa fraternal organization itself operatingunder the lodge system, and

3) Provides for the payment of life, sick,accident, or other benefits to the mem-bers of the society, order, or associationor their dependents.

Lodge system. Operating under the lodgesystem means carrying on activities under aform of organization that comprises localbranches, chartered by a parent organizationand largely self-governing, called lodges,chapters, or the like.

Payment of benefits. It is not essential thatevery member be covered by the society'sprogram of sick, accident, or death benefits.

An organization can qualify for exemption ifmost of its members are eligible for benefits,and the benefits are paid from contributionsor dues paid by those members.

The benefits must be limited to membersand their dependents. If members will havethe ability to confer benefits to other thanthemselves and their dependents, exemptionwill not be recognized.

Whole-life insurance. Whole-life insur-ance constitutes a life benefit under section501(c)(8) even though the policy may containinvestment features such as a cash surrendervalue or a policy loan.

Reinsurance pool. Payments by afraternal beneficiary society into a state-sponsored reinsurance pool that protectsparticipating insurers against excessivelosses on major medical health and accidentinsurance will not preclude exemption as afraternal beneficiary society.

Domestic FraternalSocieties (501(c)(10)) A domestic fraternal society, order, or asso-ciation may file an application for recognitionof exemption from federal income tax onForm 1024. The application and accompany-ing statements should establish that the or-ganization:

1) Is a domestic fraternal organization,

2) Operates under the lodge system,

3) Devotes its net earnings exclusively toreligious, charitable, scientific, literary,educational, and fraternal purposes, and

4) Does not provide for the payment of life,sick, accident, or other benefits to itsmembers.

The organization may arrange with insur-ance companies to provide optional insuranceto its members without jeopardizing its ex-empt status.

501(c)(4), 501(c)(9),and 501(c)(17) —Employees'AssociationsThis section describes the information to beprovided upon application for recognition ofexemption by the following types of employ-ees' associations:

1) A local association of employeeswhose membership is limited to employ-ees of a designated person or personsin a particular municipality, and whoseincome will be devoted exclusively tocharitable, educational, or recreationalpurposes,

2) A voluntary employees' beneficiaryassociation (including federal employ-ees' associations) organized to pay life,sick, accident, and similar benefits tomembers or their dependents, or desig-nated beneficiaries, if no part of the netearnings of the association benefits anyprivate shareholder or individual, and

3) A supplemental unemployment bene-fit trust whose primary purpose is pro-

Page 48 Chapter 4 Other Section 501(c) Organizations

viding for payment of supplemental un-employment benefits.

Both the application form to file and theinformation to provide are discussed laterunder the section that describes your em-ployee association. Chapter 1 describes theprocedures to follow in applying for ex-emption.

Tax treatment of donations. Donations tothese organizations are not deductible ascharitable contributions on the donor's federalincome tax return.

Local Employees'Associations (501(c)(4)) A local employees' association may apply forrecognition of exemption by filing Form 1024.The organization must submit evidence that:

1) It is of a purely local character,

2) Its membership is limited to employeesof a designated person or persons in aparticular locality, and

3) Its net earnings will be devoted exclu-sively to charitable, educational, or rec-reational purposes.

A local association of employees that hasestablished a system of paying retirement ordeath benefits, or both, to its members willnot qualify for exemption since the paymentof these benefits is not considered as beingfor charitable, educational, or recreationalpurposes. Similarly, a local association ofemployees that is operated primarily as acooperative buying service for its members inorder to obtain discount prices on merchan-dise, services, and activities does not qualifyfor exemption.

Voluntary Employees'Beneficiary Associations(501(c)(9)) An application for recognition of exemptionas a voluntary employees' beneficiary asso-ciation must be filed on Form 1024. The ma-terial submitted with the application mustshow that your organization:

1) Is a voluntary association of employees,

2) Will provide for payment of life, sick, ac-cident, or other benefits to members ortheir dependents or designated benefi-ciaries and substantially all of its oper-ations are for this purpose, and

3) Will not allow any of its earnings to ben-efit any private individual or shareholderexcept in the form of scheduled benefitpayments.

Notice requirement. An organization will notbe considered tax exempt under this sectionunless the organization gives notice to theIRS that it is applying for recognition of ex-empt status. The organization gives noticeby filing Form 1024. If the notice is not givenby 15 months after the end of the month inwhich the organization was created, the or-ganization will not be exempt for any periodbefore notice is given. The EO area managermay grant an extension of time for filing thenotice under the same procedures as thosedescribed for section 501(c)(3) organizations

in chapter 3 under Application for Recognitionof Exemption.

Membership. Membership of a section501(c)(9) organization must consist of indi-viduals who are employees and have anemployment-related common bond. Thiscommon bond may be a common employer(or affiliated employers), coverage under oneor more collective bargaining agreements,membership in a labor union, or membershipin one or more locals of a national or inter-national labor union.

The membership of an association mayinclude some individuals who are not em-ployees, provided they have an employment-related bond with the employee-members.For example, the owner of a business whoseemployees are members of the associationmay be a member. An association will beconsidered composed of employees if 90%of its total membership on one day of eachquarter of its tax year consists of employees.

Employees. Employees include individ-uals who became entitled to membership be-cause they are or were employees. For ex-ample, an individual will qualify as anemployee even though the individual is on aleave of absence or has been terminated dueto retirement, disability, or layoff.

Generally, membership is voluntary if anaffirmative act is required on the part of anemployee to become a member. Conversely,membership is involuntary if the designationas a member is due to employee status.However, an association will be consideredvoluntary if employees are required to bemembers of the organization as a conditionof their employment and they do not incur adetriment (such as a payroll deduction) as aresult of their membership. An employer hasnot imposed involuntary membership on theemployee if membership is required as theresult of a collective bargaining agreementor as an incident of membership in a labororganization.

Payment of benefits. The information sub-mitted with your application must show thatyour organization will pay life, sick, accident,supplemental unemployment, or other similarbenefits. The benefits may be provided di-rectly by your association or indirectly by yourassociation through the payments of premi-ums to an insurance company (or fees to amedical clinic). Benefits may be in the formof medical, clinical, or hospital services,transportation furnished for medical care, ormoney payments.

Nondiscrimination requirements. An or-ganization that is part of a plan will not beexempt unless the plan meets certain non-discrimination requirements. However, if theorganization is part of a plan that is a collec-tive bargaining agreement that was the sub-ject of good faith bargaining between em-ployee organizations and employers, the planneed not meet these requirements for the or-ganization to qualify as tax exempt.

A plan meets the nondiscrimination re-quirements only if both of the following state-ments are true.

1) Each class of benefits under the plan isprovided under a classification of em-ployees that is set forth in the plan anddoes not discriminate in favor of em-ployees who are highly compensatedindividuals.

2) The benefits provided under each classof benefits do not discriminate in favorof highly compensated individuals.

A life insurance, disability, severance pay, orsupplemental unemployment compensationbenefit does not discriminate in favor of highlycompensated individuals merely because thebenefits available bear a uniform relationshipto the total compensation, or the basic orregular rate of compensation, of employeescovered by the plan.

For purposes of determining whether aplan meets the nondiscrimination require-ments, the employer may elect to exclude alldisability or severance payments payable toindividuals who are in pay status as of Janu-ary 1, 1985. This will not apply to any in-crease in such payment by any plan amend-ment adopted after June 22, 1984.

If a plan provides a benefit for which thereis a nondiscrimination provision provided un-der Chapter 1 of the Internal Revenue Codeas a condition of that benefit being excludedfrom gross income, these nondiscriminationrequirements do not apply. The benefit willbe considered nondiscriminatory only if itmeets the nondiscrimination provision of theapplicable Code section. For example, bene-fits provided under a medical reimbursementplan would meet the nondiscrimination re-quirements for an association, if the benefitsmeet the nondiscrimination requirements ofCode section 105(h)(3) and 105(h)(4).

Excluded employees. Certain employ-ees who are not covered by a plan may beexcluded from consideration in applying theserequirements. These include employees:

1) Who have not completed 3 years ofservice,

2) Who have not attained age 21,

3) Who are seasonal or less than half-timeemployees,

4) Who are not in the plan and who are in-cluded in a unit of employees coveredby a collective bargaining agreement ifthe class of benefits involved was thesubject of good faith bargaining, or

5) Who are nonresident aliens and who re-ceive no earned income from the em-ployer that is United States source in-come.

Highly compensated individual. Ahighly compensated individual is one who:

1) Owned 5 percent or more of the em-ployer at any time during the current yearor the preceding year,

2) Received more than $80,000 (adjustedfor inflation) in compensation from theemployer for the preceding year, and

3) Was among the top 20% of employeesby compensation for the preceding year.

But the employer can choose not to have (3)apply.

Aggregation rules. The employer maychoose to treat two or more plans as one planfor purposes of meeting the nondiscriminationrequirements. Employees of controlledgroups of corporations, trades or businessesunder common control, or members of an af-filiated service group, are treated as employ-ees of a single employer. Leased employeesare treated as employees of the recipient.

Chapter 4 Other Section 501(c) Organizations Page 49

One employee. A trust created to providebenefits to one employee will not qualify asa voluntary employees' beneficiary asso-ciation under section 501(c)(9).

SupplementalUnemployment BenefitTrusts (501(c)(17)) A trust or trusts forming part of a written plan(established and maintained by an employer,his or her employees, or both) providingsolely for the payment of supplemental un-employment compensation benefits must filethe application for recognition of exemptionon Form 1024. The trust must be a valid, ex-isting trust under local law and must be evi-denced by an executed document. A con-formed copy of the plan of which the trust isa part should be attached to the application.

Notice requirement. An organization will notbe considered tax exempt under this sectionunless the organization gives notice to theIRS that it is applying for recognition of ex-empt status. The organization gives noticeby filing Form 1024. If the notice is not givenby 15 months after the end of the month inwhich the organization was created, the or-ganization will not be exempt for any periodbefore such notice is given. The EO areamanager may grant an extension of time forfiling the notice under the same proceduresas those described for section 501(c)(3) or-ganizations in chapter 3 under Application forRecognition of Exemption.

Types of payments. You must show that thesupplemental unemployment compensationbenefits will be benefits paid to an employeebecause of the employee's involuntary sepa-ration from employment (whether or not theseparation is temporary) resulting directlyfrom a reduction-in-force, discontinuance ofa plant or operation, or other similar condi-tions. In addition, sickness and accident ben-efits (but not vacation, retirement, or deathbenefits) may be included in the plan if theseare subordinate to the unemployment com-pensation benefits.

Diversion of funds. It must be impossibleunder the plan (at any time before the satis-faction of all liabilities with respect to em-ployees under the plan) to use or to divert anyof the corpus or income of the trust to anypurpose other than the payment of supple-mental unemployment compensation benefits(or sickness or accident benefits to the extentjust explained).

Discrimination in benefits. Neither theterms of the plan nor the actual payment ofbenefits may be discriminatory in favor of thecompany's officers, stockholders, supervi-sors, or highly paid employees. However, aplan is not discriminatory merely becausebenefits bear a uniform relationship to com-pensation or the rate of compensation.

Reestablishing exemption. If your organ-ization is a supplemental unemploymentbenefit trust and has received a denial of ex-emption because it engaged in a prohibitedtransaction, as defined by section 503(b), itmay file a claim for exemption in any tax yearfollowing the tax year in which the notice ofdenial was issued. It must file the claim onForm 1024. The organization must include awritten declaration that it will not knowingly

again engage in a prohibited transaction. Anauthorized principal officer of your organiza-tion must make this declaration under thepenalties of perjury.

If your organization has satisfied all re-quirements as a supplemental unemploymentbenefit trust described in section 501(c)(17),it will be notified in writing that it has beenrecognized as exempt. However, the organ-ization will be exempt only for those tax yearsafter the tax year in which the claim for ex-emption (Form 1024) is filed. Tax year in thiscase means the established annual account-ing period of the organization or, if the or-ganization has not established an annual ac-counting period, the calendar year. For moreinformation about the requirements for rees-tablishing an exemption previously denied,contact the IRS.

501(c)(12) —Local BenevolentLife InsuranceAssociations,Mutual Irrigationand TelephoneCompanies, andLike OrganizationsEach of the following organizations may applyfor recognition of exemption from federal in-come tax by filing Form 1024.

1) Benevolent life insurance associ-ations of a purely local character andlike organizations.

2) Mutual ditch or irrigation companiesand like organizations.

3) Mutual or cooperative telephonecompanies and like organizations.

A like organization is an organization thatperforms a service comparable to that per-formed by any one of the above organiza-tions.

The information to be provided upon ap-plication by each of these organizations isdescribed in this section. For information asto the procedures to follow in applying forexemption, see chapter 1.

General requirements. These organizationsmust use their income solely to cover lossesand expenses, with any excess being re-turned to members or retained for futurelosses and expenses. They must collect atleast 85% of their income from members forthe sole purpose of meeting losses and ex-penses.

Mutual character. These organizations,other than benevolent life insurance associ-ations, must be organized and operated on amutual or cooperative basis. They are asso-ciations of persons and organizations, orboth, banded together to provide themselvesa mutually desirable service approximately atcost and on a mutual basis. To maintain themutual characteristic of democratic ownershipand control, they must be so organized andoperated that their members have the right tochoose the management, to receive servicessubstantially at cost, to receive a return of any

excess of payments over losses and ex-penses, and to share in any assets upondissolution.

The rights and interests of members in theannual savings of the organization must bedetermined in proportion to their businesswith the organization. Upon dissolution, gainsfrom the sale of appreciated assets must bedistributed to all persons who were membersduring the period the assets were owned bythe organization in proportion to the amountof business done during that period. The by-laws must not provide for forfeiture of amember's rights and interest upon withdrawalor termination.

Membership. Membership of a mutualorganization consists of those who join theorganization to obtain its services, acquire aninterest in its assets, and have a voice in itsmanagement. In a stock company, thestockholders are members. Membership mayinclude distributors who furnish service to in-dividual consumers. However, it does not in-clude the individual consumers served by thedistributor. A mutual service organization mayserve nonmembers as long as at least 85%of its gross income is collected from mem-bers. However, a mutual life insurance or-ganization may have no policyholders otherthan its members.

Losses and expenses. In furnishingservices substantially at cost, an organizationmust use its income solely for paying lossesand expenses. Any excess income not re-tained in reasonable reserves for futurelosses and expenses belongs to members inproportion to their patronage or businessdone with the organization. If such patronagerefunds are retained in reasonable amountsfor purposes of expanding facilities, retiringcapital indebtedness, acquiring other assets,etc., the organization must maintain recordssufficient to reflect the equity of each memberin the assets acquired with the funds.

Dividends. Dividends paid to stockhold-ers on stock or the value of a capital equityinterest constitute a distribution of profitsand are not an expense within the termlosses and expenses. Therefore, a mutual orcooperative association whose shares carrythe right to dividends will not qualify for ex-emption. However, this prohibition does notapply to the distribution of the unexpendedbalance of collections or assessments re-maining on hand at the end of the year tomembers as patronage dividends or refundsprorated to each on the basis of their patron-age or business done with the organization.Such distribution represents a reduction in thecost of services rendered to the member.

The 85% requirement. All of the organ-izations discussed in this section must submitevidence with their application that they re-ceive 85% or more of their gross income fromtheir members for the sole purpose of meet-ing losses and expenses. Nevertheless, cer-tain items of income are excluded from thecomputation of the 85% requirement if theorganization is a mutual or cooperative tele-phone or electric company.

A mutual or cooperative telephone com-pany will exclude from the computation of the85% requirement any income received or ac-crued from:

1) A nonmember telephone company forthe performance of communication ser-vices involving the completion of longdistance calls to, from, or betweenmembers of the mutual or cooperativetelephone company,

Page 50 Chapter 4 Other Section 501(c) Organizations

2) Qualified pole rentals,

3) The sale of display listings in a directoryfurnished to its members, or

4) The prepayment of a loan created in1987, 1988, or 1989, under section306A, 306B, or 311 of the RuralElectrification Act of 1936.

A mutual or cooperative electric companywill exclude from the computation any incomereceived or accrued from qualified polerentals and from the prepayment of loansdescribed in (4) above. An electric cooper-ative's sale of excess fuel at cost in the yearof purchase is not income for purposes ofdetermining compliance with the 85% re-quirement.

The term qualified pole rental means anyrental of a pole (or other structure used tosupport wires) if the pole (or other structure)is used:

1) By the telephone or electric company tosupport one or more wires that are usedby the company in providing telephoneor electric services to its members, and

2) Pursuant to the rental to support one ormore wires (in addition to wires de-scribed in (1)) for use in connection withthe transmission by wire of electricity orof telephone or other communications.

The term rental, for this purpose, includes anysale of the right to use the pole (or otherstructure).

The 85% requirement is applied on thebasis of an annual accounting period. Fail-ure of an organization to meet the require-ment in a particular year precludes exemptionfor that year, but has no effect upon ex-emption for years in which the 85% require-ment is met.

Gain from the sale or conversion of theorganization's property is not consideredan amount received from members in deter-mining whether the organization's incomeconsists of amounts collected from members.

Because the 85% income test is basedon gross income, capital losses cannot beused to reduce capital gains for purposes ofthis test.

Example. The books of an organizationreflect the following for the calendar year.

Since amounts collected from membersdo not constitute at least 85% of gross in-come, the organization is not entitled to ex-emption from federal income tax for the year.

Voluntary contributions in the nature ofgifts are not taken into account for purposesof the 85% computation.

Other tax-exempt income besides gifts isconsidered as income received from otherthan members in applying the 85% test.

If the 85% test is not met, your organiza-tion, if classifiable under this section, will notqualify for exemption as any other type of or-ganization described in this publication.

Tax treatment of donations. Donations toan organization described in this section arenot deductible as charitable contributions onthe donor's federal income tax return.

Local Life InsuranceAssociations A benevolent life insurance association or anorganization seeking recognition of exemptionon grounds of similarity to a benevolent lifeinsurance association must submit evidenceupon applying for recognition of exemptionthat it will be of a purely local character, thatits excess funds will be refunded to membersor retained in reasonable reserves to meetfuture losses and expenses, and that it meetsthe 85% income requirement. If an organiza-tion issues policies for stipulated cash premi-ums, or if it requires advance deposits tocover the cost of the insurance and maintainsinvestments from which more than 15% of itsincome is derived, it will not be entitled toexemption.

To establish that your organization is of apurely local character, it should show thatits activities will be confined to a particularcommunity, place, or district irrespective ofpolitical subdivisions. If the activities of anorganization are limited only by the bordersof a state, it cannot be purely local in char-acter. A benevolent life insurance associationthat does not terminate membership when amember moves from the local area in whichthe association operates will qualify for ex-emption if it meets the other requirements.

A copy of each type of policy issued byyour organization should be included with theapplication for recognition of exemption.

Organizations similar to local benevolentlife insurance companies. These organiza-tions include those that in addition to payingdeath benefits also provide for the paymentof sick, accident, or health benefits. However,an organization that pays only sick, accident,or health benefits, but not life insurance ben-efits, is not an organization similar to a be-nevolent life insurance association andshould not apply for recognition of exemptionas described in this section.

Burial and funeral benefit insuranceorganization. This type of organization canapply for recognition of exemption as an or-ganization similar to a benevolent life insur-ance company if it establishes that the bene-fits are paid in cash and if it is not engageddirectly in the manufacture of funeral suppliesor the performance of funeral services. Anorganization that provides its benefits in theform of supplies and service is not a life in-surance company. Such an organization mayseek recognition of exemption from federalincome tax, however, as a mutual insurancecompany other than life.

Mutual or CooperativeAssociations Mutual ditch or irrigation companies, mutualor cooperative telephone companies, and likeorganizations need not establish that they areof a purely local character. They may servenoncontiguous areas.

Like organization. This is a term gener-ally restricted to organizations that perform aservice comparable to mutual ditch, irrigation,and telephone companies such as mutualwater, communications, electric power, or gascompanies all of which satisfy the 85% test.Examples are an organization structured forthe protection of river banks against erosionwhose only income consists of assessmentsagainst the property owners concerned, anonprofit organization providing and main-

taining a two-way radio system for its mem-bers on a mutual or cooperative basis, or alocal light and water company organized tofurnish light and water to its members. A co-operative organization providing cable tele-vision service to its members may qualify forexemption as a like organization if the re-quirements discussed in this section are met.

Associations operating a bus for theirmembers' convenience, providing and main-taining cooperative housing facilities for thepersonal benefit of individuals, or furnishinga financing service for purchases made bymembers of cooperative organizations are notlike organizations.

501(c)(13) —Cemetery Companies

If your organization wishes to obtain recogni-tion of exemption from federal income tax asa cemetery company or a corporation char-tered solely for the purpose of the disposalof human bodies by burial or cremation, itshould file an application on Form 1024. Forthe procedure to follow to file an application,see chapter 1.

A nonprofit mutual cemetery companythat seeks recognition of exemption shouldsubmit evidence with its application that it isowned and operated exclusively for the ben-efit of its lot owners who hold lots for bona fideburial purposes and not for purposes of re-sale. A mutual cemetery company that alsoengages in charitable activities, such as theburial of paupers, will be regarded as operat-ing within this standard. The fact that a mu-tual cemetery company limits its membershipto a particular class of individuals, such asmembers of a family, will not affect its statusas mutual so long as all the other require-ments of section 501(c)(13) are met.

If your organization is a nonprofit corpo-ration chartered solely for the purpose of thedisposal of human bodies by burial orcremation, you should show that it is notpermitted by its charter to engage in anybusiness not necessarily incident to that pur-pose. Operating a mortuary is not permitted.However, selling monuments, markers,vaults, and flowers solely for use in the cem-etery is permitted if the profits from thesesales are used to maintain the cemetery asa whole.

How income may be used. You shouldshow that your organization's earnings areor will be used only in one or more of thefollowing ways.

1) To pay the ordinary and necessary ex-penses of operating, maintaining, andimproving the cemetery or crematorium.

2) To buy cemetery property.

3) To create a fund that will provide asource of income for the perpetual careof the cemetery or a reasonable reservefor any ordinary or necessary purpose.

No part of the net earnings of your or-ganization may benefit any private share-holder or individual.

Ordinary and necessary expenses in con-nection with the operation, management,maintenance, and improvement of the ceme-

Collections from members ....................... $2,400Short-term capital gains ........................... 600Short-term capital losses ......................... 400Other income ........................................... NoneGross income ($2,400 + $600 =$3000) .. 100%Collected from members ($2,400) ........... 80%

Chapter 4 Other Section 501(c) Organizations Page 51

tery are permitted, as are reasonable fees forthe services of a manager.

Buying cemetery property. Paymentsmay be made to amortize debt incurred to buyland, but may not be in the nature of profitdistributions. You must show the methodused to finance the purchase of the cemeteryproperty and that the purchase price of theland at the time of its sale to the cemeterywas not unreasonable.

Except for holders of preferred stock (dis-cussed later), no person may have any inter-est in the net earnings of a tax-exempt cem-etery company or crematorium. Therefore, ifproperty is transferred to the organization inexchange for an interest in the organization'snet earnings, the organization will not be ex-empt so long as that interest remains out-standing.

An equity interest in the organization is aninterest in the net earnings of the organiza-tion. However, an interest in the organizationthat is not an equity interest may still be aninterest in the organization's net earnings. Forexample, a bond issued by a cemetery com-pany that provides for a fixed rate of interestand also provides for additional interest pay-ments based on the income of the organiza-tion is considered an interest in the netearnings of the organization. Similarly, aconvertible debt obligation issued after July7, 1975, is considered an interest in the netearnings of the organization.

Perpetual care organization. A perpetualcare organization, including, for example, atrust organized to receive, maintain, and ad-minister funds that it receives from a nonprofittax-exempt cemetery pursuant to state lawand contracts, may apply for recognition ofexemption on Form 1024, even though it doesnot own the land used for burial. However, theincome from these funds must be devotedexclusively to the perpetual care and mainte-nance of the nonprofit cemetery as a whole.Also, no part of the net earnings may benefitany private shareholder or individual.

In addition, a perpetual care organizationnot operated for profit, but established as acivic enterprise to maintain and administerfunds, the income of which is devoted exclu-sively to the perpetual care and maintenanceof an abandoned cemetery as a whole, mayqualify for exemption.

Care of individual plots. When fundsare received by a cemetery company for theperpetual care of an individual lot or crypt, atrust is created that is subject to federal in-come tax. Any trust income that is used orpermanently set aside for the care, mainte-nance, or beautification of a particular familyburial lot or mausoleum crypt is not deductiblein computing the trust's taxable income.

Common and preferred stock. A cemeterycompany that issues common stock mayqualify for exemption only if no dividends maybe paid. The payment of dividends must belegally prohibited either by the corporation'scharter or by applicable state law.

Generally, a cemetery company orcrematorium is not exempt if it issues pre-ferred stock. However, it can still be exemptif the preferred stock was issued before No-vember 28, 1978, or was issued after thatdate under a written plan adopted before thatdate. The adoption of the plan must be shownby the acts of the responsible officers andappear on the official records of the organ-ization.

The preferred stock issued either beforeNovember 28, 1978, or under a plan adopted

before that date, must meet all the followingrequirements.

1) The preferred stock entitles the holdersto dividends at a fixed rate that is notmore than the greater of the legal rateof interest in the state of incorporationor 8% a year on the value of the con-sideration for which the stock was is-sued.

2) The organization's articles of incorpo-ration require:

a) That the preferred stock be retiredat par as rapidly as funds becomeavailable from operations, and

b) That all funds not required for thepayment of dividends on or for theretirement of preferred stock beused by the company for the careand improvement of the cemeteryproperty.

Tax treatment of donations. Donations toexempt cemetery companies, corporationschartered solely for human burial purposes,and perpetual care funds (operated in con-nection with such exempt organizations) aredeductible as charitable contributions on thedonor's federal income tax return. However,a donor may not deduct a contribution madefor the perpetual care of a particular lot orcrypt. Payments made to a cemetery com-pany or corporation as part of the purchaseprice of a burial lot or crypt, whetherirrevocably dedicated to the perpetual careof the cemetery as a whole or earmarked forthe care of a particular lot, are also notdeductible.

501(c)(14) —Credit Unionsand OtherMutual FinancialOrganizations If your organization wants to obtain recogni-tion of exemption as a credit union withoutcapital stock, organized and operated understate law for mutual purposes and withoutprofit, it should file an application including thefacts, information, and attachments describedin this section. In addition, it should follow theprocedures for filing an application describedin chapter 1.

Federal credit unions organized and op-erated in accordance with the Federal CreditUnion Act, as amended, are instrumentalitiesof the United States, and therefore, are ex-empt under section 501(c)(1). They are in-cluded in a group exemption letter issued tothe National Credit Union Administration.They are not discussed in this publication.

State chartered credit unions and othermutual financial organizations may file appli-cations for recognition of exemption fromfederal income tax under section 501(c)(14).The other mutual financial organizationsmust be corporations or associations withoutcapital stock organized before September 1,1957, and operated for mutual purposes andwithout profit to provide reserve funds for, andinsurance of, shares or deposits in:

1) Domestic building and loan associations,

2) Cooperative banks (without capitalstock) organized and operated for mu-tual purposes and without profit,

3) Mutual savings banks (not having capitalstock represented by shares), or

4) Mutual savings banks described in sec-tion 591(b).

Similar organizations, formed before Sep-tember 1, 1957, that provide reserve funds for(but not insurance of shares or deposits in)one of the types of savings institutions de-scribed in (1), (2), or (3) above may be ex-empt from tax if 85% or more of the organ-ization's income is from providing reservefunds and from investments. There is nospecific restriction against the issuance ofcapital stock for these organizations.

Building and loan associations, savingsand loan associations, mutual savings banks,and cooperative banks, other than those de-scribed in this section, are not exempt fromtax. However, certain corporations organizedand operated in conjunction with farmers' co-operatives can be exempt.

Application form. The Internal RevenueService does not provide a printed applicationform for the use of organizations described inthis section. Any form of written application isacceptable as long as it shows the informa-tion indicated in this section and includes adeclaration that it is made under the penaltiesof perjury. The application must be submittedin duplicate.

State-CharteredCredit UnionsYour organization must show on its applica-tion that it is formed under a state credit unionlaw, the state and date of incorporation, andthat the state credit union law with respect toloans, investments, and dividends, if any, isbeing complied with.

A form of statement furnished to appli-cants by the Credit Union National Associ-ation is acceptable in meeting the applicationrequirements for credit unions, and may beused instead of the statement form of appli-cation just described. The following is a re-production of that form.

Claim for Exemption from Federal In-come Tax (Date)

The undersigned (Com-plete name) Credit Union,Inc., (Complete address, in-cluding street and number), a credit unionoperating under the credit union law of theState of , claims exemption fromfederal income tax and supplies the followinginformation relative to its operation.

1) Date of incorporation .

2) It was incorporated under the credit un-ion law of the State of , andis being operated under uniform bylawsadopted by said state.

3) In making loans, the state credit unionlaw requirements, including their pur-poses, security, and rate of interestcharged thereon, are complied with.

4) Its investments are limited to securitieswhich are legal investments for creditunions under the state credit union law.

5) Its dividends on shares, if any, are dis-tributed as prescribed by the state creditunion law.

Page 52 Chapter 4 Other Section 501(c) Organizations

I, the undersigned, a duly authorized officerof the Credit Union, Inc., de-clare that the above information is a truestatement of facts concerning the credit un-ion.

Signature ofOfficer Title

Other MutualFinancial OrganizationsEvery other organization included in this sec-tion must show in its application the state inwhich the organization is incorporated and thedate of incorporation; the character of the or-ganization; the purpose for which it was or-ganized; its actual activities; the sources of itsreceipts and the disposition thereof; whetherany of its income may be credited to surplusor may benefit any private shareholder or in-dividual; whether the law relating to loans,investments, and dividends is being compliedwith; and, in general, all facts relating to itsoperations that affect its right to exemption.

The application must include detailed in-formation showing either that the organizationprovides both reserve funds for and insuranceof shares and deposits of its member financialorganizations or that the organization pro-vides reserve funds for shares or deposits ofits members and 85% or more of the organ-ization's income is from providing reservefunds and from investments. There should beattached a conformed copy of the articles ofincorporation or other document setting forththe permitted powers or activities of the or-ganization; the bylaws or other similar codeof regulations; and the latest annual financialstatement showing the receipts, disburse-ments, assets, and liabilities of the organiza-tion.

501(c)(19) —Veterans'Organizations A post or organization of past or presentmembers of the Armed Forces of the UnitedStates may file Form 1024 to apply for rec-ognition of exemption from federal incometax. You should follow the general proce-dures outlined in chapter 1. The organizationmust also meet the qualifications describedin this section.

Examples of groups that would qualify forexemption are posts or auxiliaries of theAmerican Legion, Veterans of Foreign Wars,and similar organizations.

To qualify for recognition of exemption,your application should show:

1) That the post or organization is organ-ized in the United States or any of itspossessions,

2) That at least 75% of the members arepast or present members of the U.S.Armed Forces and that at least 97.5%of all members of the organization arepast or present members of the U.S.Armed Forces, cadets (including onlystudents in college or university ROTCprograms or at armed services acade-mies) or spouses, widows, or widowersof any of those listed here, and

3) That no part of the net earnings benefitany private shareholder or individual.

In addition to these requirements, a vet-erans' organization also must be operatedexclusively for one or more of the followingpurposes.

1) To promote the social welfare of thecommunity (that is, to promote in someway the common good and general wel-fare of the people of the community).

2) To assist disabled and needy war veter-ans and members of the U.S. ArmedForces and their dependents and thewidows and orphans of deceased veter-ans.

3) To provide entertainment, care, and as-sistance to hospitalized veterans ormembers of the U.S. Armed Forces.

4) To carry on programs to perpetuate thememory of deceased veterans andmembers of the Armed Forces and tocomfort their survivors.

5) To conduct programs for religious, char-itable, scientific, literary, or educationalpurposes.

6) To sponsor or participate in activities ofa patriotic nature.

7) To provide insurance benefits for itsmembers or dependents of its membersor both.

8) To provide social and recreational activ-ities for its members.

Auxiliary unit. An auxiliary unit or societyof a veterans' organization may apply forrecognition of exemption provided that theveterans' organization (parent organization)meets the requirements explained earlier inthis section. The auxiliary unit or society mustalso meet all the following additional require-ments.

1) It is affiliated with, and organized in ac-cordance with, the bylaws and regu-lations formulated by the parent organ-ization.

2) At least 75% of its members are eitherpast or present members of the U.S.Armed Forces, spouses of those mem-bers, or related to those members withintwo degrees of kinship (grandparent,brother, sister, and grandchild representthe most distant allowable relationship).

3) All of its members either are membersof the parent organization, spouses of amember of the parent organization, orrelated to a member of such organizationwithin two degrees of kinship.

4) No part of its net earnings benefit anyprivate shareholder or individual.

Trusts or foundations. Trusts or founda-tions for a veterans' organization also mayapply for recognition of exemption providedthat the parent organization meets the re-quirements explained earlier. The trust orfoundation must also meet all the followingqualifications.

1) The trust or foundation is in existenceunder local law and, if it is organized forcharitable purposes, has a dissolutionprovision similar to charitable organiza-tions. (See Articles of Organization inchapter 3 of this publication.)

2) The corpus or income cannot be divertedor used other than for:

a) The funding of a veterans' organ-ization, described in this section,

b) Religious, charitable, scientific, lit-erary, or educational purposes orfor the prevention of cruelty to chil-dren or animals, or

c) An insurance set aside.

3) The trust income is not unreasonablyaccumulated and, if the trust or founda-tion is not an insurance set aside, asubstantial portion of the income is infact distributed to the parent organizationor for the purposes described in item(2)(b).

4) It is organized exclusively for one ormore of the purposes listed earlier in thissection that are specifically applicable tothe parent organization.

Tax treatment of donations. Donations towar veterans' organizations are deductible ascharitable contributions on the donor's federalincome tax return. At least 90% of the or-ganization's membership must consist of warveterans. The term war veterans meanspersons, whether or not present members ofthe U.S. Armed Forces, who have served inthe U.S. Armed Forces during a period of war(including the Korean and Vietnam conflicts,the Persian Gulf war, and later declaredwars).

501(c)(20) —Group Legal ServicesPlan Organizations An organization or trust created in the U.S. forthe exclusive function of forming a part of aqualified group legal services plan or planscannot be exempt under section 501(c)(20)after June 30, 1992. However, it may qualifyfor exemption under section 501(c)(9).

501(c)(21) —Black LungBenefit Trusts If your organization wishes to obtain recogni-tion of exemption as a black lung benefit trust,it must file its application by letter and includea copy of its trust instrument. The generalprocedures to follow for obtaining recognitionare discussed in chapter 1 of this publication.This section describes the additional (or spe-cific) information to be provided upon appli-cation.

Requirements. A black lung benefit trust thatis established in writing, created or organizedin the United States, and contributed to byany person (except an insurance company)will qualify for tax-exempt status if it meetsboth of the following requirements.

1) Its only purpose is:

a) To satisfy in whole or in part the li-ability of that person (generally, thecoal mine operator contributing tothe trust) for, or with respect to,

Chapter 4 Other Section 501(c) Organizations Page 53

claims for compensation arisingunder federal or state statutes fordisability or death due topneumoconiosis,

b) To pay the premiums for insurancethat covers only that liability, and

c) To pay the administrative and otherincidental expenses of that trust(including legal, accounting,actuarial, and trustee expenses) inconnection with the operation of thetrust and processing of black lungclaims against such person arisingunder federal or state statutes.

2) No part of its assets may be used for,or diverted to, any purposes other than:

a) The purposes described in (1),above,

b) Payments into the Black Lung Dis-ability Trust Fund or into the generalfund of the U.S. Treasury (otherthan in satisfaction of any tax orother civil or criminal liability of theperson who established or contrib-uted to the trust),

c) Investment in public debt securitiesof the U.S., obligations of a stateor local government that are not indefault as to principal or interest,or time or demand deposits in abank or an insured credit union lo-cated in the U.S. (These invest-ments are restricted to the extentthat the trustee determines that aportion of the assets is not currentlyneeded for the purposes describedin (1), above), or

d) Accident and health benefits or in-surance premiums and other ad-ministrative expenses for retiredcoal miners and their spouses. Theamount of assets available for suchuse is generally limited to 110% ofthe present value of the liability forblack lung benefits.

An annual information return is required ofexempt trusts described in section 501(c)(21).Form 990–BL, Information and Initial ExciseTax Return for Black Lung Benefit Trusts andCertain Related Persons, must be used forthis purpose. However, a trust that normallyhas gross receipts in each tax year of notmore than $25,000 is excepted from this filingrequirement.

Excise taxes. If your organization makesany expenditures, payments, or investmentsother than those described earlier in thissection, a tax equal to 10% of the amount ofsuch expenditures is imposed on the trust. Ifthere are any acts of self-dealing between thetrust and a disqualified person, a tax equal to10% of the amount involved is imposed on thedisqualified person. Both of these excisetaxes are reported on Schedule A (Form990–BL). See the Form 990–BL instructionsfor more information on these taxes and whathas to be filed, even if the trust is exceptedfrom filing.

Tax treatment of donations. Contributionsby a taxpayer (generally, the coal mine oper-ator) to a black lung benefit trust are deduct-ible for federal income tax purposes undersection 192 of the Code. The deduction islimited, and any excess contributions aresubject to an excise tax of 5%. Form 6069,

Return of Excise Tax on Excess Contributionsto Black Lung Benefit Trust Under Section4953 and Computation of Section 192 De-duction, is used to compute the allowablededuction and any excise tax liability. Theform does not have to be filed if there is noexcise tax liability. For more information aboutthese contributions, see Form 6069 and itsinstructions.

501(c)(2) —Title-HoldingCorporationsfor Single Parents If your organization wants to obtain recogni-tion of exemption from federal income tax asa corporation organized to hold title to prop-erty, collect income from that property, andturn over the entire amount less expenses toa single parent organization that is exemptfrom income tax, it should file its applicationon Form 1024. The information to submitupon application is described in this section.For a discussion of the procedures for ob-taining recognition of exemption, see chapter1.

You must show that your organization isa corporation. If you are in doubt as towhether your organization qualifies as a cor-poration for this purpose, contact your IRSoffice.

A title-holding corporation will qualify forexemption only if there is effective ownershipand control over it by the distributee exemptorganization. For example, the distributee or-ganization may control the title-holding cor-poration by owning its voting stock or pos-sessing the power to select nominees to holdits voting stock.

Corporate charter. The corporate charterthat you submit upon application must confinethe purposes and powers of your organizationto holding title to property, collecting incomefrom the property, and turning the incomeover to an exempt organization. If the charterauthorizes your organization to engage inactivities that go beyond these limits, its ex-emption may not be recognized even if itsactual operations are so limited. If your or-ganization's original charter does not limit itspowers, you may amend the charter to con-form to the required limits and submit evi-dence with your application that the charterhas been so amended.

Payment of income. You must show thatyour corporation is required to turn over theentire income from the property, less ex-penses, to one or more exempt organizations.

Actual payment of the income is required.A mere obligation to use the income for theexempt organization's benefit, or the fact thatsuch organization has control over the incomedoes not satisfy this requirement.

Expenses. Expenses may reduce theamount of income required to be turned overto the tax-exempt organization for which yourorganization holds property. The term ex-penses (for this purpose) includes not onlyordinary and necessary expenses paid or in-curred, but also reasonable additions to de-preciation reserves and other reserves thatwould be proper for a business corporationholding title to and maintaining property.

In addition, the title-holding corporationmay retain part of its income each year toapply to debt on property to which it holdstitle. This transaction is treated as if the in-come had been turned over to the exemptorganization and the latter had used the in-come to make a contribution to the capital ofthe title-holding corporation that in turn, ap-plied the contribution to the debt.

Waiver of payment of income. Gener-ally, there is no payment of rent when theoccupant of property held by your title-holdingcorporation is the exempt organization forwhich your corporation holds the title. In thissituation, the statutory requirement that in-come be paid over to the exempt organizationis satisfied if your corporation turns overwhatever income is available.

Application for recognition of exemption.In addition to the information required byForm 1024, the title-holding corporation mustfurnish evidence that the organization forwhich title is held has obtained recognition ofexempt status. If that organization has notbeen specifically notified in writing by the IRSthat it is exempt, the title-holding corporationmust submit the necessary application andsupporting documents to enable the IRS todetermine whether the organization for whichtitle is held qualifies for exemption. A copy ofa ruling or determination letter issued to theorganization for which title is held will be proofthat it qualifies for exemption. However, untilthe organization for which title is held obtainsrecognition of exempt status or proof is sub-mitted to show that it qualifies, the title-holding corporation cannot obtain recognitionof exemption.

Tax treatment of donations. Donations toan exempt title-holding corporation generallyare not deductible as charitable contributionson the donor's federal income tax return.

501(c)(25) —Title-HoldingCorporations forMultiple Parents If your organization wants to obtain recogni-tion of exemption from federal income tax asan organization organized for the exclusivepurpose of acquiring, holding title to, andcollecting income from real property, andturning over the entire amount less expensesto member organizations exempt from incometax, it should file its application on Form 1024.For a discussion of the procedures for ob-taining recognition of exemption, see chapter1.

Who can control the organization. Organ-izations recognized as exempt under thissection may have up to 35 shareholders orbeneficiaries, in contrast to title-holding or-ganizations recognized as exempt under IRC501(c)(2), which may have only 1 controllingparent organization.

Organizational requirements. A 501(c)(25)organization must be either a corporation ora trust. Only one class of stock is permittedin the case of a corporation. In the case of atrust, only one class of beneficial interest isallowed.

Page 54 Chapter 4 Other Section 501(c) Organizations

Organizations eligible to acquire or holdinterests in this type of title-holding organiza-tion are qualified pension, profit-sharing, orstock bonus plans, governmental plans, gov-ernments and their agencies and instrumen-talities, and charitable organizations.

The articles of incorporation or trust in-strument must include provisions showingthat the corporation or trust is organized tomeet the requirements of the statute, includ-ing compliance with the limitations on mem-bership and classes of stock or beneficial in-terest, and compliance with the incomedistribution requirements. The organizingdocument must permit the organization'sshareholders or beneficiaries to dismiss theorganization's investment advisor, if any,upon a vote of the shareholders or beneficia-ries holding a majority interest in the organ-ization.

The organizing document must permit theshareholders or beneficiaries to terminatetheir interests by at least one of the followingmethods.

1) By selling or exchanging their stock orbeneficial interest to any organizationdescribed in IRC 501(c)(25)(C), providedthat the sale or exchange does notcause the number of shareholders orbeneficiaries to exceed 35.

2) By having their stock or beneficial inter-est redeemed by the 501(c)(25) organ-ization upon 90 days notice.

If state law prevents a corporation from in-cluding in its articles of incorporation theabove provisions, such provisions must in-stead be included in the bylaws of the corpo-ration.

A 501(c)(25) organization may be organ-ized as a nonstock corporation if its articlesof incorporation or bylaws provide memberswith the same rights as described above.

Subsidiaries. A wholly-owned subsidiary willnot be treated as a separate corporation, andall assets, liabilities, and items of income,deduction, and credit will be treated as be-longing to the section 501(c)(25) organization.Subsidiaries should not apply separately forrecognition of exemption.

Tax treatment of donations. Donations toan exempt title-holding corporation generallyare not deductible as charitable contributionson the donor's federal income tax return.

Unrelated Business IncomeIn general, the receipt of unrelated businessincome by a section 501(c)(25) organizationwill subject the organization to loss of exemptstatus since the organization cannot be ex-empt from taxation if it engages in any busi-ness other than that of holding title to realproperty and collecting the income from theproperty. However, exempt status generallywill not be affected by the receipt of debt-financed income that is treated as unrelatedbusiness taxable income solely because ofsection 514.

Under section 514(c)(9), certain share-holders or beneficiaries are not subject tounrelated debt-financed income tax undersection 514 on their investments through theorganization. These shareholders are gen-erally schools, colleges, universities, or sup-porting organizations of such educational in-stitutions. Organizations other than these willtake into account as gross income from an

unrelated trade or business their pro ratashare of income that is treated as unrelateddebt-financed income because section514(c)(9) does not apply. These organiza-tions will also take their pro rata share of theallowable deductions from unrelated taxableincome.

Real property. Real property can includepersonal property leased in connection withreal property, but only if the rent from thepersonal property is not more than 15% of thetotal rent for both the real property and thepersonal property.

Real property acquired after June 10,1987, cannot include any interest as a tenantin common (or similar interest) or any indirectinterest.

501(c)(26) —State-SponsoredHigh-Risk HealthCoverageOrganizationsA state-sponsored organization establishedto provide medical care to high-risk individ-uals should apply by letter for recognition ofexemption from federal income tax undersection 501(c)(26).

To qualify for exemption, the organizationmust be a membership organization estab-lished by a state exclusively to provide cov-erage for medical care on a nonprofit basisto high-risk individuals who are state resi-dents. It may provide coverage either by is-suing insurance itself or by entering into anarrangement with a health maintenance or-ganization (HMO).

The state must determine the compositionof membership in the organization. No partof the net earnings of the organization canbenefit any private shareholder or individual.

High-risk individuals. These are individ-uals, their spouses and qualifying children,who, because of a pre-existing medical con-dition:

1) Cannot get medical care coverage forthat condition through insurance or anHMO, or

2) Can get coverage for that condition onlyat a rate that is substantially higher thanthe rate for the same coverage from thestate-sponsored organization.

501(c)(27) —State-SponsoredWorkers'CompensationReinsuranceOrganizationsA state-sponsored workers' compensationreinsurance organization should apply by let-ter for recognition of exemption from federalincome tax under section 501(c)(27).

To qualify for exemption, any membershiporganization must meet all the following re-quirements.

1) It was established by a state before June1, 1996, exclusively to reimburse itsmembers for losses under workers'compensation acts.

2) The state requires that the membershipconsist of all persons who issue insur-ance covering workers' compensationlosses in the state and all persons andgovernment entities who self-insureagainst those losses.

3) It operates as a nonprofit organizationby returning surplus income to its mem-bers or workers' compensationpolicyholders on a periodic basis and byreducing initial premiums in anticipationof investment income.

Any organization (including a mutual in-surance company) can qualify for exemptionif it meets all of the following requirements.

1) It is created by state law and is organ-ized and operated under state law ex-clusively to:

a) Provide workmen's compensationinsurance which is required by statelaw or state law must provide sig-nificant disincentives if employersfail to purchase such insurance, and

b) Provide related coverage which isincidental to workmen's compen-sation insurance.

2) It provides workmen's compensation in-surance to any employer in the state (foremployees in the state or temporarilyassigned out-of-state) which seeks suchinsurance and meets other reasonablerequirements relating to the insurance.

3) The state makes a financial commitmentto such organization either by extendingits full faith and credit to the initial debtof the organization or by providing theinitial operating capital of the organiza-tion.

4) The assets of the organization revert tothe state upon dissolution or the organ-ization is not permitted to dissolve understate law.

5) The majority of the board of directors oroversight body of such organization areappointed by the chief executive officeror other executive branch official of thestate, by the state legislature, or by both.

5.How To Get TaxHelp

You can get help with unresolved tax is-sues, order free publications and forms, asktax questions, and get more information fromthe IRS in several ways. By selecting themethod that is best for you, you will havequick and easy access to tax help.

Chapter 5 How To Get Tax Help Page 55

Contacting your Taxpayer Advocate. If youhave attempted to deal with an IRS problemunsuccessfully, you should contact your Tax-payer Advocate.

The Taxpayer Advocate represents yourinterests and concerns within the IRS byprotecting your rights and resolving problemsthat have not been fixed through normalchannels. While Taxpayer Advocates cannotchange the tax law or make a technical taxdecision, they can clear up problems that re-sulted from previous contacts and ensure thatyour case is given a complete and impartialreview.

To contact your Taxpayer Advocate:

• Call the Taxpayer Advocate at1–877–777–4778.

• Call the IRS at 1–800–829–1040.

• Call, write, or fax the Taxpayer Advocateoffice in your area.

• Call 1–800–829–4059 if you are aTTY/TDD user.

For more information, see Publication1546, The Taxpayer Advocate Service of theIRS.

Free tax services. To find out what servicesare available, get Publication 910, Guide toFree Tax Services. It contains a list of free taxpublications and an index of tax topics. It alsodescribes other free tax information services,including tax education and assistance pro-grams and a list of TeleTax topics.

Personal computer. With your per-sonal computer and modem, you canaccess the IRS on the Internet at

www.irs.gov . While visiting our web site, youcan select:

• Frequently Asked Tax Questions (locatedunder Taxpayer Help & Ed) to find an-swers to questions you may have.

• Forms & Pubs to download forms andpublications or search for forms andpublications by topic or keyword.

• Fill-in Forms (located under Forms &Pubs) to enter information while the formis displayed and then print the completedform.

• Tax Info For You to view Internal Reve-nue Bulletins published in the last fewyears.

• Tax Regs in English to search regulationsand the Internal Revenue Code (underUnited States Code (USC)).

• Digital Dispatch and IRS Local News Net(both located under Tax Info For Busi-ness) to receive our electronic newslet-ters on hot tax issues and news.

• Small Business Corner (located underTax Info For Business) to get informationon starting and operating a small busi-ness.

You can also reach us with your computerusing File Transfer Protocol at ftp.irs.gov .

TaxFax Service. Using the phoneattached to your fax machine, you canreceive forms and instructions by

calling 703–368–9694. Follow the directionsfrom the prompts. When you order forms,enter the catalog number for the form youneed. The items you request will be faxed toyou.

Phone. Many services are availableby phone.

• Ordering forms, instructions, and publi-cations. Call 1–800–829–3676 to ordercurrent and prior year forms, instructions,and publications.

• Asking tax questions. Call the IRS withyour tax questions at 1–800–829–1040.

• Exempt organization assistance. If youhave questions about exempt organiza-tions, including the types of tax exemptorganizations or help completing exemptorganization tax forms, or if you want toverify an organization's charitable status,call our Tax Exempt/Government Enti-ties Customer Service at1–877–829–5500. Assistance is availableMonday through Friday from 8:00 a.m. to9:30 p.m. EST.

• TTY/TDD equipment. If you have accessto TTY/TDD equipment, call 1–800–829–4059 to ask tax questions or to orderforms and publications.

• TeleTax topics. Call 1–800–829–4477 tolisten to pre-recorded messages coveringvarious tax topics.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our tele-phone services in several ways.

• A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

• We sometimes record telephone calls toevaluate IRS assistors objectively. Wehold these recordings no longer than oneweek and use them only to measure thequality of assistance.

• We value our customers' opinions.Throughout this year, we will be survey-ing our customers for their opinions onour service.

Walk-in. You can walk in to manypost offices, libraries, and IRS officesto pick up certain forms, instructions,

and publications. Also, some libraries and IRSoffices have:

• An extensive collection of products avail-able to print from a CD-ROM or photo-copy from reproducible proofs.

• The Internal Revenue Code, regulations,Internal Revenue Bulletins, and Cumula-tive Bulletins available for research pur-poses.

Mail. You can send your order forforms, instructions, and publicationsto the Distribution Center nearest to

you and receive a response within 10 work-days after your request is received. Find theaddress that applies to your part of thecountry.

• Western part of U.S.:Western Area Distribution CenterRancho Cordova, CA 95743–0001

• Central part of U.S.:Central Area Distribution CenterP.O. Box 8903Bloomington, IL 61702–8903

• Eastern part of U.S. and foreign ad-dresses:Eastern Area Distribution CenterP.O. Box 85074Richmond, VA 23261–5074

CD-ROM. You can order IRS Publi-cation 1796, Federal Tax Products onCD-ROM, and obtain:

• Current tax forms, instructions, and pub-lications.

• Prior-year tax forms, instructions, andpublications.

• Popular tax forms which may be filled inelectronically, printed out for submission,and saved for recordkeeping.

• Internal Revenue Bulletins.

The CD-ROM can be purchased fromNational Technical Information Service (NTIS)by calling 1–877–233–6767 or on the Internetat www.irs.gov/cdorders. The first releaseis available in mid-December and the finalrelease is available in late January.

IRS Publication 3207, The Small BusinessResource Guide, is an interactive CD-ROMthat contains information important to smallbusinesses. It is available in mid-February.You can get one free copy by calling1–800–829–3676.

Page 56

Organization Reference ChartSection of1986 Code Description of organization General nature of activities

ApplicationForm No.

Annual returnrequired to be

filed

Contributionsallowable

501(c)(1)

501(c)(2)

501(c)(3)

501(c)(4)

501(c)(5)

501(c)(6)

501(c)(7)

501(c)(8)

501(c)(9)

501(c)(10)

501(c)(11)

501(c)(12)

501(c)(13)

501(c)(14)

501(c)(15)

501(c)(16)

501(c)(17)

501(c)(18)

501(c)(19)

501(c)(21)

Corporations Organized Under Actof Congress (including FederalCredit Unions)

Title-Holding Corporation ForExempt Organization

Religious, Educational, Charitable,Scientific, Literary, Testing for PublicSafety, to Foster National orInternational Amateur SportsCompetition, or Prevention of Crueltyto Children or Animals Organizations

Civic Leagues, Social WelfareOrganizations, and LocalAssociations of Employees

Labor, Agricultural, and HorticulturalOrganizations

Business Leagues, Chambers ofCommerce, Real Estate Boards,Etc.

Social and Recreation Clubs

Fraternal Beneficiary Societies andAssociations

Voluntary Employees’ BeneficiaryAssociations

Domestic Fraternal Societies andAssociations

Teachers’ Retirement FundAssociations

Benevolent Life InsuranceAssociations, Mutual Ditch orIrrigation Companies, Mutual orCooperative Telephone Companies,Etc.

Cemetery Companies

State-Chartered Credit Unions,Mutual Reserve Funds

Mutual Insurance Companies orAssociations

Cooperative Organizations toFinance Crop Operations

Supplemental UnemploymentBenefit Trusts

Employee-Funded Pension Trust(created before June 25, 1959)

Post or Organization of Past orPresent Members of the ArmedForces

Black Lung Benefit Trusts

Instrumentalities of theUnited States

Holding title to property of anexempt organization

Activities of nature implied bydescription of class of organization

Promotion of community welfare;charitable, educational orrecreational

Educational or instructive, thepurpose being to improve conditionsof work, and to improve productsand efficiency

Improvement of businessconditions of one or more lines ofbusiness

Pleasure, recreation, social activities

Lodge providing for payment of life,sickness, accident, or otherbenefits to members

Providing for payment of life,sickness, accident, or other benefitsto members

Lodge devoting its net earnings tocharitable, fraternal, and otherspecified purposes. No life, sickness,or accident benefits to members

Teachers’ association for paymentof retirement benefits

Activities of a mutually beneficialnature similar to those implied bythe description of class oforganization

Burials and incidental activities

Loans to members

Providing insurance to memberssubstantially at cost

Financing crop operations inconjunction with activities of amarketing or purchasingassociation

Provides for payment ofsupplemental unemploymentcompensation benefits

Payment of benefits under apension plan funded by employees

Activities implied by nature oforganization

Funded by coal mine operators tosatisfy their liability for disability ordeath due to black lung diseases

No Form

1024

1023

1024

No Form6

None

9901 or 990EZ8

9901 or 990EZ8,or 990–PF

990-BL

Yes, if made forexclusively publicpurposes

No2

Yes, generally

Yes, if for certainSec. 501(c)(3)purposes

No, generally7

No4

No, generally2,39901 or 990EZ8

1024 9901 or 990EZ8 No2

1024 9901 or 990EZ8 No2

1024 9901 or 990EZ8 No2

1024 9901 or 990EZ8

1024 9901 or 990EZ8 No2

1024 9901 or 990EZ8 Yes, if for certainSec. 501(c)(3)purposes

9901 or 990EZ8 No2

1024 9901 or 990EZ8 No2

Yes, generally9901 or 990EZ81024

No Form6 9901 or 990EZ8 No2

1024 9901 or 990EZ8 No2

No Form6 9901 or 990EZ8 No2

1024 9901 or 990EZ8 No2

No Form6 9901 or 990EZ8 No2

1024 9901 or 990EZ8

No Form6

Page 57

Organization Reference Chart (continued)

501(c)(22)

501(c)(23)

501(c)(25)

501(d)

501(e)

501(f)

501(k)

521(a)

Withdrawal Liability Payment Fund

Veterans Organization (createdbefore 1880)

Title-Holding Corporations or Trustswith Multiple Parents

Religious and Apostolic Associations

Cooperative Hospital ServiceOrganizations

Cooperative Service Organizationsof Operating EducationalOrganizations

Child Care Organization

Farmers’ Cooperative Associations

To provide funds to meet theliability of employers withdrawingfrom a multi-employer pension fund

To provide insurance and otherbenefits to veterans

Holding title and paying overincome from property to 35 orfewer parents or beneficiaries

Regular business activities.Communal religious community

Performs cooperative services forhospitals

Performs collective investmentservices for educationalorganizations

Provides care for children

Cooperative marketing andpurchasing for agricultural producers

1028

990 or 990EZ8

990 or 990EZ

10659

990–C

No5

No

Yes

No Form6

No Form6 990 or 990EZ8 No, generally7

1024

No Form No2

1023 9901 or 990EZ8

1023 9901 or 990EZ8 Yes

1023 990 or 990EZ8 Yes

No

1 For exceptions to the filing requirement, see chapter 2 and the forminstructions.

2 An organization exempt under a subsection of Code sec. 501 otherthan 501(c)(3) may establish a charitable fund, contributions towhich are deductible. Such a fund must itself meet therequirements of section 501(c)(3) and the related noticerequirements of section 508(a).

3 Contributions to volunteer fire companies and similar organizationsare deductible, but only if made for exclusively public purposes.

4 Deductible as a business expense to the extent allowed by Codesection 192.

5 Deductible as a business expense to the extent allowed by Codesection 194A.

6 Application is by letter to the address shown on Form 8718. A copyof the organizing document should be attached and the lettershould be signed by an officer.

7 Contributions to these organizations are deductible only if 90% ormore of the organization’s members are war veterans.

8 For limits on the use of Form 990EZ, see chapter 2 and the generalinstructions for Form 990EZ (or Form 990).

9 Although the organization files a partnership return, all distributionsare deemed dividends. The members are not entitled topass-through treatment of the organization’s income or expenses.

501(c)(26) State-Sponsored OrganizationProviding Health Coverage forHigh-Risk Individuals

Provides health care coverage tohigh-risk individuals

9901 or 990EZ8 NoNo Form6

501(c)(27) State-Sponsored Workers’Compensation ReinsuranceOrganization

Reimburses members for lossesunder workers’ compensation acts

No9901 or 990EZ8No Form6

501(n) Charitable Risk Pools Pools certain insurance risks of501(c)(3) organizations

1023 9901 or 990EZ8 Yes

Section of1986 Code Description of organization General nature of activities

ApplicationForm No.

Annual returnrequired to be

filed

Contributionsallowable

527 Political organizations A party, committee, fund,association, etc., that directly orindirectly accepts contributions ormakes expenditures for politicalcampaigns

No Form No1120–POL10

10 Form 1120–POL is required only if the organization had taxableincome as defined in IRC 527(c). For tax years beginning after June30, 2000, a political organization that has gross receipts of $25,000or more for the tax year must file Form 1120–POL, even if it has notaxable income.

990 or 990EZ8

Page 58

Index

A Acknowledgement ofcontributions ......................... 12 Advance ruling ............................. 4 Adverse determination ................ 4

Aged, home for .......................... 23 Agricultural organization ............ 46 Airport ........................................ 45 Alumni association .............. 20, 47

Amateur athletic organizations .. 24Animals, prevention of cruelty to 24

Appeal procedures ...................... 5Applicable tax-exempt organiza-

tion ........................................ 25 Application procedures:

Advance rulings .................... 36Form not required ................ 17

In general ............................. 15 Oral requests .......................... 2 Required inclusions:

Bylaws ............................... 3Description of activities ..... 3Employer identification num-

ber ................................ 3 Financial data .................... 3 Organizing documents ...... 3

Aquatic resources ...................... 46Articles of organization .............. 17Assets of organization ............... 18

Athletic organization ............ 20, 24Attribution, special rules ............ 41

BBlack lung benefit trust .............. 53Board of trade ........................... 46

Bureau defined .......................... 37Burial benefit insurance ............. 51Business income, unrelated ........ 9

Business league ........................ 46

C Cemetery company ................... 51

Chamber of commerce .............. 46Change in legal structure .......... 14

Charitable contributions ....... 12, 15 Charitable organization ....... 15, 22

Charitable risk pools .................. 22Child care organization ............. 15Children, prevention of cruelty to 24

Church ....................................... 23 Civic leagues ............................. 45 Clinic .......................................... 23

College alumni association ....... 47College bookstore, restaurant ... 20

Comments ................................... 2 Community association ............. 45

Community nursing bureau ....... 23 Community trust ........................ 34 Contributions, charitable ...... 12, 15

Controlled entity, 35% ............... 25 Court appeals .............................. 5 Credit union ............................... 52

D Determination letter ..................... 4 Disclosures, required:Dues used for lobbying ........ 14

Nondeductible contributions . 14Quid pro quo contributions ... 11Services available from gov-

ernment ........................... 14Discrimination, private school ... 21Dispositions of donated property 11

Disqualified persons .................. 39Domestic fraternal society ......... 48Dues used for political or leg-

islative activities ............. 14, 47

E Educational organizations ... 20, 28 Employees' association ............. 48

Employment taxes ....................... 9 Endowment fund ....................... 28 Estimated tax ............................... 9 Excess benefit ........................... 25

Excess benefit transaction ........ 25 Excise tax:Black lung benefit trust ........ 54

Disqualified persons ............. 25 Lobbying expenditures ......... 44 Organization managers ........ 25 Political expenditures ........... 44 Private foundations .............. 25

Exempt function ........................... 9 Exempt purposes ...................... 15

Extensions of time ..................... 16

FFacts and circumstances test ... 29Fair market value, estimate of .. 12

Family members ........................ 25 Filing requirements:Annual information returns ..... 8Donee information return ..... 11

Due date ................................. 9 Employment tax ..................... 9 Excise tax ............................. 25 Political organization .............. 9 Private foundations ................ 8

Unrelated business income .... 9 Forms:

872–C ............................. 32, 36990 ......................... 7, 8, 12, 43

990–BL ............................. 8, 54 990–EZ ................................... 8 990–PF ............................. 8, 25 990–T ..................................... 9

1023 ........... 2, 5, 6, 12, 15, 17,20, 24, 43, 45

1024 ......... 2, 3, 12, 45, 46, 47,48, 49, 50, 51, 53,

54 1040 ....................................... 9 1065 ....................................... 8 1120–POL .............................. 9 1128 ..................................... 15 2848 ................................... 4, 5 4720 ............................... 25, 44 5578 ..................................... 22 5768 ..................................... 43 6069 ..................................... 54 8274 ....................................... 9 8282 ..................................... 11 8283 ..................................... 11 8300 ..................................... 12 8718 ................................... 2, 4 8821 ....................................... 5 8871 ............................... 10, 12 8872 ............................... 10, 12 SS–4 ................................... 3, 6 W–2 ........................................ 9

Fraternal beneficiary society ..... 48 Fraternal societies ............... 14, 48

Free tax services ....................... 55Funeral benefit insurance .......... 51

GGifts and contributions, public

charity ................................... 37 Governmental unit ..................... 29 Grant:Distinguished from gross re-

ceipts ............................... 37Exclusion for unusual

grant .......................... 32, 35From public charity ......... 31, 38

Grantor and contributor, relianceon ruling ............................... 42

Gross receipts from nonmember-ship sources ......................... 48

Group exemption letter ................ 6

HHealth coverage organization ... 55

High-risk health coverage organ-ization ................................... 55

Home for the aged .................... 23 Homeowners' association ......... 45 Horticultural organization ........... 46 Hospital ................................ 23, 28

I Inactive organization ................. 14 Industrial development .............. 45 Instrumentalities ........................ 15 Insurance, organizationsproviding ............................... 22 Integral-part test ........................ 40

L Labor organization ............... 14, 46

Law, public interest ................... 23 Legislative activity ............... 43, 47 Literary organizations ................ 24

Loans, organizations providing . 23 Lobbying expenditures .............. 43

Local benevolent life insuranceassociations .......................... 51

Local employees' association ... 49 Lodge system ............................ 48

MMedical research organization .. 28

Membership fee ......................... 37Mutual financial organization ..... 52Mutual or cooperative

association ........................... 51

N Nursing bureau .......................... 23

OOne-third support test ............... 29

Organizational changes ............. 14

P Penalties:Failure to allow public in-

spection ........................... 14Failure to disclose .......... 12, 14Failure to file .......................... 8

Perpetual care organization ...... 52Persons not considered to have

substantial influence ............. 25Political activity .............. 14, 16, 45

Political organization:Income tax return ................... 9

Taxable income ...................... 9Power of attorney ........................ 4

Preferred stock .......................... 52Prevention of cruelty to children

or animals ............................. 24Private delivery service ............. 16

Private foundations .................... 24Private operating foundation ..... 42

Private school ............................ 20 Public charity:Gifts and contributions ......... 37

Grant from ............................ 38 Section 509(a)(1) ................. 28 Section 509(a)(2) ................. 34 Section 509(a)(3) ................. 38 Section 509(a)(4) ................. 42 Support test .................... 29, 35

Public inspection: Annual return ........................ 12 Exemption applications ........ 12

Forms 8871 and 8872 .......... 12Public-interest law firm .............. 23

Publicly-supported organization 29

RRacially nondiscriminatory policy 21Real estate board ...................... 46

Reasonable compensation ........ 25 Rebuttable presumption ............ 25 Reliance period ......................... 33 Religious organizations ............. 23 Responsiveness test ................. 40 Ruling letter ................................. 4

S Scholarship:

Organization awarding ......... 22 Private school ....................... 21

School, private ........................... 20 Scientific organizations .............. 24 Section 501(c)(3)organizations:

Amateur athletic ................... 24 Charitable ............................. 22 Educational ........................... 20 Literary ................................. 24

Prevention of cruelty ............ 24 Private foundations .............. 24 Public charities ..................... 25 Qualifications ........................ 15 Religious ............................... 23 Scientific ............................... 24

Single entity ............................... 34 Social clubs ......................... 14, 47

Social welfare organization . 14, 45Special computation period for

new organizations .......... 30, 35 Specified organizations ............. 39

Sports organization, amateur .... 24 State-sponsored:High-risk health coverage or-

ganization ........................ 55Workers' compensation rein-

surance organization ....... 55Stock or commodity exchange .. 47

Suggestions ................................. 2 Supplemental unemploymentbenefit trust .......................... 50 Support ...................................... 31 Support test:Facts and circumstances ..... 29

One-third .............................. 29 Public charity ........................ 35

T Taxpayer Advocate ................... 56 Technical advice .......................... 5

Testing for public safety ............ 42 Title-holding corporation ............ 54 TTY/TDD information ................ 55

UUnemployment benefit trust ...... 50Unrelated business income ......... 9

Unusual grants .................... 32, 35 User fee ................................... 3, 4

V Veterans' organization ............... 53

Voluntary employees' beneficiaryassociation ........................... 49

Volunteer fire company ............. 45

WWar veterans' organization ....... 53Withdrawal of application ............ 3Withholding information from

public ...................................... 3Workers' compensation reinsur-

ance organization ................. 55�

Page 59

Tax Publications for Business Taxpayers

General Guides

Commonly Used Tax Forms

Spanish Language Publications

Your Rights as a TaxpayerYour Federal Income Tax (ForIndividuals)

Farmer’s Tax Guide

Tax Guide for Small Business (ForIndividuals Who Use Schedule C orC-EZ)Tax Calendars for 2002Highlights of 2001 Tax ChangesGuide to Free Tax Services

Circular E, Employer’s Tax GuideEmployer’s Supplemental Tax Guide

Circular A, Agricultural Employer’sTax GuideCircular SS, Federal Tax Guide ForEmployers in the U.S. Virgin Islands,Guam, American Samoa, and theCommonwealth of the NorthernMariana Islands

Household Employer’s Tax Guide

Circular PR Guía ContributivaFederal Para PatronosPuertorriqueños

Travel, Entertainment, Gift, and CarExpenses

Tax Withholding and Estimated TaxExcise Taxes for 2002Withholding of Tax on NonresidentAliens and Foreign EntitiesSocial Security and OtherInformation for Members of theClergy and Religious WorkersResidential Rental PropertySelf-Employment TaxDepreciating Property Placed inService Before 1987Business ExpensesNet Operating Losses (NOLs) forIndividuals, Estates, and TrustsInstallment SalesAccounting Periods and Methods

CorporationsSales and Other Dispositions ofAssetsBasis of AssetsExamination of Returns, AppealRights, and Claims for RefundRetirement Plans for Small Business(SEP, SIMPLE, and Qualified Plans)Determining the Value of DonatedPropertyStarting a Business and KeepingRecords

The IRS Collection Process

Information on the United States-Canada Income Tax Treaty

Bankruptcy Tax GuideDirect SellersPassive Activity and At-Risk RulesHow To Depreciate Property

Reporting Cash Payments of Over$10,000The Taxpayer Advocate Service ofthe IRS

Derechos del ContribuyenteCómo Preparar la Declaración deImpuesto Federal

English-Spanish Glossary of Wordsand Phrases Used in PublicationsIssued by the Internal RevenueService

Tax on Unrelated Business Incomeof Exempt Organizations

Wage and Tax Statement

Itemized Deductions & Interest andOrdinary Dividends*

Profit or Loss From Business*Net Profit From Business*

Capital Gains and Losses*

Supplemental Income and Loss*Profit or Loss From Farming*

Credit for the Elderly or the Disabled*

Estimated Tax for Individuals*Self-Employment Tax*

Amended U.S. Individual Income Tax Return*

Capital Gains and LossesPartner’s Share of Income,Credits, Deductions, etc.

U.S. Corporation Income Tax Return

U.S. Income Tax Return for an S Corporation

Employee Business Expenses*Unreimbursed Employee BusinessExpenses*

Power of Attorney and Declaration ofRepresentative*

Child and Dependent Care Expenses*

General Business Credit

Application for Automatic Extension of Time ToFile U.S. Individual Income Tax Return*

Moving Expenses*

Additional Taxes on Qualified Plans (IncludingIRAs) and Other Tax-Favored AccountsInstallment Sale Income*Noncash Charitable Contributions*

Change of Address*Expenses for Business Use of Your Home*

Tax Highlights for CommercialFishermen

910

595

553509

334

225

171

Nondeductible IRAs*Passive Activity Loss Limitations*

1515-A

51

80

179

926

378463

505510515

517

527533534

535536

537

541538

542Partnerships

544

551556

560

561

583

594

597

598

901

911925946947

908

1544

1546

1SP

850

579SP

Comprendiendo el Proceso de Cobro594SP

10134

Sch A & B

Sch CSch C-EZSch D

Sch ESch FSch H Household Employment Taxes*

Sch RSch SE

1040-ES1040X

Sch DSch K-1

1120

1120S

1065 U.S. Return of Partnership Income

21062106-EZ

24412848

3800

4868

3903

5329

62528283

8582860688228829

Specialized Publications

Fuel Tax Credits and Refunds

Employee’s Withholding Allowance Certificate*W-4Employer’s Annual Federal Unemployment(FUTA) Tax Return*

940

940-EZ

U.S. Individual Income Tax Return*1040

Employer’s Annual Federal Unemployment(FUTA) Tax Return*

Business Use of Your Home(Including Use by Day-CareProviders)

587

U.S. Tax Treaties

Practice Before the IRS and Powerof AttorneyTax Incentives for EmpowermentZones and Other DistressedCommunities

Employer’s Guides

Certification for Reduced Tax Ratesin Tax Treaty Countries

686

954

Capital Gains and Losses and Built-In GainsShareholder’s Share of Income, Credits,Deductions, etc.

Sch DSch K-1

Underpayment of Estimated Tax byIndividuals, Estates, and Trusts*

2210

Report of Cash Payments Over $10,000Received in a Trade or Business*

8300

Depreciation and Amortization*4562Sales of Business Property*4797

Informe de Pagos en Efectivo enExceso de $10,000 (Recibidos enuna Ocupación o Negocio)

1544SP

U.S. Corporation Short-FormIncome Tax Return

1120-A

See How To Get Tax Help for a variety of ways to get publications, including bycomputer, phone, and mail.

See How To Get Tax Help for a variety of ways to get forms, including by computer, fax, phone,and mail. Items with an asterisk are available by fax. For these orders only, use the catalog numberwhen ordering.

Form Number and TitleCatalogNumber

W-21022011234

10983

170011132011330

113341437411338

113441134612187

113581134011360

Employer’s Quarterly Federal Tax Return941

11359Sch J Farm Income Averaging* 25513

11510

CatalogNumber

20604

11744

1186211980

1239212490129061308613141

13329

1360162299

639661208113232

63704

62133113901139311394

1145011456

11700

1152011516

Form Number and Title

Continuation Sheet for Schedule DSch D-1 10424

Employer’s Tax Guide to FringeBenefits

15-B

Page 60