Publication 557 (Rev

Home , Charitable organization, Nonprofit corporation, Nonprofit organization, Organization, Shelter (charity), Tax exemption

Userid: CPM Schema: tipx Leadpct: 100% Pt. size: 8 Draft Ok to Print AH XSL/XML Fileid: … ons/P557/202102/A/XML/Cycle03/source (Init. & Date) ______Page 1 of 76 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Publication 557 (Rev. February 2021) Contents

Cat. No. 46573C What's New ...... 2 Department of the Reminders ...... 2 Treasury Internal Tax-Exempt Introduction ...... 3 Revenue Service Chapter 1. Application, Approval, Status for Your and Appeal Procedures ...... 4 Application Procedures ...... 4 Forms Required ...... 4 Organization Required Information and Documents ...... 5 Miscellaneous Procedures .... 5 Determination Letters ...... 6 Effective Date of Exemption .... 6 Revocation of Exemption ..... 6 Appeal Procedures ...... 7 Independent Office of Appeals Consideration .... 7 Administrative Remedies ..... 7 Appeal to Courts ...... 8 Group Exemption Letter ...... 8 Central Organization Application Procedure ..... 8 Keeping the Group Exemption Letter in Force ...... 9 Events Causing Loss of Group Exemption ...... 9

Chapter 2. Filing Requirements and Required Disclosures ..... 10 Annual Information Returns ...... 11 Unrelated Business Income Tax Return ...... 13 Employment Tax Returns ...... 13 Political Organization Income Tax Return ...... 14 Reporting Requirements for a Political Organization ...... 14 Donee Information Return ...... 16 Information Provided to Donors .... 16 Report of Cash Received ...... 18 Public Inspection of Exemption Applications, Annual Returns, and Political Organization Reporting Forms ...... 18 Required Disclosures ...... 20 Solicitation of Nondeductible Contributions ...... 20 Sales of Information or Services Available Free from Government ...... 20 Dues Used for Lobbying or Political Activities ...... 21 Miscellaneous Rules ...... 21 Organizational Changes and Exempt Status ...... 21 Modify or Obtain an NTEE Code...... 21

Chapter 3. Section 501(c)(3) Organizations ...... 22 Get forms and other information faster and easier at: Contributions to 501(c)(3) • IRS.gov (English) • IRS.gov/Korean (한국어) Organizations ...... 22 • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) Application for Recognition of • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (Tiếng Việt) Exemption ...... 23 Articles of Organization ...... 25

Mar 01, 2021 Page 2 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Educational Organizations and Excise Tax on Executive as required by the Tax Cuts & Jobs Act of Private Schools ...... 25 Compensation ...... 65 2017. Filers will report total unrelated busi- Organizations Providing Excise Tax on Net Investment ness taxable income tax based on Sched- Insurance ...... 28 Income of Certain Colleges ule (s) A information and compute the tax Other Section 501(c)(3) and Universities ...... 66 on the Form 990-T. Organizations ...... 28 On Form 4720, each taxpayer must file Private Foundations and Public Chapter 6. How to Get Tax Help .... 66 his or her own return. Taxpayers such as Charities ...... 30 disqualified persons can no longer report Lobbying Expenditures ...... 46 Organization Reference Chart ...... 69 their tax on the organization’s return. The IRS expects e-filing to be required Chapter 4. Other Section 501(c) Appendix. Sample Articles of for Form 990-T in February 2021 and Form Organizations ...... 47 Organization ...... 70 4720 in March 2021 for tax year 2020 fil- 501(c)(4) - Civic Leagues and ings. The IRS will announce the specific Social Welfare Organizations ... 47 Appendix. Sample Articles of dates when the programming comes on- 501(c)(5) - Labor, Agricultural Organization, continued ...... 72 line. and Horticultural • Transition of Form 990-EZ Organizations ...... 48 Index ...... 75 For small exempt organizations, the 501(c)(6) - Business Leagues, legislation specifically allowed a postpone- etc...... 49 ment (“transitional relief”). For tax years 501(c)(7) - Social and ending before July 31, 2021, the IRS will Recreation Clubs ...... 50 What's New accept either paper or electronic filing of 501(c)(8) and 501(c)(10) - Future developments. The IRS has created a Form 990-EZ, Short Form Return of Or- Fraternal Beneficiary page on IRS.gov for information about Publica- ganization Exempt from Income Tax. For Societies and Domestic tion 557, at IRS.gov/pub557. Information about tax years ending July 31, 2021, and later, Fraternal Societies 51 ...... any future developments affecting Publication Forms 990-EZ must be filed electronically. 501(c)(4), 501(c)(9), and 501(c) 557 (such as legislation enacted after we re- Those who previously filed paper forms will (17) - Employees' lease it) will be posted on that page. receive a letter from the IRS informing Associations ...... 51 Electronic Form 1024-A. As of January 5, them of the change 501(c)(12) - Local Benevolent 2021, Form 1024-A, Application for Recognition • Forms 990 & 990-PF E-filing Life Insurance Associations, Forms 990, Return of Organization Ex- Mutual Irrigation and of Exemption Under Section 501(c)(4), is available for electronic filing on Pay.gov. The IRS empt from Income Tax, and 990-PF, Re- Telephone Companies, and turn of Private Foundation or Section Like Organizations ...... 53 will provide a 90-day grace period during which it will continue to accept paper versions of Form 4947(a)(1) Trust Treated as Private Foun- 501(c)(13) - Cemetery dation, for tax years ending July 31, 2020 Companies ...... 55 1024-A (Rev. 01-2018); however, after April 5 the Form 1024-A must be submitted electroni- and later MUST be filed electronically. 501(c)(14) - Credit Unions and More information on software providers is Other Mutual Financial cally. See Rev. Proc. 2021-8. available on the Exempt Organizations Organizations 56 Reporting of Donor Information (Form 990, ...... Modernized e-File (MeF) Providers page. 501(c)(19) - Veterans' 990-EZ and 990-PF). Final regulations provide Organizations ...... 56 that the requirement to report contributor names For more information go to IRS: Recent 501(c)(21) - Black Lung Benefit and addresses on annual returns generally ap- legislation requires tax exempt organizations to Trusts ...... 57 plies only to returns filed by Section 501(c)(3) e-file forms. 501(c)(2) - Title-Holding organizations and Section 527 political organi- Corporations for Single zations. All tax-exempt organizations must con- Parent Corporations ...... 58 tinue to maintain the names and addresses of 501(c)(25) - Title-Holding their substantial contributors in their books and Reminders Corporations or Trusts for records Automatic revocation. Regarding automatic Multiple Parent Corporations ... 58 IRS not accepting requests for group ex- revocation for the failure to file a return or notice 501(c)(26) - State-Sponsored emption numbers. The IRS will not accept High-Risk Health Coverage any requests for group exemption letters start- for three consecutive years, as required by sec- Organizations ...... 59 ing on June 17, 2020 until publication of the fi- tion 6033, the Taxpayer First Act of 2019, P.L. 501(c)(27) - Qualified nal revenue procedure or other guidance in the 116-25, added a requirement that the IRS notify State-Sponsored Workers' Internal Revenue Bulletin. See Notice 2020-36. the organization after the organization has Compensation Organizations ... 59 Update on Mandatory E-Filing. The Tax- failed to file for two consecutive years. See Au- 501(c)(29) - CO-OP Health payer First Act, enacted July 1, 2019, requires tomatic Revocation, later, for more information, Insurance Issuers ...... 59 tax-exempt organizations to electronically file including applicability dates. information returns and related forms. The new Electronic Form 1023. Form 1023, Applica- Chapter 5. Excise Taxes ...... 60 law affects tax-exempt organizations in tax tion for Recognition of Exemption under Section Prohibited Tax Shelter years beginning after July 1, 2019. 501(c)(3) of the Internal Revenue Code, is Transactions ...... 60 • Tax Year 2020 Forms 990-T & 4720 Are available only as an electronic form filed on Excess Benefit Transactions ..... 60 Being Revised and Will be Available for Pay.gov. Form 1023-EZ, Streamlined Applica- Excess Business Holdings ...... 64 E-filing in 2021 tion, is already on Pay.gov. Taxable Distributions of In 2020, the IRS continued to accept Tax on investment income of private foun- Sponsoring Organizations ..... 64 paper Form 990-T, Exempt Organization dations. The Taxpayer Certainty and Disaster Taxes on Prohibited Benefits Business Income Tax Return, and Form Tax Relief Act of 2019, reduced the 2% excise Resulting from Donor 4720, Return of Certain Excise Taxes Un- tax on investment income of private foundations Advised Fund Distributions .... 65 der Chapters 41 and 42 of the Internal to 1.39%. At the same time, the legislation re- Excise Taxes on Private Revenue Code, pending conversion into pealed the 1% special rate that applied if the Foundations ...... 65 electronic format. private foundation met certain distribution re- Excise Taxes on Black Lung In 2021, these forms and instructions quirements. The change is effective for taxable Benefit Trusts ...... 65 will be updated and e-filing will be required years beginning after December 20, 2019. Excise Tax on Failure to Meet as described below. the Community Health For reporting on tax year 2020, the new Increase in UBTI for disallowed fringe re- Needs Assessment Schedule A of Form 990-T will reflect sep- pealed. The Taxpayer Certainty and Disaster Requirements ...... 65 arate reporting of each trade or business Tax Relief Act of 2019 retroactively repealed

Page 2 Publication 557 (February 2021) Page 3 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Internal Revenue Code (IRC) Section 512(a)(7), Similarly, farmers' cooperative associations which increased unrelated business taxable in- Introduction that qualify for exemption under section 521, come by amounts paid or incurred for qualified qualified state tuition programs described in transportation fringes. Congress had previously This publication discusses the rules and proce- section 529, qualified ABLE programs descri- enacted this provision for amounts paid or in- dures for organizations that seek recognition of bed in section 529A, and pension, profit-shar- curred after December 31, 2017. exemption from federal income tax under sec- ing, and stock bonus plans described in section tion 501(a) of the Internal Revenue Code (the Excise tax on executive compensation. 401(a) aren't discussed in this publication. Visit Code). It explains the procedures you must fol- IRS.gov for more information on these types of Section 4960, added by Public Law 115-97, ef- low to obtain an appropriate determination letter fective for tax years beginning after December organizations. For telephone assistance, call 1– recognizing your organization's exemption, as 877–829–5500. 17, 2017, imposes an excise tax on an organi- well as certain other information that applies Check the Table of Contents at the begin- zation that pays to any covered employee more generally to all exempt organizations. To qualify ning of this publication to determine whether than $1 million in remuneration or pays an ex- for exemption under the Code, your organiza- your organization is described in this publica- cess parachute payment during the year start- tion must be organized for one or more of the tion. If it is, read the chapter (or section) that ap- ing in 2018. See Excise Tax on Executive Com- purposes specifically designated in the Code. plies to your type of organization for the specific pensation, chapter 5. See also section 4960 Organizations that are exempt under section information you must give when applying for and Form 4720, Return of Certain Excise Taxes 501(a) include those organizations described in recognition of exemption. Under Chapters 41 and 42 of the Internal Reve- section 501(c). Section 501(c) organizations nue Code, for more information. are covered in this publication. Organization Reference Chart. The Organi- Excise tax on net investment income of cer- Chapter 1, Application, Approval, and Ap- zation Reference Chart enables you to locate at tain colleges and universities. Section 4968 peal Procedures, provides general information a glance the section of the Code under which imposes an excise tax on the net investment in- about the procedures for obtaining recognition your organization might qualify for exemption. It come of certain private colleges and universi- of tax-exempt status. also shows the required application form and, if ties. See Excise Tax on Net Investment Income Chapter 2, Filing Requirements and Re- your organization meets the exemption require- of Certain Colleges and Universities, chapter 5. quired Disclosures, contains information about ments, the annual return to be filed (if any), and See also section 4968 and Form 4720, Return annual filing requirements and other matters whether or not a contribution to your organiza- of Certain Excise Taxes Under Chapters 41 and that may affect your organization's tax-exempt tion will be deductible by a donor. It also de- 42 of the Internal Revenue Code, for more infor- status. scribes each type of qualifying organization and mation. Chapter 3, Section 501(c)(3) Organizations, the general nature of its activities. Separate UBTI calculation for each trade or contains detailed information on various matters affecting section 501(c)(3) organizations, in- You may use the Organization Reference business. Organizations with more than 1 un- Chart to identify the Code section that you think related trade or business must compute unrela- cluding a section on the determination of private foundation status. applies to your organization. Any correspond- ted business taxable income (UBTI), including ence with the IRS (in requesting forms or other- for purposes of determining any net operating Chapter 4, Other Section 501(c) Organiza- tions, includes separate sections for specific wise) can be responded to faster if you indicate loss deduction, separately with respect to each in your correspondence the appropriate Code such trade or business. See Unrelated Busi- types of organizations described in section 501(c). section. Check the IRS website, IRS.gov, for ness Income Tax Return, chapter 2. See also the latest updates, Tax Information for Charities Schedule A (Form 990-T). The UBTI with re- Chapter 5, Excise Taxes, provides information on when excise taxes may be imposed. & Other Non-Profits, Tax Information for spect to any such trade or business shall not be Charities & Other Non-Profits. less than zero when computing total UBTI. Chapter 6, How to Get Tax Help, provides tips and resources on where to find answers to Comments and suggestions. We welcome Exception from the excise tax on excess tax questions or other assistance. business holdings. Section 4943(g) created your comments about this publication and your an exception from the excise tax on excess Organizations not discussed in this publi- suggestions for future editions. business holdings for certain independently op- cation. Certain organizations that may qualify You can send us comments through erated enterprises whose voting stock is wholly for exemption aren't discussed in detail in this IRS.gov/FormComments. Or, you can write to owned by a private foundation. For more de- publication, although they are included in the Internal Revenue Service, Tax Forms and Pub- tails, see Excess Business Holdings, chapter 5 Organization Reference Chart and the applica- lications, 1111 Constitution Ave. NW, IR-6526, Organizational Changes. For tax years be- tion procedures discussed in Chapter 1. These Washington, DC 20224. ginning on or after January 1, 2018, the IRS will organizations (and the Code sections that apply Although we can’t respond individually to no longer require a new exemption application to them) are as follows: each comment received, we do appreciate your from a domestic section 501(c) organization feedback and will consider your comments as we revise our tax forms, instructions, and publi- that undergoes certain changes of form or place Corporations organized under Acts of of organization, as described in Rev. Proc. Congress ...... 501(c)(1) cations. Do not send tax questions, tax returns, 2018-15, 2018-9 I.R.B. 379. Teachers' retirement fund associations ... 501(c)(11) or payments to the above address. Group Exemptions. Beginning January 2019, Mutual insurance companies ...... 501(c)(15) Corporations organized to finance crop Getting answers to your tax questions. the IRS will no longer send the List of Parent operations ...... 501(c)(16) If you have a tax question not answered by this and Subsidiary Accounts to the central organi- Employee funded pension trusts (created publication or How to Get Tax Help section at zations. See Group Exemption Letter, later. before June 25, 1959) ...... 501(c)(18) the end of this publication, go to the IRS Inter- Form 8976. Each new section 501(c)(4) or- Withdrawal liability payment fund ...... 501(c)(22) active Tax Assistant page at IRS.gov/Help/ITA ganization must notify the IRS of its intent to op- Veterans' organizations (created before where you can find topics using the search fea- 1880) ...... 501(c)(23) ture or by viewing the categories listed. erate as a section 501(c)(4) organization re- National Railroad Retirement Investment gardless of whether it will seek recognition of its Trust ...... 501(c)(28) Getting tax forms, instructions, and pub- exempt status under section 501(c)(4). Use Religious and apostolic associations .... 501(d) lications. Visit IRS.gov/Forms to download Form 8976, Notice of Intent to Operate Under Cooperative hospital service current and prior-year forms, instructions, and Section 501(c)(4), to provide this notification. organizations ...... 501(e) publications. Form 8976 may only be completed and submit- Cooperative service organizations of ted electronically at: Electronically Submit Your operating educational organizations ..... 501(f) Ordering tax forms, instructions, and Form 8976, Notice of Intent to Operate Under Section 501(c)(24) organizations (section publications. Go to IRS.gov/OrderForms to Section 501(c)(4). 4049 ERISA trusts) are neither discussed in the order current forms, instructions, and publica- Forms, Instructions and Publications. All text nor listed in the Organization Reference tions; call 800-829-3676 to order prior-year IRS forms, instructions and publications men- Chart. forms and instructions. The IRS will process tioned in this publication can be accessed on your order for forms and publications as soon IRS.gov from the Forms and Instructions page. as possible. Do not resubmit requests you’ve

Publication 557 (February 2021) Page 3 Page 4 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

already sent us. You can get forms and publica- Form 1023, Application for Recognition of Form 8718, User Fee for Exempt Organization tions faster online. Exemption Under Section 501(c)(3) of the Determination Letter Request, must also be Internal Revenue Code. File Form 1023 if you sent along with Form 1024. are seeking recognition of exemption under section: Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of • 501(c)(3) Corporations, organized and op- the Internal Revenue Code. File Form erated exclusively for religious, charitable, 1024-A if you are seeking recognition of exemp- 1. scientific, testing for public safety, literary, tion under section 501(c)(4). or educational purposes, or to foster na- Submitting Form 1024-A does not satisfy an tional or international amateur sports, or organization’s requirement to notify the Com- prevention of cruelty for children or ani- missioner that it is operating under section Application, mals, including the following types of or- 501(c)(4), as required by section 506. See ganizations to which the specified subsec- IRS.gov for information on satisfying the notifi- tions are applicable, cation requirement using Form 8976, Notice of Approval, and • 501(e) Cooperative hospital service organ- Intent to Operate Under Section 501(c)(4). ization, As of January 5, 2021, Form 1024-A, Appli- • 501(f) Cooperative service organization of cation for Recognition of Exemption Under Sec- Appeal operating educational organizations, tion 501(c)(4), is available for electronic filing on • 501(k) Certain organizations providing Pay.gov. The IRS will provide a 90-day grace child care, Procedures period during which it will continue to accept pa- • 501(n) Charitable risk pools, per versions of Form 1024-A (Rev. 01-2018); • 501(q) Credit counseling organizations, however, after April 5 the Form 1024-A must be and submitted electronically. See Rev Proc 2021-5 • 501(r) Hospital organizations. Introduction as amended by Rev. Proc. 2021-8. If your organization is one of the organizations Applications for exempt status on a Form If you are filing Form 1024-A on paper dur- described in this publication and is seeking rec- 1023 must be electronically submitted through ing the grace period, you must also submit ognition of tax-exempt status from the IRS, you Pay.gov. See Rev. Proc. 2021-5. Form 8718 with your application to submit the should follow the procedures described in this user fee. chapter and the instructions that accompany Form 1023-EZ, Streamlined Application for the appropriate application forms. Recognition of Exemption Under Section Letter application. If your organization is For information on section 501(c)(3) organi- 501(c)(3) of the Internal Revenue Code. seeking recognition of exemption under section zations, go to Section 501(c)(3) Organizations, You may be eligible to file Form 1023-EZ if you 501(c)(11), (14), (16), (18), (21), (22), (23), chapter 3. If your organization is seeking ex- are a smaller organization (assets of $250,000 (26), (27), (28), or (29), submit a letter applica- emption under one of the other paragraphs of or less and annual gross receipts of $50,000 or tion with Form 8718. See Required Inclusions section 501(c), see chapter 4. less) seeking recognition of exemption under for the information to include with the letter ap- section 501(c)(3). See Rev. Proc. 2021-5. plication. Topics Applications for exempt status on a Form This chapter discusses: 1023-EZ must be electronically submitted Form 1028, Application for Recognition of through Pay.gov. Exemption Under Section 521 of the Inter- nal Revenue Code. Use Form 1028, Applica- • Application procedures that generally Form 1024, Application for Recognition of tion for Recognition of Exemption Under Sec- apply to all organizations discussed in this Exemption Under Section 501(a). File Form tion 521 of the Internal Revenue Code, if your publication, including the application 1024 if you are seeking recognition of exemp- organization is a farmers’ cooperative seeking forms; tion under section: recognition of exemption under section 521. • Determination letters (approvals/ • 501(c)(2) Title holding corporations, You must also submit Form 8718. disapprovals); • 501(c)(5) Labor, agricultural, or horticul- Appeal procedures available if an adverse • tural organizations, Form 8871, Political Organization Notice of determination letter is proposed; and • 501(c)(6) Business leagues, chambers of Section 527 Status. Use Form 8871, Political Group exemption letters. • commerce, etc., Organization Notice of Section 527 Status, if • 501(c)(7) Social clubs, you are a political organization seeking to be • 501(c)(8) Fraternal beneficiary societies, treated as tax-exempt under section 527 unless Application Procedures orders, or associations, an exception applies. See Political Organization • 501(c)(9) Voluntary employees’ beneficiary Income Tax Return, later. associations, Some organizations don’t have to use spe- Oral requests for recognition of exemption won't 501(c)(10) Domestic fraternal societies, or- cific application forms. The application your or- be considered by the IRS. Your application for • ders, etc., ganization must use is specified in the chapter recognition of tax-exempt status must be in writ- 501(c)(12) Benevolent life insurance asso- in this publication dealing with your kind of or- ing using the appropriate forms as discussed • ciations, mutual ditch or irrigation compa- ganization. It is also shown in the Organization below. nies, mutual or cooperative telephone Reference Chart, later. companies, Form 8871 must be filed at the IRS Political Forms Required • 501(c)(13) Cemetery companies, Organizations Filing and Disclosure site. • 501(c)(15) Mutual insurance companies or If your organization is seeking recognition of ex- associations, Power of attorney. If your organization exemption from federal income tax, it must use a • 501(c)(17) Trusts providing for the pay- pects to be represented by an individual such specific application prescribed by the IRS in ment of supplemental unemployment com- as an attorney, CPA, officer or other person au- Rev. Proc. 2021-5, 2021-01 I.R.B. 250, as pensation benefits, thorized to practice before the IRS, whether in amended by Rev. Proc. 2021-8. If your organi- • 501(c)(19) A post, organization, auxiliary person or by correspondence, you must file a zation is a central organization with exempt sta- unit, etc. of past or present members of the Form 2848, Power of Attorney and Declaration tus, see Group Exemption Letter, later. All appli- Armed Forces of the United States, and of Representative, with your exemption applica- cations must be signed by an authorized • 501(c)(25) Title holding corporations or tion. The power of attorney must specifically au- individual. trusts. thorize an individual to represent your organization. You can't name an organization, firm, etc. as your representative. Form 2848 can be used

Page 4 Chapter 1 Application, Approval, and Appeal Procedures Page 5 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

for this purpose. The categories of individuals required before an exemption application is is an attachment to your application form and who can represent you before the IRS are listed submitted. Information on how to apply for an identify the part and line item number to which it on the form. EIN can be found online at Employer ID applies. Numbers (EIN). The EIN is issued immediately Form 8940, Request for Miscellaneous De- once the application information is validated. Original documents. Don't submit original documents because they become part of the termination. You can request miscellaneous If you previously applied for an EIN and IRS file and can't be returned. determinations under sections 507, 509(a), haven't yet received it, or you are unsure 4940, 4942, 4945, and 6033 using Form 8940. whether you have an EIN, please call our Description of activities. Your application Nonexempt charitable trusts also file Form 8940 toll-free customer account services number, must include a full description of the proposed for an initial determination of section 509(a)(3) 1-877-829-5500, for assistance. status or change to their type. See Form 8940 activities of your organization, including each of the fundraising activities of a section 501(c)(3) and instructions for more information. Organizing documents. If you are submitting organization and a narrative description of an- an application other than Form 1023-EZ, your Requests other than applications. ticipated receipts and contemplated expendi- application should include a copy of the organ- Requests other than applications for tures. When describing the activities in which izing or enabling document that is signed by a recognition of exemption or Form 8940 your organization expects to engage, you must principal officer or is accompanied by a written (for example, requests for letter rulings involv- include the standards, criteria, procedures, or declaration signed by an authorized individual ing feeder organizations, application of excise other means that your organization adopted or certifying that the document is a complete and taxes to activities of private foundations, taxa- planned for carrying out those activities. tion of unrelated business income, etc.) should accurate copy of the original or meets the requirements of a conformed copy in Rev. Proc. To determine the information you need to be sent to the appropriate address listed in Rev. provide, you should study the part of this publi- Proc. 2021-1, 2021-1 I.R.B. 1. 2011-9, sec. 3.08(5). If you are submitting a Form 1023-EZ, you don’t need to include a cation that applies to your organization. The ap- These requests, similar to applications for copy of your organizing documents with the appropriate chapter will describe the purposes recognition of exemption previously discussed, plication. However, you may be asked to pro- and activities that your organization must pur- must be accompanied by the appropriate user vide it during the application review process. sue, engage in, and include in your application in order to achieve exempt status. fee. The schedule for user fees, including those If your organizing or enabling document are for requests other than applications, can be articles of incorporation, include evidence that it Often, your organization's articles of organi- found in Rev. Proc. 2021-1. was filed and approved by a state official. (For zation (or other organizing instruments) contain example, a stamped “Filed” copy dated by the descriptions of your organization's purposes EO Determinations can request technical Secretary of State is prima facie evidence that it and activities. advice from the Office of Chief Counsel (EEE) was filed and approved by a state official.) A Your application should describe completely on any question that can't be resolved on the copy of the articles of incorporation can also be and in detail your past, present, and planned basis of law, regulations, or a clearly applicable submitted with a written declaration signed by activities. revenue ruling or other published precedent. an authorized individual indicating the copy is If you are filing Form 1023-EZ, also review See section 3, Rev. Proc. 2021-5. complete and was filed and approved by the the Instructions for Form 1023-EZ for more in- state, including the date filed. formation about what to include in your descrip- Reminder. The law requires payment of a user If you are formed as a limited liability com- tion. fee for determination letter requests. Go to Rev. pany and have adopted an operating agree- Proc. 2021-5, Appendix A, to find the required ment, submit the operating agreement along Financial data. Unless you are filing Form payment. Payment must accompany each re- with your state-approved articles of organiza- 1023-EZ, you must include in your application quest. tion. financial statements showing your receipts and If your organization's name has been offi- expenditures and a balance sheet for the cur- Non-exemption for terrorist organizations. rent year and the 3 preceding years (or for the An organization that is identified or designated cially changed by an amendment to your organizing instruments, you should also attach a con- number of years your organization was in exis- as a terrorist organization within the meaning of tence, if less than 4 years). For each accounting section 501(p)(2) isn't eligible to apply for rec- formed copy of that amendment to your application. period, you must describe the sources of your ognition of exemption. receipts and the nature of your expenditures. Conformed copy. A conformed copy is a If you haven't yet begun operations, or have User fee. The law requires the payment of a copy that agrees with the original and all operated for less than 1 year, a proposed user fee for determination letter requests such amendments to it. If the original document re- budget for 2 full accounting periods and a cur- as your application for recognition of tax-ex- quired a signature, the copy should either be rent statement of assets and liabilities will be empt status. User fees are listed in Rev. Proc. signed by a principal officer or, if not signed, be acceptable. 2021-5, Appendix A. If you are filing Form 1023, accompanied by a written declaration signed by Form 1023-EZ or 1024-A, the user fee must be an authorized officer of the organization. With Exempt status established in application. If submitted through Pay.gov. There is a limited either option, the officer must certify that the your application and its supporting documents period for paper submissions and checks for document is a complete and accurate copy of show that your organization meets the require- Form 1024-A. Your payment must accompany the original. A certificate of incorporation should ments for tax-exempt status under the Code your request. The IRS won't process a request be approved and dated by an appropriate state section you applied, the IRS will issue a favora- unless the fee has been paid. official. ble determination letter. For the current user fee amount and Bylaws. Bylaws alone aren't organizing TIP other information about applying for documents. However, if your organization has Miscellaneous Procedures tax-exempt status go to IRS.gov and adopted bylaws, include a current copy. The select “Charities and Non-Profits” from the but- bylaws need not be signed if submitted as an To help in processing your application, be sure tons near the top. Next, select “Applying for attachment. to attach all schedules, statements, and other Tax-Exempt Status” for more information. You documents required by the application form. If can also call 1-877-829-5500. Bylaws may be considered an organiz- you don’t attach them, you may have to resub- ing document only if they are properly mit your application or you may otherwise en- structured (includes name, purpose, counter a delay in processing your application. Required Information and signatures, and intent to form an organization). Documents Incomplete application. If an application isn't Attachments. When submitting attachments, complete and doesn't contain all the required Employer identification number (EIN). Ev- every attachment should show your organiza- attachments found under Required Inclusions, ery exempt organization must have its own EIN, tion's name and EIN. It should also state that it the IRS will return it to you for completion. The whether or not it has any employees. An EIN is IRS will no longer request the missing

Chapter 1 Application, Approval, and Appeal Procedures Page 5 Page 6 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

information if the application is incomplete. 3. Be filed with the office where your organi- requirements for exempt status under the appli- However, the IRS may, but is not required to, zation files the documents in which the cable section of 501(c). Upon obtaining recog- request additional information to validate infor- material to be withheld is contained. nition of exemption, the organization can file a mation presented or to clarify an inconsistency claim for a refund of income taxes paid for the on a Form 1023-EZ. See Rev. Proc. 2021-5, Where to file. Submit Form 1023, 1023-EZ, or period for which its exempt status is recog- 2021 I.R.B. 250, 1024-A through Pay.gov. Send other applica- nized. tions for recognition of exempt status (e.g., If the IRS returns the application or requests An organization that does not submit its ap- Form 1024) with all attachments, including additional information from you, that application plication for exemption within that 27-month pe- Form 8718, to: will be considered filed on the date the substan- riod but otherwise meets the requirements for tially completed application is postmarked, or if tax-exempt status will be recognized as exempt no postmark, received at the IRS. Internal Revenue Service PO Box 12192 from the postmark date of application or the For applications that are returned to the ap- submission date of its Form 1023, 1023-EZ, or plicant because they aren't complete, the user TE/GE Stop 31A Team 105 Covington, KY 41012-0192 Form 1024-A, if applicable. See Rev. Proc. fee will be returned or refunded. 2021-5, as amended by Rev. Proc. 2021-8. Additional information may be requested if necessary to clarify the nature of your organiza- EO Determinations will consider your com- If an organization is required to alter its action. plete application and will issue you a favorable tivities or substantially amend its charter to determination letter, an adverse letter denying qualify, the determination letter recognizing ex- IRS responses. Organizations that success- the exempt status requested in your application emption will be effective as of the date speci- fully submit Form 1023, Form 1023-EZ or Form or, if you are asked to provide supplemental in- fied in the letter. If a nonsubstantive amend- 1024-A on Pay.gov will receive an email from formation and fail to respond, may close your ment is made, such as correction of a clerical Pay.gov confirming payment of the user fee. Or- case without making a determination if you error in the enabling instrument or the addition ganizations that submit a complete Form 1024 don't respond to a request for additional infor- of a dissolution clause, exemption will ordinarily application will receive an acknowledgment mation. EO Determinations will also close your be recognized as of the date of formation if the from the IRS. In addition, any applicant may re- case without a determination if you withdraw activities of the organization before the determi- ceive a letter requesting additional information your request. nation are consistent with the exemption re- the IRS needs to make its determination. These quirements. letters will be sent out as soon as possible after A determination letter recognizing exemp- receipt of the organization's application. Determination Letters tion can't be relied on if there is a material change, inconsistent with exemption, in the Withdrawal of application. An organization Public charity status. A new section 501(c) character, the purpose, or the method of opera- may withdraw an application at any time before (3) organization will be classified as a publicly tion of the organization. Also, a determination the issuance of a determination letter upon the supported organization and not a private foun- letter can't be relied on if it is based on any written request of a principal officer or author- dation if it can show when it applies for tax-ex- omission or inaccurate material information ized representative of your organization. How- empt status that it reasonably can be expected submitted by the organization. See section 11 ever, the withdrawal won't prevent the informa- to be publicly supported. of Rev. Proc. 2021-5. tion contained in the application from being used by the IRS in any subsequent examination An organization must describe fully the ac- For more information about the effective of your organization's returns. The information tivities in which it expects to engage. This in- date of exemption, see Rev. Proc. 2021-5, sec- forwarded with an application won't be returned cludes standards, procedures, or other means tion 6. to your organization and, generally, when an adopted or planned by the organization for car- application is withdrawn, the user fee paid won't rying out its activities, expected sources of Revocation of Exemption be refunded. funds, and the nature of its contemplated expenses. A determination letter recognizing exemption Requests for withholding of information may be revoked by: from the public. The law requires many ex- Adverse determination. A proposed adverse empt organizations and private foundations to determination letter will be issued to an organi- 1. A notice to the organization to which the make their application forms and annual infor- zation that has not provided sufficiently detailed determination letter originally was issued, mation returns available for public inspection. information to establish that it qualifies for ex- 2. Enactment of legislation or ratification of a The law also requires the IRS to make available emption or if the information provided estab- tax treaty, for public inspection, in accordance with section lishes that it doesn't qualify for exemption. An 6104 and the related regulations, your ap- organization can appeal a proposed adverse 3. A decision of the United States Supreme proved application for recognition of exemption determination letter. See Appeal Procedures, Court, (including any papers submitted in support of later. 4. Issuance of temporary or final regulations, the application) and the determination letter or (discussed later, under Determination Letters). Expedited Handling. Exempt organization de- Any information submitted in the application termination letter requests may be eligible for 5. Issuance of a revenue ruling, a revenue or in support of it that relates to any trade se- expedited handling under section 4.09 of Rev. procedue, or other statement published in cret, patent, process, style of work, or appara- Proc. 2021-5, as modified by section 3.02 of the Internal Revenue Bulletin or Cumula- tus, upon request, can be withheld from public Rev. Proc. 2021-8. tive Bulletin. inspection if the IRS determines that the disclo- 6. Section 6033(j), for failure to file a required sure of such information would adversely affect Effective Date of Exemption annual return or notice, for three consecu- the organization. Your request must: tive years, automatically. 1. Identify the material to be withheld (the A determination letter recognizing exemption is document, page, paragraph, and line) by usually effective as of the date of formation When revocation takes effect. If the organi- clearly marking it “Not Subject to Public of an organization if, the organization submit- zation omitted or misstated material informa- Inspection.” ted the application for recognition of exemption tion, operated in a manner materially different within 27 months from the end of the month in from that originally represented, or, with regard 2. Explain why the information is of the type which it was organized and during the period to organizations to which section 503 applies, that can be withheld from public inspec- before the date of the determination letter, its engaged in a prohibited transaction (such as di- tion. purposes and activities are consistent with the verting corpus or income from its exempt purpose), or if there has been a change in the applicable law, the revocation or modification may be retroactive.

Page 6 Chapter 1 Application, Approval, and Appeal Procedures Page 7 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Material change in organization. If there is a of Attorney,which is also available on IRS.gov An adverse decision can be appealed to the material change, inconsistent with exemption, from the Forms and Instructions page. courts (discussed later). If new information is in the character, purpose, or method of opera- submitted during Independent Office of Appeals tion of the organization, revocation or modifica- consideration, the matter may be returned to tion will ordinarily take effect as of the date of Independent Office of Rulings and Agreements for further considera- that material change. An organization may seek Appeals Consideration tion. See section 9 of Rev. Proc. 2021-5 for relief from retroactive revocation or modification more information. of a determination letter under section 7805(b). Before forwarding a case to the Independent For more information on requesting section Office of Appeals, Rulings and Agreements will The Independent Office of Appeals must re- 7805(b) relief, see section 12 of Rev. Proc. consider the applicant’s statement protesting quest technical advice on any exempt organiza- 2021-5 and appealing (hereinafter appealing) the pro- tion issue concerning qualification for exemp- posed adverse determination. If the organization or foundation status for which there is no Relief from retroactivity. If a determination does not submit the information that pro- published precedent or for which there is rea- tion letter was issued in error or the IRS vides a basis for Rulings and Agreements to son to believe that nonuniformity exists. If an or- changed its position after issuing a letter, and if reconsider its adverse determination, it will for- ganization believes that its case involves such section 7805(b) relief is granted, retroactivity of ward the appeal and case file to the Independ- an issue, it should ask the Independent Office the revocation ordinarily will be limited to a date ent Office of Appeals. For more information of Appeals to request technical advice. not earlier than that on which the original deter- about the role of the Independent Office of Ap- mination letter was revoked. peals, see Publication 892, How to Appeal an Any determination letter issued on the basis IRS Decision on Tax-Exempt Status. The ap- Foundations. The determination of the ef- of technical advice can't be appealed to the In- peal should include the following information. fective date is the same for the revocation or dependent Office of Appeals Office for those is- modification of foundation status or operating 1. The organization's name, address, day- sues that were the subject of the technical ad- foundation status unless the effective date is time telephone number, and employer vice. expressly covered by statute or regulations. identification number. 2. A statement that the organization wants to Administrative Remedies Written notice. If the IRS concludes, as a re- protest the determination. sult of examining an information return or con- In the case of an application under section sidering information from any other source, that 3. A copy of the letter showing the determi- 501(c) or 501(d) and exempt from tax under a determination letter should be revoked or nation you disagree with, or the date and 501(a), all of the following actions, called ad- modified, the organization will be advised in IRS office symbols on the determination ministrative remedies, must be completed by writing of the proposed action and the reasons letter. your organization before an unfavorable deter- for it. 4. A statement of facts supporting the organi- mination letter from the IRS can be appealed to The organization will also be advised of its zation's position in any contested factual the courts. right to protest the proposed action by request- issue. ing Independent Office of Appeals considera- 1. The filing of the correct completed application. The appeal procedures are discussed 5. A statement outlining the law or other au- tion or group exemption request under next. thority the organization is relying on. section 501(c), or 501(d) and exempt from 6. A statement as to whether a conference at tax under 501(a) (described earlier in this the Independent Office of Appeals is de- chapter) or the filing of a request for a de- Appeal Procedures sired. termination of foundation status (see Pri- vate Foundations and Public Charities in If your organization applies for recognition of The statement of facts in item 4 must be de- chapter 3). clared true under penalties of perjury. This may tax-exempt status and Rulings and Agreements 2. In the case of a late-filed application, re- be done by adding to the protest the following determines your organization doesn't qualify for questing relief under Regulations section signed declaration: exemption, your organization will be advised of 301.9100 regarding applications for exten- its rights to protest the determination by re- sions of time for making an election or ap- questing Independent Office of Appeals consid- “Under penalties of perjury, I declare that I plication for relief from tax (see Application eration. Your organization must submit a state- have examined the statement of facts for Recognition of Exemption in chap- ment of its views fully explaining its reasoning. presented in this protest and in any accompanying schedules and statements and, ter 3). The statement must be submitted within 30 to the best of my knowledge and belief, it is 3. The timely submission of all additional in- days from the date of the proposed adverse de- true, correct, and complete.” termination letter and must state whether your formation requested to perfect an exemption application or request for determina- organization wishes Independent Office of Ap- Signature. peals consideration. tion of private foundation status. If the organization's representative submits the 4. Exhaustion of all administrative appeals Representation. A principal officer or trustee appeal, a substitute declaration must be inclu- available within the IRS. can represent an organization at any level of ded, stating: The actions just described won't be consid- appeal within the IRS. Also, an attorney, certi- 1. That the representative prepared the ap- ered completed until the IRS has had a reason- fied public accountant, or individual enrolled to peal and accompanying documents, and practice before the IRS can represent the or- able time to act upon the appeal or protest, as ganization. 2. Whether the representative knows person- the case may be. If the organization's representative attends a ally that the statements of fact contained in conference without a principal officer or trustee, the appeal and accompanying documents An organization won't be considered to have the representative must file a proper power of are true and correct. exhausted its administrative remedies before the earlier of: attorney or a tax information authorization be- Be sure the appeal contains all of the infor- fore receiving or inspecting confidential information requested. Incomplete appeals will be 1. The completion of the steps just listed and mation. Form 2848 or Form 8821, Tax Informa- returned for completion. the sending by certified or registered mail tion Authorization, as appropriate (or any other of a notice of final determination, or properly written power of attorney or authoriza- The Independent Office of Appeals, after tion), can be used for this purpose. These forms any requested conference and upon considera- 2. The expiration of the 270-day period in are available on IRS.gov from the Forms and In- tion of the organization's appeal as well as infor- which the IRS has not issued a notice of fi- structions page. For more information, see Pub- mation presented in any conference held, will nal determination and the organization has lication 947, Practice Before the IRS and Power generally notify the organization of its decision taken, in a timely manner, all reasonable and issue an appropriate determination letter. steps to secure a ruling or determination.

Chapter 1 Application, Approval, and Appeal Procedures Page 7 Page 8 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

270-day period. The 270-day period will be • Is a public charity described in a part of If your organization is a central organization considered by the IRS to begin on the date a section 509(a) or section 170(b)(1)(A) with affiliated subordinates under its control, it completed application, or group exemption re- other than the part under which your or- can apply for a group exemption letter for its quest is sent or submitted to the IRS. See Appli- ganization requested classification. subordinates, provided it has obtained recogni- cation Procedures, earlier, for information nee- tion of its own exemption. A central organization ded to complete the application form. Favorable court rulings - IRS procedure. If obtains recognition of its own exemption by If the application doesn't contain all of the a suit results in a final determination that your submitting Form 1023 or 1023-EZ, 1024 or required items, it won't be further processed organization is exempt from tax, the IRS will is- 1024-A as described in their instructions with and may be returned to the applicant for com- sue a favorable determination letter, provided the appropriate user fee. You request the group pletion. The 270-day period, in this event, won't your organization has filed an application for ex- exemption letter for the central organization’s be considered as starting until the date the ap- emption and submitted a statement that the un- subordinates by letter rather than a specific application is remailed to the IRS with the reques- derlying facts and applicable law are the same plication form. The issuance of the group ex- ted information, or, if a postmark isn't evident, as in the period considered by the court. emption letter relieves each of the covered sub- on the date the IRS receives a completed appli- ordinates from filing its own application. cation. Group Exemption Letter A central organization that has previously Appeal to Courts obtained recognition of its own exemption must A group exemption letter is a determination let- indicate its employer identification number and ter issued to a central organization recognizing the date of the letter recognizing its exemption, If the IRS issues an unfavorable determination but need not forward documents already sub- letter to your organization and you have ex- on a group basis the exemption under section 501(c) of subordinate organizations on whose mitted. However, if it has not already done so, hausted all the administrative remedies just dis- the central organization must submit a copy of cussed, your organization can seek judicial behalf the central organization has applied for recognition of exemption. any amendment to its governing instruments or remedies. internal regulations as well as any information For example, if your organization has paid A central organization is an organization that about changes in its character, purposes, or the tax resulting from the adverse determination has one or more subordinates under its general method of operation. and met all other statutory prerequisites, it can supervision or control. A subordinate organiza- file suit for a refund in a U.S. District Court or tion is a chapter, local, post, or unit of a central Employer identification number. Each sub- the U.S. Court of Federal Claims. Or, if your or- organization. ordinate must have its own EIN, even if it has no ganization elected not to pay the tax deficiency employees. When submitting its group exemp- resulting from the adverse determination and A subordinate organization may or may not tion application, the central organization must met all other statutory prerequisites, it can file be incorporated, but it must have an organizing provide an EIN for each subordinate organiza- suit for a redetermination of the tax deficiencies document and it must have its own taxpayer tion. in the United States Tax Court. For more infor- identification number (EIN). A subordinate that mation on these types of suits, get Publication is organized and operated in a foreign country Information required for subordinate organ- 556, Examination of Returns, Appeal Rights, can't be included in a group exemption letter. A izations. The exempt central organization re- and Claims for Refund. subordinate described in section 501(c)(3) can't quests the group ruling letter. The central or- be included in a group exemption letter if it is a ganization must submit information for In certain situations, your organization can private foundation described in section 509(a). subordinates it will include in the group exemp- file suit for a declaratory judgment in the U.S. tion letter. The information should be forwarded District Court for the District of Columbia, the If your organization is a subordinate control- in a letter signed by a principal officer of the U.S. Court of Federal Claims, or the U.S. Tax led by a central organization (for example, a central organization setting forth or including as Court. This remedy is available if your organiza- church, a veterans' organization, or a fraternal attachments the following. tion received an adverse notice of final determi- organization), you should check with the central 1. Information verifying that the subordinates: nation, or if the IRS failed to make a timely de- organization to see if it has been issued a group termination on your initial or continuing exemption letter that covers your organization. a. Are affiliated with the central organi- qualification or classification as an exempt or- If it has, you don’t have to file a separate appli- zation at the close of its annual ac- ganization. However, your exempt status claim cation unless your organization no longer wants counting period; must be as: to be included in the group exemption letter. • An organization qualifying under section b. Are subject to its general supervision or control; 501(c) or 501(d) and exempt from tax un- If the group exemption letter doesn't cover der 501(a), your organization, ask your central organization c. Are all eligible to qualify for exemption • An organization to which a deduction for a about being included in the next annual group under the same paragraph of section contribution is allowed under section ruling update that it submits to the IRS. 501(c), though not necessarily the 170(c)(2), paragraph under which the central or- • An organization that is a private foundation See Publication 4573, Group Exemptions, ganization itself is exempt; under section 509(a), for additional general information about group • A private operating foundation under sec- exemption. Go to the Charities & Nonprofits d. If described in section 501(c)(3), tion 4942(j)(3), or page on IRS.gov for Group Exemption Resour- aren’t private foundations; • A cooperative organization that is exempt ces for the most current information and up- e. Are all on the same accounting period from tax under section 521. dates. as the central organization if they are to be included in group returns (de- Adverse notice of final determination. The scribed later); and adverse notice of final determination referred to Central Organization above is a determination letter sent by certified Application Procedure f. If described in section 501(c)(3), are or registered mail holding that your organiza- organizations that have been formed tion: Note: The content about the Central Organ- within the 15-month period preceding • Isn't described in section 501(c) or 501(d) ization Application Procedure is included here the date of submission of the group and exempt from tax under 501(a), or sec- for informational purposes. However, as stated exemption application if they are are tion 170(c)(2), in Notice 2020-36, IRB 2020-21, 840 and Rev. subject to the requirements of section • Is a private foundation and not a public Proc. 2021-5, IRB 2021-1, 250, the IRS is not 508(a) and wish to be recognized as charity described in a part of section 509 or accepting any requests for group exemption let- exempt from their dates of creation . If section 170(b)(1)(A) ters until publication of the final revenue proce- one or more of the subordinates • Is not a private foundation as defined in dure described in the Notice or other guidance haven't been organized within the section 4942(j)(3), or in the Internal Revenue Bulletin. 15-month period, a group ruling may

Page 8 Chapter 1 Application, Approval, and Appeal Procedures Page 9 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

be issued if all subordinates are will- Keeping the Group 3. The same information about new subordi- ing to be recognized as exempt only nates that was required in the initial appli- from the date of application. Exemption Letter in Force cation for group exemption. (This information is listed in items 1 through 10, under 2. A detailed description of the purposes and Continued effectiveness of a group exemption Information required for subordinate or- activities of the subordinates, including the letter is based on the following conditions. ganizations, earlier.) If a new subordinate sources of receipts and the nature of ex- 1. The continued existence of the central or- doesn't differ in any material respects from penditures. ganization. the subordinates included in the applica- 3. A sample copy of a uniform governing in- tion for group exemption, however, a 2. The continued qualification of the central strument (such as articles of incorpora- statement to this effect may be submitted organization for exemption under section tion or articles of association) adopted by in lieu of detailed information. 501(c). the subordinates, or, in its absence, copies of representative instruments. 3. The submission by the central organiza- The organization should send this in- tion of the information regarding its subor- formation to: 4. An affirmation to the effect that, to the best dinate organizations that is required annu- of the officer's knowledge, the purposes ally (described under Information and activities of the subordinates are as Required Annually). Internal Revenue Service Center stated in (2) and (3), above. Ogden, UT 84201–0027 4. The annual filing of an information return 5. A statement that each of the subordinates (Form 990, for example) by the central or- has provided a written authorization to the ganization if required. central organization, signed by an author- Submitting the required information an- ized officer of the subordinate, agreeing to In addition, a group exemption letter will not be ! nually doesn't relieve the central organ- be included in the group exemption (see effective as to a particular subordinate if the CAUTION ization or any of its subordinates of the also New 501(c)(3) organizations that subordinate ceases to conform to the require- duty to submit any other information that may want to be included, later in this section). ments for inclusion in a group exemption letter be required by an EO area manager to deter- and authorization for inclusion (see items 1 and mine whether the conditions for continued ex- 6. A list of subordinates to be included in the emption are being met. group exemption letter to which the IRS 5 in Information required for subordinate organi- has issued an outstanding determination zations, earlier), and the annual filing of any required information return for the subordinate. A As of 2019, the IRS will no longer send letter relating to exemption determination TIP the List of Parent and Subsidiary Ac- letter. central organization may file a group return for some or all of its subordinates. If it does so, the counts to the central organizations. 7. An affirmation to the effect that, to the best group return must be filed on Form 990 under a of the officer's knowledge and belief, no separate EIN obtained exclusively for the pur- subordinate described in section 501(c)(3) pose of filing the group return. Form 990-EZ Events Causing is a private foundation as defined in sec- cannot be used for a group return. Loss of Group Exemption tion 509(a). A group exemption letter no longer has effect, 8. For each subordinate that is a school Information Required Annually for either a particular subordinate or the group claiming exemption under section 501(c) as a whole, when: (3), the information required by Revenue To maintain a group exemption letter, the cen- Ruling 75-50, 1975-2 C.B. 587 (as modi- tral organization must submit annually, at least 1. The central organization notifies the IRS fied by Rev. Proc. 71-447, 1971-2 C.B. 90 days before the close of its annual account- that it is going out of existence, ing period, all of the following information. 230 and Rev. Proc. 2019–22, 2019–2 2. The central organization notifies the IRS, I.R.B. 1260 (these requirements are de- 1. Information about all changes in the pur- by its annual submission or otherwise, that scribed in chapter 3, under Private poses, character, or method of operation any of its subordinates will no longer fulfill Schools. of the subordinates included in the group the conditions for continued effectiveness, 9. For any school affiliated with a church, the exemption letter. explained earlier, or information to show that the provisions of 2. A separate list (that includes the names, 3. The IRS notifies the central organization or Revenue Ruling 75-231, 1975-1 C.B. 158, mailing addresses, actual addresses if dif- the affected subordinate that the group ex- have been met. ferent, and EINs of the affected subordi- emption letter will no longer have effect for 10. A list of the names, mailing addresses, ac- nates) for each of the three following cate- some or all of the group because the con- tual addresses if different, and EINs of gories. ditions for continued effectiveness of a group exemption letter haven't been fulfil- subordinates to be included in the group a. Subordinates that have changed their led. exemption letter. A current directory of names or addresses during the year. subordinates may be furnished instead of When notice is given under any of these three b. Subordinates no longer to be included the list if it includes the required informa- conditions, the IRS will no longer recognize the in the group exemption letter because tion and if the subordinates not to be inclu- exempt status of the affected subordinates until they no longer exist or have disaffili- ded in the group exemption letter are iden- they file separate applications on their own be- ated from or withdrawn their authori- tified. half or the central organization files complete zation to the central organization. supporting information for their inclusion in the New 501(c)(3) organizations that want to be c. Subordinates to be added to the group exemption at the time of its annual sub- included. A new organization, described in group exemption letter because they mission. However, when the notice is given by section 501(c)(3), that wants to be included in a are newly organized or affiliated or the IRS and the withdrawal of recognition is group exemption letter must submit its authori- because they have recently author- based on the failure of the organization to com- zation (as explained in item number 5, earlier, ized the central organization to in- ply with the requirements for recognition of under Information required for subordinate or- clude them. tax-exempt status under the particular subsec- ganizations) to the central organization before tion of section 501(c), the revocation will ordina- the end of the 15th month after it was formed in An annotated directory of subordinates rily take effect as of the date of that failure. The order to satisfy the requirement of section won't be accepted for this purpose. If there notice, however, will be given only after the ap- 508(a). The central organization must also in- were none of the above changes, the cen- peal procedures described earlier in this chap- clude this subordinate in its next annual sub- tral organization must submit a statement ter are completed. mission of information, as discussed later, un- to that effect. der Information Required Annually. In addition, the IRS will cease to recognize the subordinates under a group exemption as

Chapter 1 Application, Approval, and Appeal Procedures Page 9 Page 10 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

tax-exempt if the central organization is auto- Form (and Instructions) 990-T 990-T Exempt Organization Business matically revoked for failure to file required re- Income Tax Return turns or notices for three consecutive years. 941 941 Employer's Quarterly Federal Tax

See Automatic Revocation, later. Subordinates Return Schedule A (Form 990-T) Schedule A (Form 990-T) Unrelated Business Taxable Income from an under a group exemption are also subject to au- 990 990 Return of Organization Exempt From tomatic revocation for failure to file required re- Income Tax Unrelated Trade or Business turns (or appear on a group return if the subor-

990-W 990-W Estimated Tax on Unrelated dinate does not file its own) or notices for three 990-EZ 990-EZ Short Form Return of Business Taxable Income for consecutive years. A subordinate organization Organization Exempt From Income Tax-Exempt Organizations that is automatically revoked must apply to the Tax IRS for reinstatement of its exempt status.

1120-POL Schedule A (Form 990 or 990-EZ) Schedule A (Form 990 or 990-EZ) 1120-POL U.S. Income Tax Return for Thereafter, it may retain independent exempt Public Charity Status and Public Certain Political Organizations status or it may seek to resume its status as a Support subordinate of the central organization. See 4720 4720 Return of Certain Excise Taxes

Group Exemption Resources . Schedule B (Form 990, 990-EZ, or Schedule B (Form 990, 990-EZ, or 990-PF) Under Chapters 41 and 42 of the 990-PF) Internal Revenue Code Schedule of Contributors

5768 5768 Election/Revocation of Election by Schedule C (Form 990 or 990-EZ) Schedule C (Form 990 or 990-EZ) an Eligible Section 501(c)(3) Political Campaign and Lobbying Organization To Make Expenditures Activities To Influence Legislation

Schedule D (Form 990) Schedule D (Form 990) Supplemental

2. 6069 6069 Return of Excise Tax on Excess Financial Statements Contributions to Black Lung Benefit

Schedule E (Form 990 or 990-EZ) Schedule E (Form 990 or 990-EZ) Trust Under Section 4953 and Schools Computation of Section 192 Filing Deduction

Schedule F (Form 990) Schedule F (Form 990) Statement of

Requirements Activities Outside the United States 7004 7004 Application for Automatic Extension of Time to File Certain Business

Schedule G (Form 990 or 990-EZ) Schedule G (Form 990 or 990-EZ) Income Tax, Information, and Other Supplemental Information Regarding Returns and Required Fundraising or Gaming Activities

8274 8274 Certification by Churches and Schedule H (Form 990) Schedule H (Form 990) Hospitals Disclosures Qualified Church-Controlled

Schedule I (Form 990) Schedule I (Form 990) Grants and Other Organizations Electing Exemption Assistance to Organizations, from Employer Social Security and Governments, and Individuals in the Medicare Taxes Introduction United States

Most exempt organizations (including private 8282 8282 Donee Information Return Schedule J (Form 990) Schedule J (Form 990) Compensation foundations) must file various returns and re- Information 8300 8300 Report of Cash Payments Over ports at some time during (or following the close $10,000 Received in a Trade or

Schedule K (Form 990) Schedule K (Form 990) Supplemental of) their accounting period. Business Information on Tax-Exempt Bonds

8453-X 8453-X Political Organization Declaration Topics Schedule L (Form 990 or 990-EZ) Schedule L (Form 990 or 990-EZ) This chapter discusses: Transactions With Interested Persons for Electronic Filing of Notice of Section 527 Status

Schedule M (Form 990) Schedule M (Form 990) Noncash • Annual information returns Contributions 8822-B 8822-B Change of Address or • Unrelated business income tax return Responsible Party-Business

• Employment tax returns Schedule N (Form 990 or 990-EZ) Schedule N (Form 990 or 990-EZ)

• Political organization income tax return Liquidation, Termination, Dissolution, 8868 8868 Application for Automatic Extension • Reporting requirements for a political or Significant Disposition of Assets of Time to File an Exempt organization Organization Return • Donee information return Schedule O (Form 990 or 990-EZ) Schedule O (Form 990 or 990-EZ) Supplemental Information to Form • Information provided to donors 8870 8870 Information Return for Transfers • Report of cash received 990 Associated with Certain Personal Public inspection of exemption Benefits Contracts • 940 940 Employer's Annual Federal applications, annual returns, and political Unemployment (FUTA) Tax Return organizations reporting forms 8871 8871 Political Organization Notice of

• Required disclosures Schedule R (Form 990) Schedule R (Form 990) Related Section 527 Status • Miscellaneous rules Organizations and Unrelated Partnerships 8872 8872 Political Organization Report of Contributions and Expenditures

Useful Items 990-PF 990-PF Return of Private Foundation or

You may want to see: Section 4947(a)(1) Nonexempt 8886-T 8886-T Disclosure by Tax-Exempt Entity Charitable Trust Treated as a Private Regarding Prohibited Tax Shelter Publication Foundation Transaction

8899

990-BL 15 15 Circular E, Employer's Tax Guide 990-BL Information and Initial Excise Tax 8899 Notice of Income from Donated Return for Black Lung Benefit Trusts Intellectual Property 15-A 15-A Employer's Supplemental Tax Guide and Certain Related Persons

8976 8976 Notice of Intent to Operate Under 15-B 15-B Employer's Tax Guide to Fringe

990-N 990-N Electronic Notice (e-Postcard) for Benefits Section 501(c)(4) Tax-Exempt Organizations Not

598 598 Tax on Unrelated Business Income of Required to File Form 990 or Form See chapter 6 for information about getting Exempt Organizations 990-EZ these publications and forms.

Page 10 Chapter 2 Filing Requirements and Required Disclosures Page 11 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

within the United States of $50,000 or to reapply for recognition as a tax-exempt or- Annual Information less. ganization. Exceptions. This filing requirement doesn't Returns Supporting Organization apply to: Annual Information Return • Churches, their integrated auxiliaries, and Every organization exempt from federal income conventions or associations of churches; tax under section 501(a) must file an Annual Each section 509(a)(3) supporting organization • Organizations that are included in a group Exempt Organization Return except: is required to file Form 990 or 990-EZ with the return; 1. A church, an interchurch organization of IRS regardless of the organization's gross re- • Private foundations required to file Form local units of a church, a convention or as- ceipts, unless it qualifies as one of the following: 990-PF; and sociation of churches, • Section 509(a)(3) supporting organizations 1. An integrated auxiliary of a church; required to file Form 990 or Form 990-EZ. 2. An integrated auxiliary of a church, 2. The exclusively religious activities of a reli- 3. A church-affiliated organization that is ex- gious order; or Forms 990 and 990-EZ clusively engaged in managing funds or 3. An organization, the gross receipts of Exempt organizations, other than private foun- maintaining retirement programs, which are normally not more than $5,000, dations, must file their annual information re- that supports a section 509(a)(3) religious 4. A school below college level affiliated with turns on Form 990 or 990-EZ, unless excepted order. a church or operated by a religious order, from filing or allowed to submit Form 990-N, de- 5. Church-affiliated mission societies if more If the organization is described in item (3) scribed earlier. than half of their activities are conducted above, then it must submit Form 990-N (e-Post- in, or are directed at persons in, foreign card) unless it voluntarily files Form 990 or Generally, political organizations with gross countries, 990-EZ. receipts of $25,000 ($100,000 for a qualified state or local political organization (QSLPO)) or 6. An exclusively religious activity of any reli- On its annual information return, at Part I, more for the tax year are required to file Form gious order, Schedule A (Form 990 or 990-EZ) a supporting 990 or 990-EZ unless specifically excepted 7. A state institution, the income of which is organization must: from filing the annual return. The following politi- excluded from gross income under section • List the organizations to which it provides cal organizations aren't required to file Form 115, support, 990 or Form 990-EZ. • Indicate whether it is a Type I, Type II, or • A state or local committee of a political 8. A corporation described in section 501(c) Type III supporting organization, and party. (1) that is organized under an Act of Con- • Certify that the organization isn't controlled • A political committee of a state or local gress, an instrumentality of the United directly or indirectly by disqualified persons candidate. States, and is exempt from Federal in- (other than by foundation managers and • A caucus or association of state or local of- come taxes, other than one or more publicly supported ficials. 9. A stock bonus, pension, or profit-sharing organizations). • A political organization that is required to trust that qualifies under section 401 (re- report as a political committee under the quired to file Form 5500, Annual Return/ Annual Electronic Notice Filing Federal Election Campaign Act. Report of Employee Benefit Plan), Requirement for Small Tax-Exempt • A 501(c) organization that has expendi- Organizations tures for influencing or attempting to influ- 10. A religious or apostolic organization de- ence the selection, nomination, election, or scribed in section 501(d) (required to file appointment of any individual for a federal, Small tax-exempt organizations with annual Form 1065, U.S. Return of Partnership In- state, or local public office. come), gross receipts normally $50,000 or less that are not otherwise required to file an annual informa- Form 990-EZ. This is a shortened version of 11. A governmental unit or an affiliate of a tion return and are not otherwise exempted en- Form 990. Form 990-EZ is designed for use by governmental unit that meets the require- tirely from a filing requirement must submit small exempt organizations and nonexempt ments of Rev. Proc. 95-48, 1995-2 C.B. Form 990-N, Electronic Notice (e-Postcard) for charitable trusts. 418, IRS.gov/pub/irs-tege/rp1995-48.pdf, Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, with the IRS each year, if An organization can file either Form 990 or 12. A private foundation described in section 990-EZ if it satisfies both of the following: 501(c)(3) and exempt under section they choose not to file a Form 990 or 990-EZ. 501(a) (required to file Form 990-PF, Re- Form 990-N requires the following information: 1. Its gross receipts during the year are less turn of Private Foundation), • The organization's legal name, and mailing than $200,000. address; 13. A political organization that is a state or lo- • Any name under which it operates and 2. Its total assets (line 25, column (B) of cal committee of a political party, a politi- does business; Form 990-EZ) at the end of the year are cal committee of a state or local candi- • Its Internet website address (if any); less than $500,000. date, a caucus or association of state or • Its taxpayer identification number; If your organization doesn't satisfy both of these local officials, or required to report under • The name and address of a principal offi- conditions, it can't file Form 990-EZ. Instead, the Federal Election Campaign Act of cer; the organization must file Form 990. 1971 as a political committee, • Organization's annual tax period; Group return. A group return on Form 990 14. An exempt organization (other than a pri- • Verification that the organization's annual may be filed by a central, parent, or like organi- vate foundation or a supporting organiza- gross receipts are normally $50,000 or zation for two or more local organizations, none tion described in Supporting Organization less; and of which is a private foundation. This return is in Annual Information Return, later) that nor- • Notification if the organization has termina- addition to the central organization's separate mally has annual gross receipts of ted. annual return if it must file a return. The central $50,000 or less (required to file Form organization can't be included in the group re- 990-N, Electronic Notice (e-Postcard) for Form 990-N is due by the 15th day of the turn. See the instructions for Form 990 for the Tax-Exempt Organizations Not Required fifth month after the close of the tax year. For conditions under which this procedure may be to File Form 990 or Form 990EZ), or tax years beginning after December 31, 2006, any organization that fails to meet its annual re- used. 15. A foreign organization, or an organization porting requirement for 3 consecutive years will located in a U.S. possession, that normally automatically lose its tax-exempt status. To re- has annual gross receipts from sources gain its exempt status an organization will have

Chapter 2 Filing Requirements and Required Disclosures Page 11 Page 12 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

In any year that an organization is total assets of $10 million or more at the end of checking the application pending block at the TIP properly included as a subordinate or- the tax year. For tax years beginning after July top of page 1 of the return. For more information ganization on a group return, it 1, 2019, an organization is required to file Form on the filing requirements, see the Instructions shouldn't file its own Form 990. 990 electronically unless exceptions described for Forms 990, 990-EZ, and 990-PF. in the form instructions apply. As of the 2020 Schedule A (Form 990 or 990-EZ). Organi- Form 990, the instructions no longer describe State reporting requirements. Copies of zations, other than private foundations, that are any exceptions to the e-filing requirement. Forms 990, 990-EZ, or 990-PF may be used to described in section 501(c)(3) and that are oth- satisfy state reporting requirements. See the in- Form 990-EZ For small exempt organiza- structions for those forms. erwise required to file Form 990 or 990-EZ must tions, the legislation specifically allowed a post- also complete Schedule A of that form. ponement (“transitional relief”). For tax years Form 8870. Organizations that filed a Form ending before July 31, 2021, the IRS will accept 990, 990-EZ, or 990-PF, and paid premiums or Schedule B (Form 990, 990-EZ, or 990-PF). either paper or electronic filing of Form 990-EZ, Organizations that file Form 990, 990-EZ or received transfers on certain life insurance, an- Short Form Return of Organization Exempt from nuity, and endowment contracts (personal ben- 990-PF use this schedule to provide required Income Tax. For tax years ending July 31, information regarding certain contributors. efit contracts), must file Form 8870. For more 2021, and later, Forms 990-EZ must be filed information, see Form 8870 and the instructions electronically. Generally, Form 990-EZ is for or- for that form. Schedule O (Form 990 or 990-EZ). Organi- ganizations with annual gross receipts less than zations that file Form 990 or 990-EZ must use $200,000 and total assets at tax year-end less Form 8822-B. If you moved during the year, fill this schedule to provide required additional in- than $500,000. formation or if additional space is needed. out Form 8822-B, Change of Address or Re- sponsible Party-Business. Also, if your “Re- Other schedules may be required to be filed Form 990-PF. For tax years beginning on sponsible Party” changed this year, you must with Form 990 or 990-EZ. See the instructions or before July 1, 2019, an organization is re- also fill out Form 8822-B. The “Responsible for Form 990 or the instructions for Form quired to file Form 990-PF electronically if it files Party” is the tax-exempt organization’s “Princi- 990-EZ for more information. at least 250 returns during the calendar year. For tax years beginning after July 1, 2019, an pal Officer” as defined in the Form 990 instructions, in the Glossary section. Report significant new or changed program organization is required to file form 990-PF services and changes to organizational electronically unless exceptions described in documents. An organization should report the form instructions apply. As of the 2020 Form Automatic Revocation new significant program services or significant 990-PF, the instructions no longer describe any changes in how it conducts program services, exceptions to the e-filing requirement. If the organization fails to file a Form 990, and significant changes to its organizational 990-EZ, or 990-PF, or fails to submit a Form documents, on its Form 990 rather than in a let- Form 990-N. An organization that is eligible 990-N, as required, for 3 consecutive years, it ter to EO Determinations. EO Determinations and elects to submit Form 990-N must submit it will automatically lose its tax-exempt status by no longer issues letters confirming the tax-ex- electronically. operation of law effective as of the due date for empt status of organizations that report new Form 990-T. The IRS will continue to ac- the third missed return or notice. The list of or- services or significant changes, or changes to cept paper forms until Form 990-T is available ganizations whose tax-exempt status has been organizational documents. See Miscellaneous in electronic format, including Form 990-T, automatically revoked is available on IRS.gov. Rules, Organization Changes and Exempt Sta- through 2020. The IRS plans to have these re- This list (Auto-Revocation List) may be viewed tus, later. turns ready for e-filing in 2021 (reporting on tax and searched on Tax-Exempt Organization year 2020). Visit IRS.gov for the latest informa- Search. The Auto-Revocation List includes tion on the availability of e-filing for Form 990-T. each organization's name, Employer Identifica- Form 990-PF tion Number (EIN) and last known address. It also includes the effective date of the automatic All private foundations exempt under section Form 8872. Form 8872 must be filed elec- revocation and the date it was posted to the list. 501(c)(3) must file Form 990-PF. These organi- tronically if reporting on periods after 2019. For auto-revoked organizations that applied for zations are discussed in chapter 3. Due Date and received reinstatement, the list gives the date of reinstatement. The IRS updates the list Electronic Filing Forms 990, 990-EZ, or 990-PF must be filed by monthly to include additional organizations that lose their tax-exempt status. For tax years beginning on or before July 1, the 15th day of the fifth month after the end of 2019, your organization may be required to file your organization's accounting period. Thus, for Form 990, Form 990-EZ, or Form 990-PF, and a calendar year taxpayer, Forms 990, 990-EZ, Tax Effect of Loss of Tax-Exempt related forms, schedules, and attachments or 990-PF are due May 15 of the following year. Status electronically. For tax years beginning after July If any due date falls on a Saturday, Sunday, or 1, 2019, under the Taxpayer First Act, organiza- legal holiday, the return will be due the next If your organization’s tax-exempt status is auto- tions are required to file certain returns electron- business day. matically revoked, you may be required to file ically, including Form 990, 990-EZ, 990-PF, one of the following federal income tax returns Extension of time to file. Use Form 8868 to 8872, and 990-T. The e-filing requirement is and pay any applicable income taxes: request an automatic six-month extension of generally effective for tax years beginning after • Form 1120, U.S. Corporation Income Tax time to file Forms 990, 990-EZ, or 990-PF. July 1, 2019. The Taxpayer First Act allows Return, due by the 15th day of the 3rd transitional relief for certain small organizations When filing Form 8868 for an automatic ex- month after the end of your organization’s or other organizations for which the IRS deter- tension, neither a signature, nor an explanation tax year, or mines that application of the e-filing require- is required. • Form 1041, U.S. Income Tax Return for ment would constitute an undue hardship in the Estates and Trusts, due by the 15th day of absence of additional transitional time. Application for exemption pending. An or- the 4th month after the end of your organi- ganization that claims to be exempt under sec- zation’s tax year. If an organization is required to file a return tion 501(a) but has not established its exempt electronically but doesn't, it isn't considered to status by the due date for filing an information In addition, a section 501(c)(3) organization have filed its return. See Regulations section return must complete and file Form 990, that loses its tax-exempt status can't receive 301.6033-4 for more information. 990-EZ, 990–N, or 990-PF (if it considers itself tax-deductible contributions and won't be identi- a private foundation), unless the organization is fied in the IRS Business Master File extract as Form 990. For tax years beginning on or exempt from Form 990-series filing require- eligible to received tax-deductible contributions, before July 1, 2019, an organization is required ments. If the organization's application is pend- or be included in Tax-Exempt Organization to file Form 990 electronically if it files at least ing with the IRS, it must so indicate on Forms Search (Pub. 78 database). 250 returns during the calendar year and has 990, 990-EZ, or 990-PF (whichever applies) by

Page 12 Chapter 2 Filing Requirements and Required Disclosures Page 13 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

An organization whose exemption was auto- filing guidance. For tax years beginning after Certification Program for Professional Em- matically revoked must apply for tax exemption December 31, 2017, an organization with more ployer Organizations (CPEOs). The Tax In- in order to regain its tax exemption (even if it than 1 unrelated trade or business must com- crease Prevention Act of 2014, enacted Dec. wasn't originally required to apply). In some sit- pute its UBTI (unrelated business taxable in- 19, 2014, requires the IRS to establish a volun- uations, an organization may be able to obtain come), including for purposes of determining tary certification program for professional em- exemption retroactive to its date of revocation. any net operating loss deduction, separately ployer organizations (PEOs). PEOs handle vari- Similarly, if the central organization with a with respect to each such trade or business. Or- ous payroll administration and tax reporting Group Exemption Number is automatically re- ganizations subject to the rule should complete responsibilities for their business clients and are voked, all its covered subsidiaries may need to a separate Schedule A (Form 990-T) to calcu- typically paid a fee based on payroll costs. For apply for exemption as independent organiza- late UBTI for each additional trade or business. further information, go to: IRS.gov/for-tax-pros/ tions. basic-tools/certified-professional-employer- Estimated tax. An organization that ex- organization. For more information about automatic revo- pects to owe $500 or more in tax (including tax cation, go to IRS.gov and select Charities & on unrelated business income) is required to FICA and FUTA tax exceptions. Payments Non-Profits and then select Reinstated? Learn make quarterly estimated tax payments. Use for services performed by a minister of a church more with Reinstate Tax-Exempt Status. Form 990-W to figure your organization's esti- in the exercise of the ministry, or a member of a mated tax payments. Failure to make appropri- religious order performing duties required by ate quarterly estimated tax payments may result Penalties the order, are generally not subject to FICA or in an underpayment penalty. FUTA taxes. Penalties for failure to file. Generally, an ex- See Publication 598, Tax on Unrelated Busi- FUTA tax exception. Payments for serv- empt organization that fails to file a required re- ness Income of Exempt Organizations more in- ices performed by an employee of a religious, turn must pay a penalty of $20 a day for each formation on UBTI. charitable, educational, or other organization day the failure continues. The same penalty will described in section 501(c)(3) that are generally apply if the organization doesn't give all the in- subject to FICA taxes if the payments are $100 formation required on the return or doesn't give Employment or more for the year, aren't subject to FUTA the correct information. This penalty is indexed taxes. for inflation for returns required to be filed after Tax Returns December 31, 2014. FICA tax exemption election. Churches Every employer, including an organization ex- and qualified church-controlled organizations Maximum penalty. The maximum penalty empt from federal income tax that pays wages can elect exemption from employer FICA taxes for any one return is the smaller of $10,000 or to employees is responsible for withholding, de- by filing Form 8274. 5% of the organization's gross receipts for the positing, paying, and reporting federal income To elect the exemption, Form 8274 must be year. tax, social security and Medicare (FICA) taxes, filed before the first date on which a quarterly Organization with gross receipts over $1 and federal unemployment tax (FUTA), unless employment tax return would otherwise be due million. For an organization that has gross re- that employer is specifically excepted by law from the electing organization. The organization ceipts of over $1 million for the year, the penalty from those requirements, or if the taxes clearly can make the election only if it is opposed for is $100 a day up to a maximum of $50,000. don't apply. religious reasons to the payment of FICA taxes. The election applies to payments for serv- Managers. If the organization is subject to For more information, obtain a copy of Publi- ices of current and future employees other than this penalty, the IRS may specify a date by cation 15, which summarizes the responsibili- services performed in an unrelated trade or which the return or correct information must be ties of an employer, Publication 15-A, Publica- business. supplied by the organization. Failure to comply tion 15-B, and Form 941. with this demand will result in a penalty im- Revoking the election. The election can posed upon the manager of the organization, or Small Business Health Care Tax Credit. If be revoked by the IRS if the organization fails to upon any other person responsible for filing a your small tax-exempt organization provides file Form W-2, Wage and Tax Statement, for 2 correct return. The penalty is $10 a day for each health care coverage for your workers you may years and fails to furnish certain information day that a return isn't filed after the period given qualify for the small business health care tax upon request by the IRS. Such revocation will for filing. The maximum penalty imposed on all credit. Go to Affordable Care Act Tax apply retroactively to the beginning of the persons with respect to any one return is Provisions for more details. See also Small 2-year period. Business Health Care Tax Credit. $5,000. Definitions. For purposes of this election, Exception for reasonable cause. No Trust fund recovery penalty. If any person the term church means a church, a convention penalty will be imposed if reasonable cause for required to collect, truthfully account for, and or association of churches, or an elementary or failure to file timely can be shown. pay over any of these taxes willfully fails to sat- secondary school that is controlled, operated, isfy any of these requirements or willfully tries in or principally supported by a church or by a any way to evade or defeat any of them, that convention or association of churches. Unrelated Business person will be subject to a penalty. The penalty The term qualified church-controlled organi- is equal to the tax evaded, not collected, or not zation means any church-controlled section Income Tax Return accounted for and paid over. The term person 501(c)(3) tax-exempt organization, other than includes: an organization that both: Even though your organization is recognized as • An officer or employee of a corporation, or 1. Offers goods, services, or facilities for tax exempt, it still may be liable for tax on its un- • A member or employee of a partnership. sale, other than on an incidental basis, to related business income. Unrelated business Exception. The penalty isn't imposed on the general public at other than a nominal income is income from a trade or business, reg- charge that is substantially less than the ularly carried on, that isn't substantially related any unpaid volunteer director or member of a board of trustees of an exempt organization if cost of providing such goods, services, or to the charitable, educational, or other purpose facilities, and that is the basis for the organization's exemp- the unpaid volunteer serves solely in an hono- tion. rary capacity, doesn't participate in the 2. Normally receives more than 25% of its day-to-day or financial operations of the organi- support from the sum of governmental If your organization has gross income of zation, and doesn't have actual knowledge of sources and receipts from admissions, $1,000 or more from a regularly conducted un- the failure on which the penalty is imposed. sales of merchandise, performance of related trade or business, you must file Form This exception doesn't apply if it results in services, or furnishing of facilities, in activi- 990-T in addition to your required annual infor- no one being liable for the penalty. ties that aren't unrelated trades or busi- mation return or notice. The form instructions nesses. and irs.gov should be consulted for electronic

Chapter 2 Filing Requirements and Required Disclosures Page 13 Page 14 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Effect on employees. If a church or quali- 2. Deductions directly connected with the the organization can show that the failure to pay fied church-controlled organization has made earning of gross income. on time was due to reasonable cause. an election, payment for services performed for that church or organization, other than in an un- To figure taxable income, allow for a $100 spe- related trade or business, won't be subject to cific deduction, but don't allow for the net oper- Reporting Requirements FICA taxes. However, the employee, unless ating loss deduction, the dividends-received otherwise exempt, will be subject to self-em- deduction, and other special deductions for cor- for a Political ployment tax on the income. The tax applies to porations. income of $108.28 or more for the tax year from Organization Exempt organization not a political organi- that church or organization, and no deductions zation. An organization exempt under section for trade or business expenses are allowed Certain political organizations are required to 501(c) that spends any amount for an exempt against this self-employment income. notify the IRS that the organization is to be trea- Schedule SE (Form 1040), Self-Employ- function must file Form 1120-POL for any year ted as a section 527 political organization. The ment Tax, should be attached to the employ- which it has political taxable income. These or- organization is also required to periodically re- ee's income tax return. ganizations must include in gross income the port certain contributions received and expendi- lesser of: tures made by the organization. To notify the IRS of section 527 treatment, an organization 1. The total amount of its exempt function ex- must file Form 8871. To report contributions penditures, or Political Organization and expenditures, certain tax-exempt political Income Tax Return 2. The organization's net investment income. organizations must file Form 8872. Separate fund. A section 501(c) organiza- Generally, a political organization is treated as tion can set up a separate segregated fund that Form 8871 an organization exempt from tax. Certain politi- will be treated as an independent political or- cal organizations, however, must file an annual ganization. The earnings and expenditures A political organization must electronically file income tax return, Form 1120-POL, U.S. In- made by the separate fund won't be attributed Form 8871 to notify the IRS that it is to be trea- come Tax Return for Certain Political Organiza- to the section 501(c) organization. ted as a section 527 organization. However, an tions, for any year they have political organiza- organization isn't required to file Form 8871 if: tion taxable income in excess of the $100 Section 501(c)(3) organizations are • It reasonably expects its annual gross re- specific deduction allowed under section 527. precluded from, and may suffer loss of exemption for, engaging in any political ceipts to always be less than $25,000. A political organization that has campaign on behalf of, or in opposition to, any • It is a political committee required to report TIP $25,000 ($100,000 for a qualified state candidate for public office. under the Federal Election Campaign Act or local political organization) or more of 1971 (FECA) (52 U.S.C. section 30101 in gross receipts for the tax year must file Form et seq.). 990 or Form 990-EZ (and Schedule B of the Due date. Form 1120-POL is due by the 15th • It is a state or local candidate committee. form), unless excepted. See Forms 990 and day of the 4th month after the end of the tax • It is a state or local committee of a political 990-EZ earlier. year. Thus, for a calendar year taxpayer, Form party. 1120-POL is due on April 15 of the following year. If any due date falls on a Saturday, Sun- All other political organizations are required to Political organization. A political organization day, or legal holiday, the organization can file file Form 8871. is a party, committee, association, fund, or the return on the next business day. other organization (whether or not incorporated) An organization must provide on Form 8871: organized and operated primarily for the pur- Form 1120-POL is not required of an 1. Its name and address (including any busi- pose of directly or indirectly accepting contribu- exempt organization that makes ex- ness address, if different) and its elections or making expenditures, or both, for an expenditures for political purposes if its tronic mailing address; empt function. gross income doesn't exceed its directly connected deductions by more than $100 for the 2. Its purpose; Exempt function. An exempt function tax year. means influencing or attempting to influence the 3. The names and addresses of its officers, selection, nomination, election, or appointment highly compensated employees, contact Extension of time to file. Use Form 7004 to of any individual to any federal, state, local pub- person, custodian of records, and mem- request an automatic extension of time to file lic office or office in a political organization, or bers of its board of directors; Form 1120-POL. The extension will be granted the election of the Presidential or Vice Presi- if you complete Form 7004 properly, make a 4. The name and address of, and relation- dential electors, whether or not such individual proper estimate of the tax (if applicable), file ship to, any related entities (within the or electors are selected, nominated, elected, or Form 1120-POL by the due date, and pay any meaning of section 168(h)(4)); and appointed. It also includes certain office expen- tax due. ses of a holder of public office or an office in a 5. Whether it intends to claim an exemption political organization. Failure to file. A political organization that from filing Form 8872, Form 990, or Form 990-EZ. Certain political organizations are re- fails to file Form 1120-POL is subject to a pen- quired to notify the IRS that they are alty equal to 5% of the tax due for each month Employer identification number. If your ! (or partial month) the return is late up to a maxi- CAUTION section 527 organizations. These or- organization needs an EIN, you can apply for ganizations must use Form 8871. Some of mum of 25% of the tax due, unless the organi- one online. Click on the Employer ID Numbers these section 527 organizations must use Form zation shows the failure was due to reasonable (EINs) link at IRS.gov/businesses/small 8872 to file periodic reports with the IRS dis- cause. If you previously applied for an EIN and closing their contributions and expenditures. For more information about filing Form haven't yet received it, or you are unsure For a discussion on these forms, see Reporting 1120-POL, refer to the instructions accompany- whether you have an EIN, please call our Requirements for a Political Organization, later. ing the form. toll-free customer account services number, 1-877-829-5500, for assistance. Political organization taxable income. Failure to pay on time. An organization Political organization taxable income is the ex- that doesn't pay the tax when due generally Due dates. The initial Form 8871 must be filed cess of: may have to pay a penalty of 1/2 of 1% of the within 24 hours of the date on which the organi- unpaid tax for each month or part of a month zation was established. If there is a material 1. Gross income for the tax year (excluding the tax isn't paid, up to a maximum of 25% of change, an amended Form 8871 must be filed exempt function income) minus the unpaid tax. The penalty won't be imposed if within 30 days of the material change. When the organization terminates its existence, it

Page 14 Chapter 2 Filing Requirements and Required Disclosures Page 15 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

must file a final Form 8871 within 30 days of ter- expenditure, for an exempt function during the Nonelection year filing. In nonelection years, mination. calendar year, must file Form 8872 except: the form must be filed on a semiannual or If the due date falls on a Saturday, Sunday, • A political organization that isn't required to monthly basis. A complete listing of these filing or legal holiday, the organization can file on the file Form 8871 (discussed earlier). periods are in the Form 8872 Instructions. A next business day. • A political organization that is subject to tax nonelection year is any odd-numbered year. on its income because it didn't file or How to file. An organization must file Form amend Form 8871. How to file. An organization must file Form 8871 electronically via the IRS Internet website • A qualified state or local political organiza- 8872 electronically if reporting on periods after at IRS.gov/polorgs. tion (QSLPO), discussed below. 2019. For reporting on periods before 2020, form 8872 can be filed either electronically or by All other tax-exempt section 527 organizations Form 8453-X, Political Organization Decla- mail, but organizations that have, or expect to that accept contributions or make expenditures ration for Electronic Filing of Notice of Sec- have, contributions or expenditures of $50,000 for an exempt function are required to file Form tion 527 Status. After electronically submitting or more for the year are required to file electron- 8872. the initial Form 8871, the political organization ically. must print, sign, and mail Form 8453-X to the Qualified state or local political organi- Electronic filing. File electronically via the IRS. Upon receipt of the Form 8453-X, the IRS zation. A state or local political organization IRS internet website at IRS.gov/polorgs. You will send the organization a username and may be a QSLPO if: password that must be used to file an amended will need a user ID and password to electroni- or final Form 8871 or to electronically file Form 1. All of its political activities relate solely to cally file Form 8872. Organizations that have 8872. state or local public office (or office in a completed the electronic filing of Form 8871 state or local political organization). and submitted a completed and signed Form 8453-X will receive a username and password Penalties 2. It is subject to a state law that requires it to in the mail. report (and it does report) to a state Failure to file. An organization that is re- Organizations that have completed the elec- agency information about contributions quired to file Form 8871, but fails to do so on a tronic filing of Form 8871, but haven't received and expenditures that is similar to the in- timely basis, won't be treated as a tax-exempt their user ID and password can request one by formation that the organization would oth- section 527 organization for any period before writing to the following address: erwise be required to report to the IRS. the date Form 8871 is filed. Also, the taxable income of the organization for that period will in- 3. The state agency and the organization Internal Revenue Service clude its exempt function income (including make the reports publicly available. Attn: Request for 8872 Password contributions received, membership dues, and Mail Stop 6273 4. No federal candidate or office holder: political fundraising receipts) minus any deduc- Ogden, UT 84201 tions directly connected with the production of a. Controls or materially participates in that income. the direction of the organization, Lost username and password. If you Failure to file an amended Form 8871 will b. Solicits contributions for the organiza- have forgotten or misplaced the username and cause the organization not to be treated as a tion, or password issued to your organization after you tax-exempt section 527 organization. If an or- filed your initial Form 8871, send a letter re- ganization is treated as not being a tax-exempt c. Directs the disbursements of the or- questing a new username and password to the section 527 organization, the taxable income of ganization. address under Electronic filing. You can also the organization will be determined by consider- fax your request to (801) 620-3249. It may take ing any exempt function income and deductions Information required on Form 8872. If an or- 3-6 weeks for your new username and pass- during the period beginning on the date of the ganization pays an individual $500 or more for word to arrive, as they will be mailed to the or- material change and ending on the date that the the calendar year, the organization is required ganization. amended Form 8871 is filed. to disclose the individual's name, address, occupation, employer, amount of the expense, the The tax is computed by multiplying the or- Penalty ganization's taxable income by the highest cor- date the expense was paid, and the purpose of the expense on Form 8872. porate tax rate. A penalty will be imposed if the organization is If an organization receives contributions of Fraudulent returns. Any individual or cor- required to file Form 8872 and it: $200 or more from one contributor for the calen- • Fails to file the form by the due date, or poration that willfully delivers or discloses to the dar year, the organization must disclose the do- IRS any list, return, account, statement or other • Files the form but fails to report all of the in- nor's name, address, occupation, employer, formation required or reports incorrect in- document known to be fraudulent or false as to and the date the contributions were made. any material matter will be fined not more than formation. For additional information that is required, $10,000 ($50,000 in the case of a corporation) see Form 8872. or imprisoned for not more than 1 year or both. The penalty is 21% for tax years beginning after December 31, 2017 (35% for tax years be- Waiver of penalties. The IRS may waive Due dates. The due dates for filing Form 8872 ginning before December 31 2017) of the total any additional tax assessed on an organization vary depending on whether the form is due for a amount of contributions and expenditures to for failure to file Form 8871 if the failure was due reporting period that occurs during a calendar which a failure relates. to reasonable cause and not willful neglect. year in which a regularly scheduled election is held, or any other calendar year (a nonelection Fraudulent returns. Any individual or cor- Additional information. For more information year). poration that willfully delivers or discloses any on Form 8871, see the form and its instructions. If the due date falls on a Saturday, Sunday, list, return, account, statement, or other docu- For a discussion on the public inspection re- or legal holiday, the organization can file on the ment known to be fraudulent or false as to any quirements for the form, see Public Inspection next business day. material matter will be fined not more than of Exemption Applications, Annual Returns, and $10,000 ($50,000 in the case of a corporation), Political Organization Reporting Forms, later. Election year filing. In election years, Form or imprisoned for not more than 1 year, or both. 8872 must be filed on either a quarterly or a Waiver of penalties. The IRS may waive monthly basis. Both a pre-election report and a any additional tax assessed on an organization Form 8872 post-election report are also required to be filed for failure to file Form 8872 if the failure was due in an election year. An election year is any year Every tax-exempt section 527 political organi- to reasonable cause and not willful neglect. in which a regularly scheduled general election zation that accepts a contribution or makes an for federal office is held (an even-numbered year).

Chapter 2 Filing Requirements and Required Disclosures Page 15 Page 16 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

acknowledgment represents receipt of the goods or services provided by the charity, property described on Form 8283 on the date and Donee Information specified on the form. The signature also indi- 2. Provide the donor with a good faith esti- cates knowledge of the information reporting re- Return mate of the fair market value of the goods quirements on dispositions, as previously dis- or services that the donor received. cussed. A copy of Form 8283 must be given to Dispositions of donated property. If an or- the donee. ganization receives charitable deduction prop- The charity must furnish the statement in con- erty and within three years sells, exchanges, or nection with either the solicitation or the receipt otherwise disposes of the property, the organi- of the quid pro quo contribution. If the disclo- zation must file Form 8282, Donee Information Information Provided to sure statement is furnished in connection with a Return. However, an organization isn't required Donors particular solicitation, it isn't necessary for the to file Form 8282 if: organization to provide another statement when it actually receives the contribution. • The property is valued at $500 or less, or In some situations, a donor must obtain certain • The property is consumed or distributed for No disclosure statement is required if any of information from a donee organization to obtain the following are true. charitable purposes. a deduction for a charitable contribution. In Form 8282 must be filed with the IRS within other situations, the donee organization is re- 1. The goods or services given to a donor 125 days after the disposition. Additionally, a quired to provide information to the donor. have insubstantial value as described in copy of Form 8282 must be given to the donor. Rev. Proc. 90-12, 1990-1 C.B. 471, Rev. If the organization fails to file the required infor- A charitable organization must give a donor Proc. 90-12, and Rev. Proc. 92-49, 1992-1 mation return, penalties may apply. a disclosure statement for a quid pro quo contri- C.B. 507 (as adjusted for inflation), Rev. bution over $75. (See Disclosure statement. Proc. 92-49. Charitable deduction property. This is later.) This is a payment a donor makes to a 2. There is no donative element involved in a any property (other than money or publicly tra- charity partly as a contribution and partly for particular transaction with a charity (for ex- ded securities) for which the donee organiza- goods or services. See Quid pro quo contribu- ample, there is generally no donative ele- tion signed an appraisal summary or Form tion below for an example. 8283, Noncash Charitable Contributions. ment involved in a visitor's purchase from Failure to make the required disclosure may a museum gift shop). Publicly traded securities. These are se- result in a penalty to the organization. A donor 3. There is only an intangible religious benefit curities for which market quotations are readily can't deduct a charitable contribution of $250 or provided to the donor. The intangible reli- available on an established securities market as more unless the donor has a written acknowl- gious benefit must be provided to the do- of the date of the contribution. edgment from the charitable organization. nor by an organization organized exclusively for religious purposes, and must be Appraisal summary. If the value of the don- In certain circumstances, an organization of a type that generally isn't sold in a com- ated property exceeds $5,000, the donor must may be able to meet both of these requirements mercial transaction outside the donative get a qualified appraisal for contributions of with the same written document. property, see Exceptions, below. context. For example, a donor who, for a payment, is granted admission to a reli- Exceptions. A written appraisal isn't need- Disclosure of gious ceremony for which there is no ad- ed if the property is: Quid Pro Quo Contributions mission charge is provided an intangible • Nonpublicly traded stock of $10,000 or religious benefit. A donor isn't provided in- less, A charitable organization must provide a written tangible religious benefits for payments • A vehicle (including a car, boat, or air- disclosure statement to donors of a quid pro made for tuition for education leading to a plane), if your deduction for the vehicle is quo contribution over $75. recognized degree, travel services, or limited to the gross proceeds from its sale, consumer goods. Intellectual property, • Quid pro quo contribution. A contribution 4. The donor makes a payment of $75 or Certain securities considered to have mar- • made by a donor in exchange for goods or serv- less per year and receives only annual ket quotations readily available (see Regu- ices is known as a quid pro quo contribution. membership benefits that consist of: lations section 1.170A-13(c)(7)(xi)(B)), Your charitable organization must provide the • Inventory and other property donated by a donor a written statement informing the donor a. Any rights or privileges (other than the corporation that are qualified contributions of the fair market value of the items or services right to purchase tickets for college for the care of the ill, the needy, or infants, it provided in exchange for the contribution. athletic events) that the taxpayer can within the meaning of section 170(e)(3)(A), Generally, a written statement is required for exercise often during the membership or each payment, whenever the contribution por- period, such as free or discounted ad- • Any donation of stock in trade, inventory, tion is over $75. missions or parking or preferred ac- or property held primarily for sale to cus- cess to goods or services, or tomers in the ordinary course of your trade Example. If a donor gives your charity $100 b. Admission to events that are open or business. and receives a concert ticket valued at $40, the only to members and the cost per per- The donee organization isn't a qualified ap- donor has made a quid pro quo contribution. In son of which is within the limits for praiser for the purpose of valuing the donated this example, the charitable part of the payment low-cost articles described in Rev. property. For more information, get Publication is $60. Even though the deductible part of the Proc. 90-12 (as adjusted for inflation), 561, Determining the Value of Donated Prop- payment isn't more than $75, a written state- Rev. Proc. 90-12. erty. ment must be filed because the total payment is more than $75. If your organization fails to dis- Good faith estimate of fair market value Form 8283. For noncash donations over close quid pro quo contributions, the organiza- (FMV). An organization can use any reasona- $5,000, the donor must attach Form 8283 to the tion may be subject to a penalty. ble method to estimate the FMV of goods or tax return to support the charitable deduction. services it provided to a donor, as long as it ap- The donee must sign Part IV of Section B, Form Disclosure statement. The required written plies the method in good faith. 8283 unless publicly traded securities are don- disclosure statement must: The organization can estimate the FMV of ated. The person who signs for the donee must goods or services that generally aren't commer- 1. Inform the donor that the amount of the be an official authorized to sign the donee's tax cially available by using the FMV of similar or contribution that is deductible for federal or information returns, or a person specifically comparable goods or services. Goods or serv- income tax purposes is limited to the ex- authorized to sign by that official. The signature ices may be similar or comparable even if they cess of any money (and the value of any doesn't represent concurrence in the appraised don't have the unique qualities of the goods or property other than money) contributed by value of the contributed property. A signed services being valued. the donor over the fair market value of

Page 16 Chapter 2 Filing Requirements and Required Disclosures Page 17 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example 1. A charity provides a 1-hour more information, see Publication 1771, Chari- Acknowledgment tennis lesson with a tennis professional for the table Contributions – Substantiation and Disclo- first $500 payment it receives. The tennis pro- sure Requirements. For a contribution of a qualified vehicle fessional provides 1-hour lessons on a com- ! with a claimed value of $500 or less, CAUTION mercial basis for $100. A good faith estimate of Cash contributions. To deduct a contribu- don't file Form 1098-C. However, you the lesson's FMV is $100. tion of cash, a check, or other monetary gift (re- can use it as the contemporaneous written ac- gardless of the amount), a donor must maintain knowledgment under section 170(f)(8) by pro- Example 2. For a payment of $50,000, a a bank record or a written communication from viding the donor with Copy C only. See the In- museum allows a donor to hold a private event the donee organization showing the donee's structions for Form 1098-C. in a room of the museum. A good faith estimate name, date, and amount of the contribution. In of the FMV of the right to hold the event in the the case of a lump-sum contribution (rather than Generally, the organization should complete museum can be made by using the cost of rent- a contribution by payroll deduction) made Form 1098-C as the written acknowledgment to ing a hotel ballroom with a capacity, amenities, through the Combined Federal Campaign or a the donor and the IRS. The contents of the ac- and atmosphere comparable to the museum similar program such as a United Way Cam- knowledgment depend upon whether the or- room, even though the hotel ballroom lacks the paign, the written communication must include ganization: unique art displayed in the museum room. If the the name of the donee organization that is the • Sells a qualified vehicle without any signifi- hotel ballroom rents for $2,500, a good faith es- ultimate recipient of the charitable contribution. cant intervening use or material improve- timate of the FMV of the right to hold the event Contributions by payroll deduction. An ment, in the museum is $2,500. organization may substantiate an employee's • Intends to make a significant intervening contribution by deduction from its payroll by: use of or material improvement to a quali- Example 3. For a payment of $1,000, a • A pay stub, Form W-2, or other document fied vehicle prior to sale, or charity provides an evening tour of a museum showing a contribution to a donee organi- • Sells a qualified vehicle to a needy individ- conducted by a well-known artist. The artist zation, together with ual at a price significantly below fair market doesn't provide tours on a commercial basis. • A pledge card or other document from the value, or a gratuitous transfer to a needy Tours of the museum normally are free to the donee organization that shows its name. individual in direct furtherance of a charita- public. A good faith estimate of the FMV of the ble purpose of the organization of relieving evening museum tour is $0 even though it is For contributions of $250 or more, the docu- the poor and distressed or the underprivi- conducted by the artist. ment must state that the donee organization leged who are in need of a means of trans- provides no goods or services for any payroll portation. Penalty for failure to disclose. A penalty is contributions. The amount withheld from each imposed on a charity that doesn't make the repayment of wages to a taxpayer is treated as a For more information on the acknowledg- quired disclosure of a quid pro quo contribution separate contribution. ment, see Notice 2005-44. of more than $75. The penalty is $10 per contribution, not to exceed $5,000 per fundraising Acknowledgment of Vehicle Material improvements or significant inter- event or mailing. The charity can avoid the pen- vening use. To constitute significant interven- alty if it can show that the failure was due to rea- Contribution ing use, the organization must actually use the sonable cause. vehicle to substantially further the organization's If an exempt organization receives a contribu- regularly conducted activities, and the use must tion of a qualified vehicle with a claimed value be significant, not incidental. Factors in deter- Acknowledgment of of more than $500, the donee organization is mining whether a use is a significant intervening Charitable Contributions of required to provide a contemporaneous written use depend on the nature, extent, frequency, $250 or More acknowledgment to the donor. The donee or- and duration. For this purpose, use includes ganization can use a completed Form 1098-C, providing transportation on a regular basis for a Contributions of Motor Vehicles, Boats, and Air- A donor can deduct a charitable contribution of significant period of time or significant use di- planes, for the contemporaneous written ac- $250 or more only if the donor has a written ac- rectly related to training in vehicle repair. Use knowledgment. See section 3.03 of Notice knowledgment from the charitable organization. doesn't include the use of a vehicle to provide 2005-44, 2005-25 I.R.B. 1287 for guidance on The donor must get the acknowledgment by the training in business skills, such as marketing or the information that must be included in a con- earlier of: sales. Examples of significant use include: temporaneous written acknowledgment and the • Driving a vehicle every day for 1 year to 1. The date the donor files the original return deadline for furnishing the acknowledgment to deliver meals to needy individuals, if deliv- for the year the contribution is made, or the donor. ering meals is an activity regularly conduc- 2. The due date, including extensions, for fil- Any donee organization that provides a con- ted by the organization. ing the return. temporaneous written acknowledgment to a do- • Driving a vehicle for 10,000 miles over a nor is required to report to the IRS the informa- 1-year period to deliver meals to needy in- The donor is responsible for requesting and ob- tion contained in the acknowledgment. The dividuals, if delivering meals is an activity taining the written acknowledgment from the report is due by February 28 (March 31 if filing regularly conducted by the organization. donee. A charitable organization that receives a electronically) of the year following the year in payment made as a contribution is treated as Material improvements include major repairs which the donee organization provides the ac- the donee organization for this purpose even if and additions that improve the condition of the knowledgment to the donor. The organization the organization (according to the donor's in- vehicle in a manner that significantly increases must file the report on Copy A of Form 1098-C. structions or otherwise) distributes the amount the value. To be a material improvement, the improvement can't be funded by an additional received to one or more charities. An organization that files Form 1098-C on payment to the organization from the donor of paper should send it with Form 1096, Annual the vehicle. Material improvements don't in- Quid pro quo contribution. If the donee pro- Summary and Transmittal of U.S. Information clude cleaning, minor repairs, routine mainte- vides goods or services to the donor in ex- Returns. See the Instructions for Form 1096 for nance, painting, removal of dents or scratches, change for the contribution (a quid pro quo con- the correct filing location. tribution), the acknowledgment must include a cleaning or repair of upholstery, and installation good faith estimate of the value of the goods or An organization that is required to file 250 or of theft deterrent devices. services. See Disclosure of Quid Pro Quo Con- more Forms 1098-C during the calendar year tributions earlier. must file the forms electronically or magneti- Penalties. If your charitable organization re- cally. Specifications for filing Form 1098-C elec- ceives contributions of used motor vehicles, Form of acknowledgment. Although there is tronically or magnetically can be found in Publi- no prescribed format for the written acknowl- cation 1220, Specifications for Filing Forms edgment, it must provide enough information to 1097, 1098, 1099, 3921, 3922, 5498, 8935, and substantiate the amount of the contribution. For W-2G Electronically at Pub. 1220.

Chapter 2 Filing Requirements and Required Disclosures Page 17 Page 18 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

boats, and airplanes valued over $500 it may be year. This form must be filed for each tax year Code. Section 6104 provides exceptions to the subject to a penalty if it knowingly: of the donee in which the donated property pro- general rule of confidentiality for disclosure of • Fails to furnish an acknowledgement in a duces net income, but only if all or part of that certain information about exempt organizations. timely manner, showing the required tax year occurs during the 10-year period be- information, or ginning on the date of the contribution and that In addition, included in this section is a dis- • Furnishes a false or fraudulent acknowl- tax year doesn't begin after the expiration of the cussion on the public inspection requirements edgement of the contribution. legal life of the donated property. for political organizations filing Forms 8871 and 8872. Other penalties may apply. See Part O Qualified donee income. Qualified donee in- ! in the current General Instructions for come is any net income received by or accrued CAUTION Annual Information Return Certain Information Returns. to the donee that is properly allocable to the An acknowledgment containing a certifica- qualified intellectual property for the tax year of An exempt organization must make available tion will be presumed to be false or fraudulent if the donee which ends within or with the tax year for public inspection, upon request and without the qualified vehicle is sold to a buyer other of the donor. Income isn't treated as allocated charge, a copy of its original and amended an- than a needy individual without a significant in- to qualified intellectual property if it is received nual information returns. Each information re- tervening use or material improvement within 6 or accrued after the earlier of the expiration of turn must be made available from the date it is months of the date of the contribution. the legal life of the qualified intellectual prop- required to be filed (determined with regard to If a charity sells a donated vehicle at auc- erty, or the 10-year period beginning with the any extensions), or is actually filed, whichever is tion, the IRS won't accept as substantiation an date of the contribution. later. An original return doesn't have to be made acknowledgment from the charity stating that available if more than 3 years have passed from the vehicle is to be transferred to a needy indi- Qualified intellectual property. Qualified in- the date the return was required to be filed (in- vidual for significantly below fair market value. tellectual property is generally any patent, copy- cluding any extensions) or was filed, whichever Vehicles sold at auction aren't sold at prices right, trademark, trade name, trade secret, is later. An amended return doesn't have to be significantly below fair market value, and the know-how, software or similar property, or ap- made available if more than 3 years have IRS won't treat vehicles sold at auction as quali- plications or registrations of such property passed from the date it was filed. fying for this exception. (other than property contributed to or for the use An annual information return includes an ex- The penalty for a false or fraudulent ac- of a private foundation as defined in section act copy of the return (Forms 990, 990-EZ, knowledgment where the donee certifies that 509(a) that isn't described in section 990-BL, 990-PF, 990-T, or 1065), and amended the vehicle won't be transferred for money, 170(b)(1)(F)). See Exceptions below. return if any, and all schedules, attachments, other property, or services before completion of Exceptions. The following property isn't and supporting documents filed with the IRS. material improvements or significant intervening considered qualified intellectual property for use or the donee certifies that the vehicle is to purposes of the additional charitable deduction: An annual information return doesn't in- be transferred to a needy individual for signifi- clude: cantly below fair market value in furtherance of 1. Computer software that is readily available • Schedule A of Form 990-BL, the donee's charitable purpose is the larger of for purchase by the general public, is sub- • Schedule K-1 of Form 1065, or $5,000 or the claimed value of the vehicle multi- ject to a nonexclusive license, and has not • Form 1120-POL. plied by 39.6%. been substantially modified. In the case of a tax-exempt organization The penalty for an acknowledgment relating 2. A copyright held by a taxpayer: to a qualified vehicle being sold in an arm's other than a private foundation, an annual infor- length transaction to an unrelated party is the • Whose personal efforts created the prop- mation return doesn't include the names and larger of the gross proceeds from the sale or erty, or addresses of contributors to the organization. In whose hands the basis of the property is the sales price stated in the acknowledgment • Form 990-T. All section 501(c)(3) or- determined, for purposes of determining multiplied by 39.6%. ganizations that file Form 990-T must gain from a sale or exchange, in whole or make the return public, regardless of in part by reference to the basis of the whether the organization is otherwise subject to Qualified Intellectual property in the hands of a taxpayer whose the disclosure requirements of section 6104. personal efforts created the property. Property For example, although churches aren't required to file Form 1023 or Form 990 with the IRS, they A taxpayer who contributes qualified intellectual must file the Form 990-T with the IRS to report property to a charity may be entitled to a chari- Report of Cash Received unrelated business taxable income. Thus, table deduction, in addition to any initial deduc- churches must disclose Form 990-T to the pub- tion allowed in the year of contribution. The ad- An exempt organization that receives, in the lic. ditional deduction is based on a specified course of its activities, more than $10,000 cash percentage of the qualified donee income with in one transaction (or two or more related trans- State colleges and universities that have respect to the qualified intellectual property. To actions) that isn't a charitable contribution must been recognized by the IRS as exempt under qualify for the additional charitable deduction, report the transaction to the IRS on Form 8300, section 501(a) as organizations described in the donor must provide notice to the donee at Report of Cash Payments Over $10,000 Re- section 501(c)(3) must disclose Form 990-T to the time of the contribution that the donor in- ceived in a Trade or Business. the public. However, state colleges and univer- tends to treat the contribution as qualified intel- sities that are subject to tax under section lectual property contribution for purposes of 511(a) solely by virtue of section 511(a)(2)(B) sections 170(m) and 6050L. Public Inspection and that haven't been recognized by the IRS as Every donee organization described in sec- exempt under section 501(a) as organizations tion 170(c) (except a private foundation as de- of Exemption described in section 501(c)(3) aren't required to fined in section 509(a) that isn't described in make their Forms 990-T public. section 170(b)(1)(F)) that receives or accrues Applications, Annual net income from a charitable gift of qualified in- Returns, and Political tellectual property must file Form 8899. Public Inspection of Organization Reporting Exemption Application Form 8899. Form 8899, Notice of Income from Donated Intellectual Property, is used by a do- Forms An exempt organization must also make availa- nee to report net income from qualified intellec- ble for public inspection without charge its ap- tual property to the donor of the property and to The general rule under section 6103 is that re- plication for tax-exempt status. An application the IRS and is due by the last day of the first full turns and return information of all taxpayers are for tax exemption includes the application form month following the close of the donee’s tax confidential except as authorized under the (such as Forms 1023 or 1024), all documents

Page 18 Chapter 2 Filing Requirements and Required Disclosures Page 19 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

and statements the IRS requires the organiza- than 2 weeks) and at a reasonable time of day. Local and subordinate organizations. A lo- tion to file with the form, any statement or other At its option, it can mail, within 2 weeks of re- cal or subordinate organization is an exempt or- supporting document submitted by an organiza- ceiving the request, a copy of its application for ganization that didn't file its own application for tion in support of its application, and any letter tax exemption and annual information returns to tax exemption because it is covered by a group or other document issued by the IRS concern- the requester in lieu of allowing an inspection. exemption letter. Generally, a local or subordi- ing the application. The organization can charge the requester for nate organization of an exempt organization copying and actual postage costs only if the re- must, upon request, make available for public The application for exemption doesn't in- quester consents to the charge. inspection, or provide copies of: clude: An organization that has a permanent office, 1. The application submitted to the IRS by • Any application from an organization that but has no office hours or very limited hours isn't yet recognized as exempt; the central or parent organization to obtain during certain times of the year, must make its the group exemption letter, and • Any material that is required to be withheld documents available during those periods when from public inspection, see Material re- office hours are limited or not available as 2. Those documents which were submitted quired to be withheld from public inspec- though it were an organization without a perma- by the central or parent organization to in- tion, next; nent office. clude the local or subordinate organization • In the case of a tax-exempt organization in the group exemption letter. other than a private foundation, the names Furnishing copies. An exempt organization and addresses of contributors to the or- also must provide a copy of all, or any specific However, if the central or parent organization ganization; or part or schedule, of its three most recent annual submits to the IRS a list or directory of local or • Any applications filed before July 15, 1987, information returns and/or exemption applica- subordinate organizations covered by the group if the organization didn't have a copy of the tion to anyone who requests a copy either in exemption letter, the local or subordinate organ- application on July 15, 1987. person or in writing at its principal, regional, or ization is required to provide only the applica- district office during regular business hours. If tion for the group exemption ruling and the pa- If there is no prescribed application form, the individual made the request in person, the ges of the list or directory that specifically refer see Regulations section 301.6104(d)-1(b)(3)(ii) copy must be provided on the same business to it. for a list of the documents that must be made day the request is made unless there are un- The local or subordinate organization must available. usual circumstances. Unusual circumstances permit public inspection or comply with a request for copies made in person, within a rea- Material required to be withheld from are defined in Regulations section 301.6104(d)-1(d)(1)(ii). sonable amount of time (normally not more than public inspection. Material that is required to 2 weeks) after receiving a request made in per- be withheld from public inspection includes: The organization must honor a written request for a copy of documents or specific parts son for public inspection or copies and at a rea- • Trade secrets, patents, processes, styles sonable time of day. In lieu of allowing an in- of work, or apparatus for which withholding or schedules of documents that are required to be disclosed. However, this rule only applies if spection, the local or subordinate organization was requested and granted; can mail a copy of the applicable documents to • National defense material; the request: • Is addressed to the exempt organization's the person requesting inspection within the • Unfavorable rulings or determination let- same time period. In that case, the organization ters issued in response to applications for principal, regional, or district office; • Is sent to that address by mail, electronic can charge the requester for copying and actual tax exemption; postage costs only if the requester consents to • Rulings or determination letters revoking or mail (e-mail), facsimile (fax), or a private delivery service approved by the IRS; and the charge. If the local or subordinate organiza- modifying a favorable determination letter; tion receives a written request for a copy of its • Technical advice memoranda relating to a • Gives the address to where the copy of the document should be sent. application for exemption, it must fulfill the re- disapproved application for tax exemption quest in the time and manner specified earlier. or the revocation or modification of a favor- The organization must mail the copy within The requester has the option of requesting able determination letter; 30 days from the date it receives the request. from the central or parent organization, at its Any letter or document filed with or issued • The organization can request payment in ad- principal office, inspection or copies of the ap- by the IRS relating to whether a proposed vance and must then provide the copies within plication for group exemption and the material or accomplished transaction is a prohibited 30 days from the date it receives payment. submitted by the central or parent organization transaction under section 503; and to include a local or subordinate organization in Any other letter or document filed with or Fees for copies. The organization can • the group ruling. If the central or parent organi- issued by the IRS which, although it relates charge a reasonable fee for providing copies. It zation submits to the IRS a list or directory of lo- to an organization's tax-exempt status as can charge no more for the copies than the per cal or subordinate organizations covered by the an organization described in section page rate the IRS charges for providing copies. group exemption letter, it must make the list or 501(c) or 501(d), doesn't relate to that or- The IRS can't charge more for copies than the directory available for public inspection, but it is ganization's application for tax exemption. fees listed in the Freedom of Information Act (FOIA) fee schedule. Although the IRS charges required to provide copies only of those pages of the list or directory that refer to particular lo- Time, place, and manner restrictions. The no fee for the first 100 pages, the organization cal or subordinate organizations specified by annual returns and exemption application must can charge a fee for all copies. For noncommer- the requester. The central or parent organiza- be made available for inspection, without cial requesters, the FOIA schedule currently tion must fulfill such requests in the time and charge, at the organization's principal, regional, provides a rate of $0.10 per page for black and manner specified earlier. and district offices during regular business white pages, and $0.20 per page for color pa- hours. The organization can have an employee ges. The organization can also charge the ac- A local or subordinate organization that present during inspection, but must allow the in- tual postage costs it pays to provide the copies. doesn't file its own annual information return dividual to take notes freely and to photocopy at (because it is affiliated with a central or parent no charge if the individual provides the photo- Regional and district offices. Generally, the organization that files a group return) must, on copying equipment. Generally, regional and dis- same rules regarding public inspection and pro- request, make available for public inspection, or trict offices are those that have paid employees viding copies of applications and annual infor- provide copies of, the group returns filed by the who together are normally paid for at least 120 mation returns that apply to a principal office of central or parent organization. However, if the hours a week. an exempt organization also apply to its re- group return includes separate schedules for each local or subordinate organization included If the organization doesn't maintain a perma- gional and district offices. However, a regional in the group return, the local or subordinate or- nent office, it must make its application for tax or district office isn't required to make its annual ganization receiving the request can omit any exemption and its annual information returns information return available for inspection or to schedules relating only to other organizations available for inspection at a reasonable location provide copies until 30 days after the date the included in the group return. The local or subor- of its choice. It must permit public inspection return is required to be filed (including any ex- dinate organization must permit public inspec- within a reasonable amount of time after receiv- tensions) or is actually filed, whichever is later. tion, or comply with a request for copies made ing a request for inspection (normally not more

Chapter 2 Filing Requirements and Required Disclosures Page 19 Page 20 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

in person, within a reasonable amount of time Electronically filed Forms 8871 and 8872 Organizations subject to requirements. An (normally not more than 2 weeks) after receiv- are available online 48 hours after the form has organization must follow these disclosure re- ing a request made in person for public inspec- been filed. Forms 8872 that are filed by mail are quirements if it is exempt under section 501(c), tion or copies and at a reasonable time of day. available online after being imaged by the IRS. other than section 501(c)(1), or under section In lieu of allowing an inspection, the local or These forms are considered widely available if 501(d), unless the organization is eligible to re- subordinate organization can mail a copy of the you provide the online address to the requester. ceive tax deductible charitable contributions un- applicable documents to the person requesting In addition, your organization must make a copy der section 170(c). These requirements must inspection within the same time period. In this of these materials available for public inspection be followed by, among others: during regular business hours at the organiza- case, the organization can charge the requester 1. Social welfare organizations (section tion’s principal office and at each of its regional for copying and actual postage costs only if the 501(c)(4)), requester consents to the charge. If the local or or district offices having at least three paid em- subordinate organization receives a written re- ployees. 2. Labor unions (section 501(c)(5)), quest for a copy of its annual information return, 3. Trade associations (section 501(c)(6)), it must fulfill the request by providing a copy of Penalties the group return in the time and manner speci- 4. Social clubs (section 501(c)(7)), fied earlier. The requester has the option of re- The penalty for failure to allow public inspection 5. Fraternal organizations (section 501(c)(8) questing from the central or parent organiza- of annual returns is $20 for each day the failure and 501(c)(10)) (however, fraternal organ- tion, at its principal office, inspection or copies continues. The maximum penalty on all persons izations described in section 170(c)(4) of group returns filed by the central or parent or- for failures involving any one return is $10,000. must follow these requirements only for ganization. The central or parent organization solicitations for funds that are to be used must fulfill such requests in the time and man- The penalty for failure to allow public inspec- for noncharitable purposes not described ner specified earlier. tion of exemption applications is $20 for each in section 170(c)(4)), If an organization fails to comply, it may be day the failure continues. liable for a penalty. See Penalties, later. 6. Any political organization described in section 527(e), including political cam- Making applications and annual informa- The penalty for willful failure to allow public paign committees and political action tion returns widely available. An exempt or- inspection of a return or exemption application committees, and is $5,000 for each return or application. The ganization doesn't have to comply with requests 7. Any organization not eligible to receive for copies of its annual information returns or penalty also applies to a willful failure to provide copies. tax-deductible contributions if the organi- exemption application if it makes them widely zation or a predecessor organization was, available. However, making these documents at any time during the 5-year period end- The penalty for failure to allow public inspec- widely available doesn't relieve the organization ing on the date of the fundraising solicitation of a political organization's section 527 no- from making its documents available for public tion, an organization of the type to which tice (Form 8871) is $20 for each day the failure inspection. this disclosure requirement applies. The organization can make its application continues. and annual information returns widely available Fundraising solicitation. This disclosure re- by posting the application and annual informa- The penalty for failure to allow public inspec- quirement applies to a fundraising solicitation if tion returns on the Internet. For the rules to fol- tion of a section 527 organization's contribu- all of the following are true. low so that the Internet posting will be consid- tions and expenditures report (Form 8872) is ered widely available, see Regulations section $20 for each day the failure continues. The 1. The organization soliciting the funds nor- 301.6104(d)-2(b). maximum penalty on all persons for failures in- mally has gross receipts over $100,000 If the organization has made its application volving any one report is $10,000. per year. for tax exemption and/or annual information re- 2. The solicitation is part of a coordinated turns widely available, it must inform any indi- fundraising campaign that is soliciting vidual requesting a copy where the documents Required Disclosures more than 10 persons during the year. are available, including the website address on 3. The solicitation is made in written or prin- the Internet, if applicable. If the request is made Certain exempt organizations must disclose to in person, the notice must be provided immedi- ted form, by television or radio, or by tele- the IRS or the public certain information about phone. ately. If the request is made in writing, the no- their activities. Generally, an organization dis- tice must be provided within 7 days. closes this information by entering it on the ap- Penalties. Failure by an organization to make propriate lines of its annual return. In addition, Harassment campaign. If the tax-exempt or- the required statement will result in a penalty of there are disclosure requirements for: $1,000 for each day the failure occurred, up to a ganization is the subject of a harassment cam- • Solicitation of nondeductible contributions, paign, the organization may not have to fulfill re- maximum penalty of $10,000 for a calendar • Sales of information or services that are year. No penalty will be imposed if it is shown quests for information. For more information, available free from the government, see Regulations section 301.6104(d)-3. that the failure was due to reasonable cause. If • Dues paid to the organization that aren't the failure was due to intentional disregard of deductible because they are used for lob- the requirements, the penalty may be higher Political Organization bying or political activities, and and isn't subject to a maximum amount. Reporting Forms • Prohibited tax shelter transactions. Sales of Information or Forms 8871 and 8872 (discussed earlier under Solicitation of Nondeductible Services Available Free from Reporting Requirements for a Political Organi- Contributions zation) are open to public inspection. Government Form 8871. Form 8871 (including any sup- Solicitations for contributions or other payments porting papers), and any letter or other docu- by certain exempt organizations (including lob- Certain organizations that offer to sell to individ- ment the IRS issues with regard to Form 8871, bying groups and political action committees) uals (or solicit money for) information or routine are open to public inspection online at IRS.gov/ must include a statement that payments to services that could be readily obtained free (or polorgs. those organizations aren't deductible as charita- for a nominal fee) from the Federal Government ble contributions for federal income tax purpo- must include a statement that the information or Form 8872. Form 8872 (including Sched- ses. The statement must be included in the service can be so obtained. The statement ules A and B) are open to public inspection on- fundraising solicitation and be conspicuous and must be made in a conspicuous and easily rec- line at IRS.gov/polorgs. easily recognizable. ognized format when the organization makes an offer or solicitation to sell the information or

Page 20 Chapter 2 Filing Requirements and Required Disclosures Page 21 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

service. Organizations affected are those ex- 2. Is identified in published guidance by type, If your organization amends its articles of or- empt under section 501(c) or 501(d) and politi- class, or role as a party to a prohibited tax ganization or its internal regulations (bylaws), cal organizations defined in section 527(e). shelter transaction. then follow the instructions to Form 990, Form 990-EZ, or Form 990-PF for reporting these Penalty. A penalty is provided for failure to See Prohibited Tax Shelter Transactions changes. Regardless of whether your organiza- comply with this requirement if the failure is due later for further information. tion files an annual information return, you may to intentional disregard of the requirement. The also report these changes to the EO Determina- Disclosure. A single disclosure is made by the penalty is the greater of $1,000 for each day the tions office; however, such reporting doesn't reorganization for each prohibited tax shelter failure occurred, or 50% of the total cost of all lieve your organization from reporting the transaction. The disclosure is made on Form offers and solicitations that were made by the changes on its annual information return. For in- 8886-T, Disclosure by Tax-Exempt Entity Re- organization the same day that it fails to meet formation about informing the IRS of a termina- garding Prohibited Tax Shelter Transaction. the requirement. tion or merger, see Publication 4779, Facts Due date. Generally, for exempt organiza- about Terminating or Merging Your Exempt Or- Dues Used for Lobbying tions described in 1 above, the disclosure is ganization. due on or before May 15 of the calendar year or Political Activities following the close of the calendar year that the An organization should report new signifi- exempt organization entered into the prohibited cant program services or significant changes in Certain exempt organizations must notify any- tax shelter transaction. If any date falls on a Sat- how it conducts program services, and signifi- one paying dues to the organization whether urday, Sunday, or legal holiday, substitute the cant changes to its organizational documents, any part of the dues isn't deductible because it next business day. However, the disclosure for on its Form 990 rather than in a letter to EO De- is related to lobbying or political activities. subsequently listed transactions (as defined in terminations. EO Determinations no longer is- An organization must provide the notice if it section 4965(e)(2)) is due on or before May 15 sues letters confirming the tax-exempt status of is exempt from tax under section 501(a) and is of the calendar year following the close of the organizations that report new services or signifi- one of the following. calendar year that the transaction was identified cant changes, or changes to organizational by the Secretary as a listed transaction. documents. 1. A social welfare organization described in The disclosure for exempt organizations de- section 501(c)(4) that isn't a veterans' or- scribed in 2 above is due on or before the date ganization. Change in Accounting Period the first tax return (whether original or amended 2. An agricultural or horticultural organization return) is filed that reflects a reduction or elimi- The procedures that an organization must fol- described in section 501(c)(5). nation of the exempt organization's liability for low to change its accounting period differ for an 3. A business league, chamber of com- applicable federal employment, excise, or unre- independent organization and for a central or- merce, real estate board, or other organi- lated business income taxes that is derived di- ganization that seeks a group change for its zation described in section 501(c)(6). rectly or indirectly from tax consequences or tax subordinate organizations. strategy described in the published guidance However, an organization described in (1), (2), that lists the transaction. Independent organizations. If an organiza- or (3) doesn't have to provide the notice if it es- tion isn't required to file an annual information tablishes that substantially all the dues paid to it Penalty. Exempt organizations that fail to file return, but files a Form 990-T, it can change its aren't deductible anyway or if certain other con- the required disclosure are subject to a nondi- annual accounting period by timely filing the ditions are met. For more information, see Rev. sclosure penalty of $100 for each day the failure Form 990-T. If neither an information return nor Proc. 98-19, 1998-1 C.B. 547 (or later update). continues with a maximum penalty for any one a Form 990-T is required to be filed, an organi- disclosure of $50,000. zation must notify the IRS by letter that it has If the organization doesn't provide the re- Also, if the IRS makes a written demand on changed its fiscal period. quired notice, it may have to pay a tax that is re- any exempt organization subject to this penalty, If an organization changed its annual ac- ported on Form 990-T. But the tax doesn't apply giving the organization a reasonable date to counting period at any time within the previous to any amount on which the section 527 tax has make the disclosure, and the organization fails 10 years and within that time it had a filing re- been paid on Form 1120-POL. See Political Or- to make the disclosure by that date, the organi- quirement, the organization must file a Form ganization Income Tax Return, earlier. zation is subject to a penalty of $100 for each 1128, Application to Adopt, Change, or Retain a For more information about nondeductible day after the date specified by the IRS until dis- Tax Year, with its timely filed annual information dues, see Deduction not allowed for dues used closure is made (with a maximum penalty for return or Form 990-T, as appropriate, whether for political or legislative activities. under Sec- any one disclosure of $10,000). or not the filing of the information return or Form tion 501(c)(6) organizations, later. 990-T would have otherwise been required for that year. Miscellaneous Rules Prohibited Tax Shelter Central organizations. A central organization Transactions can obtain approval for a group change in an Organizational Changes and annual accounting period for its subordinate or- Every exempt organization (as defined in sec- Exempt Status ganizations on a group basis only by filing Form tion 4965(c)) that is a party to a prohibited tax 1128 with the Service Center where it files its shelter transaction is required to disclose to the If you’ve changed your form or place of organi- annual information return. For more information, IRS the following information: zation, review Rev. Proc. 2018-15, 2018-9 see Rev. Proc. 76-10, 1976-1 C.B. 548, as • Whether such organization is a party to the I.R.B. 379, to determine whether you’re re- modified by Rev. Proc. 79-3, 1979-1 C.B. 483, prohibited tax shelter transaction (as de- quired to file a new exemption application. If or any later updates. fined in section 4965(e)); and your organization becomes inactive for a period • The identity of any other party to the trans- of time but doesn't cease being an entity under Due date. Form 1128 must be filed by the 15th action that is known to the exempt organi- the laws of the state in which it was formed, you day of the 5th month following the close of the zation. will have to continue to file an annual informa- short period. tion return during the period of inactivity, unless Party to a prohibited tax shelter transac- a filing exception applies. If your organization Modify or Obtain an NTEE tion. An exempt organization is a party to a has been liquidated, dissolved, terminated, or prohibited tax shelter transaction if the organi- substantially contracted, you should file your Code. zation: annual return of information by the 15th day of 1. Facilitates a prohibited tax shelter transac- the 5th month after the change and follow the Organizations that wish to modify or obtain a tion by reason of its tax-exempt, tax-indif- applicable instructions to the form. National Taxonomy of Exempt Entities (NTEE) ferent, or tax-favored status; or Code should send a written request to the

Chapter 2 Filing Requirements and Required Disclosures Page 21 Page 22 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Correspondence Unit with the relevant facts, in- • Chapters of the Red Cross, such as charity balls, bazaars, banquets, auc- cluding the Code currently assigned, if any, and • Boys' or Girls' Clubs, and tions, concerts, athletic events, and solicitations the requested Code, as well as who selected • Churches. for membership or contributions when mer- the currently assigned Code initially, if known. chandise or benefits are given in return for pay- The Correspondence Unit will refer to EO De- Child care organizations. The term edu- ment of a specified minimum contribution. cational purposes includes providing for care of terminations, if necessary, and will notify the or- If the donor receives or expects to receive children away from their homes if substantially ganization if a form or user fee is required to goods or services in return for a contribution to all the care provided is to enable individuals make the requested change. The written re- your organization, the donor can't deduct any (the parents) to be gainfully employed and the quest must be sent or faxed to: part of the contribution unless the donor intends services are available to the general public. to, and does, make a payment greater than the Internal Revenue Service fair market value of the goods or services. If a Instrumentalities. A state or municipal instru- Attn: Correspondence Unit deduction is allowed, the donor can deduct only mentality may qualify under section 501(c)(3) if P.O. Box 2508, Room 6403 the part of the contribution, if any, that is more it is organized as a separate entity from the gov- Cincinnati, Ohio 45201 than the fair market value of the goods or serv- ernmental unit that created it and if it otherwise Fax: (855) 204-6184 ices received. You should determine in ad- meets the organizational and operational tests vance the fair market value of any goods or of section 501(c)(3). Examples of a qualifying services to be given to contributors and tell Express and Overnight Delivery: instrumentality may include state schools, uni- them, when you publicize the fundraising event versities, or hospitals. However, if an organiza- or solicit their contributions, how much is de- Internal Revenue Service tion is an integral part of the local government ductible and how much is for the goods or serv- Attn: Correspondence Unit or possesses governmental powers, it doesn't ices. See Disclosure of Quid Pro Quo Contribu- 500 Main Street, Room 6403 qualify for exemption. A state or municipality it- tions in chapter 2. Cincinnati, Ohio 45202 self doesn't qualify for exemption under section 501(c)(3). Exemption application not filed. Generally, donors can't deduct any charitable contribution Topics to an organization that is required to apply for This chapter discusses: recognition of exemption but has not done so. 3. • Contributions to 501(c)(3) organizations, Separate fund—contributions that are de- • Applications for recognition of exemption, ductible. An organization that is exempt from • Articles of Organization, federal income tax other than as an organiza- • Educational organizations and private tion described in section 501(c)(3) can, if it de- Section schools, sires, establish a fund, separate and apart from • Organizations providing insurance, its other funds, exclusively for religious, charita- • Other section 501(c)(3) organizations, ble, scientific, literary, or educational purposes, 501(c)(3) • Private foundations and public charities, fostering national or international amateur and sports competition, or for the prevention of cru- Organizations • Lobbying expenditures. elty to children or animals. If the fund is organized and operated exclu- Useful Items sively for these purposes, it may qualify for ex- You may want to see: emption as an organization described in section Introduction 501(c)(3), and contributions made to it will be deductible as provided by section 170. A fund An organization may qualify for exemption from Forms (and Instructions) with these characteristics must be organized in federal income tax under section 501(c)(3) if it such a manner as to prohibit the use of its funds is organized and operated exclusively for one or 1023 1023 Application for Recognition of Exemption Under Section 501(c)(3) upon dissolution, or otherwise, for the general more of the following purposes. purposes of the organization creating it. • Religious. of the Internal Revenue Code Charitable. • 1023-EZ 1023-EZ Streamlined Application for Personal benefit contracts. Generally, chari- • Scientific. Recognition of Exemption Under table deductions won't be allowed for a transfer • Testing for public safety. Section 501(c)(3) of the Internal to, or for the use of, a section 501(c)(3) or (c)(4) • Literary. Revenue Code organization if in connection with the transfer: • Educational. • The organization directly or indirectly pays, • Fostering national or international amateur Form 1023 and Form 1023-EZ must be filed or previously paid, a premium on a per- sports competition (but only if none of its electronically on Pay.gov. sonal benefit contract for the transferor, or activities involve providing athletic facilities There is an understanding or expectation See chapter 6 for information about getting pub- • or equipment; however, see Amateur Ath- that anyone will directly or indirectly pay a lications and forms. letic Organizations, later in this chapter). premium on a personal benefit contract for • The prevention of cruelty to children or ani- the transferor. mals. Contributions to A personal benefit contract with respect to To qualify, the organization must be organ- the transferor is any life insurance, annuity, or ized as a corporation (including a limited liability 501(c)(3) Organizations endowment contract, if any direct or indirect company), unincorporated association, or trust. beneficiary under the contract is the transferor, Sole proprietorships, partnerships, individuals, Contributions to domestic organizations descri- any member of the transferor's family, or any or loosely associated groups of individuals bed in this chapter, except organizations testing other person designated by the transferor. won't qualify. for public safety, are deductible as charitable contributions on the donor's federal income tax Certain annuity contracts. If an organiza- Examples. Qualifying organizations include: return. tion incurs an obligation to pay a charitable gift • Nonprofit old-age homes, annuity, and the organization purchases an an- • Parent-teacher associations, Fundraising events. If the donor receives nuity contract to fund the obligation, individuals • Charitable hospitals or other charitable or- something of value in return for the contribution, receiving payments under the charitable gift an- ganizations, a common occurrence with fundraising efforts, nuity won't be treated as indirect beneficiaries if • Alumni associations, part or all of the contribution may not be deduc- the organization owns all of the incidents of • Schools, tible. This may apply to fundraising activities ownership under the contract, is entitled to all

Page 22 Chapter 3 Section 501(c)(3) Organizations Page 23 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

payments under the contract, and the timing Additional information to help you com- cation is mailed or, if no postmark appears on and amount of the payments are substantially TIP plete your application can be found on- the cover, the date the application is stamped the same as the timing and amount of pay- line. Go to Exemption Requirement – as received by the IRS or, for an electronic sub- ments to each person under the obligation (as Section 501(c)(3) Organizations and select the mission, the date submitted to IRS. See section such obligation is in effect at the time of the link at the bottom of the Web page for step by 6.08 of Rev. Proc. 2021-5. transfer). step help with the application process. See Exemption Requirements - Section 501(c)(3) Private delivery service. You can use cer- Certain contracts held by a charitable Organizations. tain private delivery services (PDS) designated remainder trust. An individual won't be con- by the IRS to meet the “timely mailing as timely sidered an indirect beneficiary under a life in- Form 1023 and accompanying statements filing” rule for tax returns. Go to IRS.gov/PDS for surance, annuity, or endowment contract held must show that all of the following are true. the current list of designated services. by a charitable remainder annuity trust or a 1. The organization is organized exclusively charitable remainder unitrust solely by reason for, and will be operated exclusively for, The PDS can tell you how to get written proof of of being entitled to the payment if the trust owns one or more of the purposes (religious, the mailing date. all of the incidents of ownership under the con- charitable, etc.) specified in the introduc- tract, and the trust is entitled to all payments un- tion to this chapter. For the IRS mailing address to use if you're us- der the contract. ing PDS, go to IRS.gov/PDStreetAddresses. 2. No part of the organization's net earnings Excise tax. If the premiums are paid in con- will inure to the benefit of private share- nection with a transfer for which a deduction holders or individuals. You must establish Private delivery services can't deliver isn't allowable under the deduction denial rule, that your organization won't be organized ! items to P.O. boxes. You must use the CAUTION without regard to when the transfer to the chari- or operated for the benefit of private inter- U.S. Postal Service to mail any item to table organization was made, an excise tax will ests, such as the creator or the creator's an IRS P.O. box address. be applied that is equal to the amount of the family, shareholders of the organization, premiums paid by the organization on any life other designated individuals, or persons Amendments to organizing documents insurance, annuity, or endowment contract. The controlled directly or indirectly by such pri- required. If an organization is required to alter excise tax doesn't apply if all of the direct and vate interests. its activities or to make substantive amend- indirect beneficiaries under the contract are or- ments to its organizing document, the determi- 3. The organization won't, as a substantial ganizations. nation letter recognizing its exempt status will part of its activities, attempt to influence be effective as of the date the changes are Excise Taxes. A charitable organization li- legislation (unless it elects to come under made. If only a nonsubstantive amendment is able for excise taxes must file Form 4720, Re- the provisions allowing certain lobbying made, exempt status will be effective as of the turn of Certain Excise Taxes Under Chapters 41 expenditures) or participate to any extent date it was organized, if the application was and 42 of the Internal Revenue Code. Gener- in a political campaign for or against any filed within the 27-month period, or the date the ally, the due date for filing Form 4720 occurs on candidate for public office. See Political application was filed. the fifteenth day of the fifth month following the activity, next, and Lobbying Expenditures, close of the organization's tax year. near the end of this chapter. Discretionary extension of time for filing. An organization that fails to file a Form 1023 Political activity. If any of the activities Indoor tanning services. If your organiza- within the 27-month period may be granted an (whether or not substantial) of your organization tion provides an indoor tanning bed service, the extension to file if it submits evidence (including consist of participating in, or intervening in, any ACA imposed a 10% excise tax on services affidavits) to establish that. provided after June 30, 2010. For more infor- political campaign on behalf of (or in opposition mation, go to IRS.gov and select Affordable to) any candidate for public office, your organi- 1. It acted reasonably and in good faith, and zation won't qualify for tax-exempt status under Care Act Tax Provisions. 2. Granting a discretionary extension won't section 501(c)(3). Such participation or inter- prejudice the interests of the government. vention includes the publishing or distributing of Application for statements. See Form 1023 instructions. Whether your organization is participating or The discretionary extension of the time for filing Recognition of intervening, directly or indirectly, in any political Form 1023 does not apply if granting relief campaign on behalf of (or in opposition to) any would result in the organization’s exempt status Exemption candidate for public office depends upon all of being automatically revoked for failure to file a the facts and circumstances of each case. Cer- required annual information return or notice for This discussion describes certain information to tain voter education activities or public forums three consecutive years, effective before the be provided upon application for recognition of conducted in a nonpartisan manner may not be application date. See Rev. Proc. 2021-5. exemption by all organizations created for any prohibited political activity under section 501(c) Additionally, organizations that are not re- of the purposes described earlier in this chap- (3), while other so-called voter education activi- quired to apply for recognition of exemption in ter. See the organization headings that follow ties may be prohibited. order to be exempt are not eligible to request for specific information your organization may the discretionary extension. See Rev. Proc. need to provide. Effective date of exemption. Most organiza- 2021-5. However, these organizations may be tions described in this chapter that were organ- exempt prior to the effective date the IRS recog- Form 1023 or Form 1023-EZ. Your organiza- ized after October 9, 1969, won't be treated as nizes exempt status because they may be tion must file its application for recognition of tax exempt unless they apply for recognition of tax-exempt under Section 501(c)(3) without fil- exemption on Form 1023 or Form 1023-EZ. exemption by filing Form 1023 or Form ing an application. See Organizations Not Re- See chapter 1 and the instructions accompany- 1023-EZ. These organizations won't be treated quired to File Form 1023 or Form 1023-EZ. ing Form 1023 or Form 1023-EZ for the proce- as tax exempt for any period before they file dures to follow in applying. Some organizations Form 1023 or Form 1023-EZ, unless they file How to show reasonable action and aren't required to file Form 1023 or Form the form within 27 months from the end of the good faith. The following factors are consid- 1023-EZ. See Organizations Not Required to month in which they were organized. If the or- ered in determining whether an organization ac- File Form 1023 or 1023-EZ, later. ganization files the application within this ted reasonably and showed good faith: If you are a small organization, you may be 27-month period, the organization's exemption 1. The organization failed to file an applica- eligible to apply for recognition of exemption by will generally be recognized retroactively to the tion because of intervening events beyond filing Form 1023-EZ instead of Form 1023. Spe- date it was organized. Otherwise, exemption its control. cific eligibility requirements apply. You can find will be recognized only from the date of receipt. more information about eligibility to use Form The date of receipt is the date of the U.S. post- 2. The organization exercised reasonable dil- 1023-EZ at Instructions for Form 1023-EZ. mark on the cover in which an exemption appli- igence (taking into account the complexity of the filing or issue and the organization's

Chapter 3 Section 501(c)(3) Organizations Page 23 Page 24 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

experience in these matters) but wasn't responsibilities of the professional and the ex- doesn't have more than $5,000 annually in aware of the application filing requirement. tent to which the organization relied on him or gross receipts if: her. An organization applying for Section 501(c) 3. The organization reasonably relied upon 1. During its first tax year the organization re- (3) status can no longer request the extension the written advice of the IRS. ceived gross receipts of $7,500 or less, by filing Form 1023-EZ and then submitting cor- 4. The organization reasonably relied upon respondence to the IRS. 2. During its first 2 years the organization had the advice of a qualified tax professional A request for this relief in connection with an a total of $12,000 or less in gross receipts, who failed to file or advise the organization application for exemption doesn't require pay- and to file Form 1023 or Form 1023-EZ. An or- ment of an additional user fee. Also, a request 3. In the case of an organization that has ganization can't rely on the advice of a tax for relief under the automatic 12-month exten- been in existence for at least 3 years, the professional if it knows or should know sion doesn't require payment of a user fee. total gross receipts received by the organi- that he or she isn't competent to render zation during the immediately preceding 2 advice on filing exemption applications or More information. For more information years, plus the current year, are $15,000 isn't aware of all the relevant facts. about these procedures, see Regulations sections 301.9100-1, 301.9100-2, 301.9100-3, or less. 5. The organization filed required Form Rev. Proc. 2021-5. 990-series returns or notices consistent An organization with gross receipts more than the amounts in the gross receipts test, un- with its requested status. Notification from the IRS. Organizations filing less otherwise exempt from filing Form 1023 or Form 1023 or Form 1023-EZ and satisfying all Not acting reasonably and in good faith. Form 1023-EZ, must apply for recognition of ex- requirements of section 501(c)(3) will be noti- An organization has not acted reasonably and emption within 90 days after the end of the pe- fied of their exempt status in writing. in good faith under the following circumstances. riod in which the amounts are exceeded. For 1. It seeks to change a return position for example, an organization's gross receipts for its which an accuracy-related penalty has Organizations Not Required first tax year were less than $7,500, but at the been or could be imposed at the time the to File Form 1023 or Form end of its second tax year its gross receipts for relief is requested. the 2-year period were more than $12,000. The 1023-EZ organization must apply for recognition of ex- 2. It was informed of the requirement to file emption within 90 days after the end of its sec- Some organizations aren't required to file Form and related tax consequences, but chose ond tax year. 1023 or 1023-EZ. These include: not to file. If the organization had existed for at least 3 • Churches, interchurch organizations of lo- tax years and had met the gross receipts test 3. It uses hindsight in requesting relief. The cal units of a church, conventions or asso- for all prior tax years but fails to meet the re- IRS won't ordinarily grant an extension if ciations of churches, or integrated auxilia- quirement for the current tax year, its tax-ex- specific facts have changed since the due ries of a church, such as a men's or empt status for the prior years won't be lost date that makes filing an application ad- women's organization, religious school, even if it does not apply for recognition of ex- vantageous to an organization. mission society, or youth group. emption within 90 days after the close of the • Any organization (other than a private 4. Granting the request for relief would result current tax year. However, the organization foundation) normally having annual gross in the organization’s tax-exempt status be- won't be treated as a section 501(c)(3) organi- receipts of not more than $5,000 (see ing automatically revoked effective before zation for the period beginning with the current Gross receipts test, later). the application date. tax year and ending with the filing of its applica- Prejudicing the interest of the Govern- These organizations are exempt automati- tion for recognition of exemption . cally if they meet the requirements of section ment. Prejudice to the interest of the Govern- Example. An organization is organized and 501(c)(3). However, such organizations will not ment results if granting an extension of time to operated exclusively for charitable purposes appear on the Tax-Exempt Organization Search file to an organization results in a lower total tax and isn't a private foundation. It was incorpora- list of organizations eligible to receive tax-de- liability for the years to which the filing applies ted on January 1, 2016, and files returns on a ductible contributions. These organizations also than would have been the case if the organiza- calendar-year basis. It didn't apply for recogni- cannot obtain a written affirmation of their ex- tion had filed on time. Before granting an exten- tion of exemption. The organization's gross re- empt status. To be included in the IRS data- sion, the IRS can require the organization receipts during the years 2016 through 2019 were base of exempt organizations and be eligible to questing it to submit a statement from an as follows: independent auditor certifying that no prejudice receive a written determination or affirmation of will result if the extension is granted. exempt status, these organization must file Form 1023 or 1023-EZ. 2016 ...... $3,600 The interests of the Government are ordina- 2017 ...... 2,900 2018 ...... 400 rily prejudiced if the tax year in which the appli- Filing Form 1023 or 1023-EZ to establish 2019 ...... 12,600 cation should have been filed (or any tax year exemption. If the organization wants to estab- that would have been affected had the filing lish its exemption with the IRS and receive a de- been timely) are closed by the statute of limita- The organization's total gross receipts for termination letter recognizing its exempt status, 2016, 2017, and 2018 were $6,900. Therefore, tions before relief is granted. . Therefore, the re- it should file Form 1023 or 1023-EZ (if eligible). quest for relief will not be granted if the period of it didn't have to apply for recognition of exemp- By establishing its exemption, potential contrib- tion and is exempt for those years. However, for limitations on assessment under § 6501(a) for utors are assured by the IRS that contributions any taxable year for which the organization 2017, 2018, and 2019 the total gross receipts will be deductible. A subordinate organization were $15,900. Therefore, the organization must claims tax-exempt status has expired prior to (other than a private foundation) covered by a the date of application. See Rev. Proc 2021-5. apply for recognition of exemption within 90 group exemption letter doesn't have to submit a days after the end of its 2019 tax year. If it The IRS can condition a grant of relief on the or- Form 1023 or Form 1023-EZ for itself. ganization providing the IRS with a statement doesn't apply within this time period, it won't be from an independent auditor certifying that the Private foundations. See Private Founda- exempt under section 501(c)(3) for the period interests of the Government aren't prejudiced. tions and Public Charities, later in this chapter, beginning with tax year 2019 ending when the for more information about the additional notice application for recognition of exemption is re- Procedure for requesting extension. To required from an organization in order for it not ceived by the IRS. The organization, however, request a discretionary extension, an organiza- to be presumed to be a private foundation and won't lose its exempt status for the tax years tion must submit the relevant portions of Form for the additional information required from a ending before January 1, 2019. 1023, Schedule E, including describing in detail private foundation claiming to be an operating The IRS will consider applying the Commis- the events that led to the failure to apply and to foundation. sioner's discretionary authority to extend the the discovery of that failure. If the organization time for filing an application for recognition of relied on a tax professional's advice, the Gross receipts test. For purposes of the exemption. See the procedures for this Schedule should describe the engagement and gross receipts test, an organization normally extension discussed earlier.

Page 24 Chapter 3 Section 501(c)(3) Organizations Page 25 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

organization won't be properly limited as to its should contain a provision ensuring their distri- purposes since all research isn't scientific. The bution for an exempt purpose in the event of Articles of Organization organization doesn't meet the organizational dissolution. Although reliance can be placed test. upon state law to establish permanent dedica- Your organization must be a legal entity (corpo- tion of assets for exempt purposes, review of an ration, trust or association) separate from its or- Example 3. An organization's articles state application for exemption may be facilitated if ganizers and must have written articles of or- that its purpose is to receive contributions and the articles of organization include a provision ganization. Depending upon the type of entity, pay them over to organizations that are descri- ensuring permanent dedication of assets for ex- its articles organization may be a corporate bed in section 501(c)(3) and exempt from taxa- empt purposes. charter (filed articles of incorporation), trust in- tion under section 501(a). The organization strument, articles of association, or any other meets the organizational test. Distribution. Rev. Proc. 82-2, 1982-1 C.B. written instrument by which the organization 367, identifies the states and circumstances in was created. If applying for recognition of ex- Example 4. If a stated purpose in the arti- which the IRS won't require an express provi- emption using Form 1023, a conformed copy of cles is the conduct of a school of adult educa- sion for the distribution of assets upon dissolu- the articles of organization must be uploaded tion and its manner of operation is described in tion in the articles of organization. The proce- with the application for recognition of exemp- detail, such a purpose will be satisfactorily limi- dure also provides a sample of an acceptable tion. See Form 1023 Part II. An organization ap- ted. dissolution provision for organizations required plying for exemption using Form 1023-EZ does to have one. not submit a copy of the articles of organization Example 5. If the articles state the organi- If a named beneficiary is to be the distribu- with its application; however, the organization zation is formed for charitable purposes, without tee, it must be one that would qualify and would could be asked to provide a copy at any time as any further description, such language ordina- be exempt within the meaning of section 501(c) part of a compliance check or examination. rily will be sufficient since the term charitable (3) at the time the dissolution takes place. Since has a generally accepted legal meaning. On the the named beneficiary at the time of dissolution other hand, if the purposes are stated to be may not be qualified, may not be in existence, Organizational Test charitable, philanthropic, and benevolent, the or may be unwilling or unable to accept the as- organizational requirement won't be met since sets of the dissolving organization, a provision The articles of organization must limit the or- the terms philanthropic and benevolent have no should be made for distribution of the assets for ganization's purposes to one or more of those generally accepted legal meaning and, there- one or more of the purposes specified in this described at the beginning of this chapter and fore, the stated purposes may, under the laws chapter in the event of any such contingency. mustn't expressly empower it to engage, other of the state, permit activities that are broader than as an insubstantial part of its activities, in than those intended by the exemption law. Sample articles of organization. See sample activities that don't further one or more of those articles of organization in the Appendix in the purposes. These conditions for exemption are Example 6. If the articles state an organiza- back of this publication. referred to as the organizational test. tion is formed to promote American ideals, or to Section 501(c)(3) is the provision of law that foster the best interests of the people, or to fur- grants exemption to the organizations descri- ther the common welfare and well-being of the Educational bed in this chapter. Therefore, the organiza- community, without any limitation or provision tional test may be met if the purposes stated in restricting such purposes to accomplishment Organizations the articles of organization are limited in some only in a charitable manner, the purposes won't and Private Schools way by reference to section 501(c)(3). be sufficiently limited. Such purposes are vague and may be accomplished other than in an ex- If your organization wants to obtain recognition The requirement that your organization's empt manner. purposes and powers must be limited by the ar- of exemption as an educational organization, you must submit complete information as to ticles of organization isn't satisfied if the limit is Example 7. A stated purpose to operate a how your organization carries on or plans to contained only in the bylaws or other rules or hospital doesn't meet the organizational test carry on its educational activities, such as by regulations. Moreover, the organizational test since it isn't necessarily charitable. A hospital conducting a school, by panels, discussions, isn't satisfied by statements of your organiza- may or may not be exempt depending on the lectures, forums, radio and television programs, tion's officers that you intend to operate only for manner in which it is operated. exempt purposes. Also, the test isn't satisfied or through various cultural media such as museums, symphony orchestras, or art exhibits. In by the fact that your actual operations are for Example 8. An organization that is ex- each instance, you must explain by whom and exempt purposes. pressly empowered by its articles to carry on where these activities are or will be conducted social activities won't be sufficiently limited as to In interpreting an organization's articles, the and the amount of admission fees, if any. You its power, even if its articles state that it is or- law of the state where the organization was cre- must submit a copy of the pertinent contracts, ganized and will be operated exclusively for ated is controlling. If an organization contends agreements, publications, programs, etc. that the terms of its articles have a different charitable purposes. meaning under state law than their generally If you are organized to conduct a school, accepted meaning, such meaning must be es- Dedication and you must submit full information regarding your tablished by a clear and convincing reference to Distribution of Assets tuition charges, number of faculty members, relevant court decisions, opinions of the state number of full-time and part-time students en- attorney general, or other appropriate state au- rolled, courses of study and degrees conferred, Assets of an organization must be permanently thorities. together with a copy of your school catalog. dedicated to an exempt purpose. This means See Form 1023 Schedule B and Private that should an organization dissolve, its assets The following are examples illustrating the Schools, discussed later. organizational test. must be distributed for an exempt purpose described in this chapter, or to the Federal Gov- Example 1. Articles of organization state ernment or to a state or local government for a Educational Organizations that an organization is formed exclusively for lit- public purpose. If the assets could be distrib- erary and scientific purposes within the mean- uted to members or private individuals or for The term educational relates to: ing of section 501(c)(3). These articles appro- any other purpose, the organizational test isn't 1. The instruction or training of individuals for priately limit the organization's purposes. The met. the purpose of improving or developing organization meets the organizational test. Dedication. To establish that your organi- their capabilities, or Example 2. An organization, by the terms zation's assets will be permanently dedicated to 2. The instruction of the public on subjects of its articles, is formed to engage in research an exempt purpose, the articles of organization useful to individuals and beneficial to the without any further description or limitation. The community.

Chapter 3 Section 501(c)(3) Organizations Page 25 Page 26 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Advocacy of a position. Advocacy of a par- it may still be exempt as a social club if it meets Racially Nondiscriminatory Policy ticular position or viewpoint may be educational the requirements described in chapter 4, under if there is a sufficiently full and fair exposition of 501(c)(7) - Social and Recreation Clubs. To qualify as an organization exempt from fed- pertinent facts to permit an individual or the eral income tax, a private school must include a public to form an independent opinion or con- Athletic organization. This type of organi- statement in its charter, bylaws, or other gov- clusion. The mere presentation of unsupported zation must submit evidence that it is engaged erning instrument, or in a resolution of its gov- opinion isn't educational. in activities such as directing and controlling in- erning body, that it has a racially nondiscrimina- terscholastic athletic competitions, conducting tory policy as to students and that it doesn't Method not educational. The method tournaments, and prescribing eligibility rules for discriminate against applicants and students on used by an organization to develop and present contestants. If it isn't so engaged, your organi- the basis of race, color, or national or ethnic ori- its views is a factor in determining if an organization may be exempt as a social club descri- gin. Also, the school must circulate information zation qualifies as educational within the mean- bed in chapter 4. Raising funds to be used for that clearly states the school's admission poli- ing of section 501(c)(3). The following factors travel and other activities to interview and per- cies. A racially nondiscriminatory policy toward may indicate that the method isn't educational. suade prospective students with outstanding students means that the school admits the stu- athletic ability to attend a particular university 1. The presentation of viewpoints unsuppor- dents of any race to all the rights, privileges, doesn't show an exempt purpose. If your organ- ted by facts is a significant part of the or- programs, and activities generally accorded or ization isn't exempt as an educational organiza- ganization's communications. made available to students at that school and tion, see Amateur Athletic Organizations, later that the school doesn't discriminate on the ba- 2. The facts that purport to support the view- in this chapter. sis of race in administering its educational poli- point are distorted. cies, admission policies, scholarship and loan 3. The organization's presentations make Private Schools programs, and athletic and other school-admin- substantial use of inflammatory and dis- istered programs. paraging terms and express conclusions Every private school filing an application for rec- more on the basis of emotion than of ob- ognition of tax-exempt status must supply the The IRS considers discrimination on the ba- jective evaluations. IRS (on Schedule B, Form 1023) with the fol- sis of race to include discrimination on the basis lowing information. of color or national or ethnic origin. 4. The approach used isn't aimed at developing an understanding on the part of the au- 1. The racial composition of the student The existence of a racially discriminatory dience because it doesn't consider their body, and of the faculty and administrative policy with respect to the employment of faculty background or training. staff, as of the current academic year. and administrative staff is indicative of a racially (This information also must be projected, Exceptional circumstances, however, may discriminatory policy as to students. Con- so far as may be feasible, for the next aca- versely, the absence of racial discrimination in exist where an organization's advocacy may be demic year.) educational even if one or more of the factors the employment of faculty and administrative listed above are present. 2. The amount of scholarship and loan funds, staff is indicative of a racially nondiscriminatory if any, awarded to students enrolled and policy as to students. Qualifying organizations. The following types the racial composition of students who of organizations may qualify as educational: have received the awards. A policy of a school that favors racial minority groups with respect to admissions, facilities 1. An organization, such as a primary or sec- 3. A list of the school's incorporators, found- and programs, and financial assistance isn't ondary school, a college, or a professional ers, board members, and donors of land discrimination on the basis of race when the or trade school, that has a regularly sched- or buildings, whether individuals or organi- purpose and effect of this policy is to promote uled curriculum, a regular faculty, and a zations. establishing and maintaining the school's non- regularly enrolled student body in attend- 4. A statement indicating whether any of the discriminatory policy. ance at a place where the educational ac- persons described in item (3) above have tivities are regularly carried on, an objective of maintaining segregated A school that selects students on the basis 2. An organization whose activities consist of public or private school education at the of membership in a religious denomination or conducting public discussion groups, fo- time the application is filed and, if so, unit isn't discriminating if membership in the de- rums, panels, lectures, or other similar whether any of the individuals described in nomination or unit is open to all on a racially programs, item (3) are officers or active members of nondiscriminatory basis. those organizations at the time the appli- 3. An organization that presents a course of cation is filed. Policy statement. The school must include a instruction by correspondence or through statement of its racially nondiscriminatory policy the use of television or radio, 5. The public school district and county in in all its brochures and catalogs dealing with which the school is located. 4. A museum, zoo, planetarium, symphony student admissions, programs, and scholar- orchestra, or other similar organization, ships. Also, the school must include a reference How to determine racial composition. The to its racially nondiscriminatory policy in other 5. A nonprofit children's day-care center, and racial composition of the student body, faculty, written advertising that it uses to inform pro- and administrative staff can be an estimate spective students of its programs. 6. A credit counseling organization. based on the best information readily available College book stores, cafeterias, restau- to the school, without requiring student appli- Publicity requirement. The school must rants, etc. These and other on-campus organi- cants, students, faculty, or administrative staff make its racially nondiscriminatory policy zations should submit information to show that to submit to the school information that the known to all segments of the general commun- they are controlled by and operated for the con- school otherwise doesn't require. Nevertheless, ity served by the school. Selective communica- venience of the faculty and student body or by a statement of the method by which the racial tion of a racially nondiscriminatory policy that a whom they are controlled and whom they serve. composition was determined must be supplied. school provides solely to leaders of racial The identity of individual students or members groups won't be considered an effective means Alumni association. An alumni associa- of the faculty and administrative staff shouldn't of communication to make the policy known to tion should establish that it is organized to pro- be included with this information. all segments of the community. To satisfy this mote the welfare of the university with which it is A school that is a state or municipal instru- requirement, the school must use one of the fol- affiliated, is subject to the control of the univer- mentality (see Instrumentalities, near the begin- lowing three methods. sity as to its policies and destination of funds, ning of this chapter), whether or not it qualifies and is operated as an integral part of the univer- for exemption under section 501(c)(3), isn't Method one. The school can publish a no- sity or is otherwise organized to promote the considered to be a private school for purposes tice of its racially nondiscriminatory policy in a welfare of the college or university. If your of the following discussion. newspaper of general circulation that serves all association doesn't have these characteristics, racial segments of the community. Such

Page 26 Chapter 3 Section 501(c)(3) Organizations Page 27 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

publication must be repeated at least once an- 4.03 of the revenue procedure by using its Inter- school or schools became subject to a desegre- nually during the period of the school's solicita- net website to publicize the school’s racially gation order of a federal court or are otherwise tion for students or, in the absence of a solicita- nondiscriminatory policy as to students. To sat- expressly obligated to implement a desegrega- tion program, during the school's registration isfy the requirement using this method, the tion plan under the terms of any written contract period. When more than one community is school may display a notice (consisting of the or other commitment to which any federal served by a school, the school can publish the same language as in Method 1) of its racially agency was a party. notice in those newspapers that are reasonably nondiscriminatory policy on its primary publicly The IRS encourages schools to satisfy the likely to be read by all racial segments in the accessible Internet homepage at all times dur- publicity requirement by using either of the communities that the school serves. ing its taxable year (excluding temporary out- methods described earlier, even though a ages due to website maintenance or technical school considers itself to be within one of the If this method is used, the notice must meet problems) in a manner reasonably expected to Exceptions. The IRS believes that these publi- the following printing requirements. be noticed by visitors to the homepage. See city requirements are the most effective meth- Rev. Proc. 2019-22 for more information about ods to make known a school's racially nondis- 1. It must appear in a section of the newspa- satisfying the publicity requirement using this criminatory policy. In this regard, it is each per likely to be read by prospective stu- method. school's responsibility to determine whether ei- dents and their families. ther of the exceptions applies. Such responsi- Exceptions. The publicity requirements 2. It must occupy at least 3 column inches. bility will prepare the school, if it is audited by won't apply in the following situations. the IRS, to demonstrate that the failure to pub- 3. It must have its title printed in at least 12 First, if for the preceding 3 years the en- lish its racially nondiscriminatory policy in ac- point bold face type. rollment of a parochial or other church-rela- cordance with either one of the publicity re- 4. It must have the remaining text printed in ted school consists of students at least quirements was justified by one of the at least 8 point type. 75% of whom are members of the sponsor- exceptions. Also, a school must be prepared to ing religious denomination or unit, the demonstrate that it has publicly disavowed or The following is an acceptable example of school can make known its racially nondis- repudiated any statements purported to have the notice: criminatory policy in whatever newspapers been made on its behalf (after November 6, or circulars the religious denomination or 1975) that are contrary to its publicity of a ra- unit uses in the communities from which cially nondiscriminatory policy as to students, to NOTICE OF the students are drawn. These newspapers the extent that the school or its principal official NONDISCRIMINATORY POLICY and circulars can be distributed by a partic- was aware of these statements. AS TO STUDENTS ular religious denomination or unit or by an The M School admits students of any race, color, national and ethnic origin to all the association that represents a number of re- Facilities and programs. A school must be rights, privileges, programs, and activities ligious organizations of the same denomi- able to show that all of its programs and facili- generally accorded or made available to nation. If, however, the school advertises in ties are operated in a racially nondiscriminatory students at the school. It doesn't newspapers of general circulation in the manner. discriminate on the basis of race, color, community or communities from which its national and ethnic origin in administration students are drawn and the second excep- Scholarship and loan programs. As a gen- of its educational policies, admissions tion (discussed next) doesn't apply to the eral rule, all scholarship or other comparable policies, scholarship and loan programs, school, then it must comply with either of benefits obtainable at the school must be of- and athletic and other school-administered the publicity requirements explained ear- fered on a racially nondiscriminatory basis. This programs. lier. must be known throughout the general com- Second, if a school customarily draws a munity being served by the school and should substantial percentage of its students na- be referred to in its publicity. Financial assis- Method two. The school can use the tionwide, worldwide, from a large geo- tance programs, as well as scholarships and broadcast media to publicize its racially nondis- graphic section or sections of the United loans made under financial assistance pro- criminatory policy if this use makes the policy States, or from local communities, and if grams, that favor members of one or more ra- known to all segments of the general commun- the school follows a racially nondiscrimina- cial minority groups and that don't significantly ity the school serves. If the school uses this tory policy as to its students, the school detract from or are designed to promote a method, it must provide documentation show- may satisfy the publicity requirement by school's racially nondiscriminatory policy won't ing that the means by which this policy was complying with the instructions explained adversely affect the school's exempt status. communicated to all segments of the general earlier under Policy statement. community was reasonably expected to be ef- The school can demonstrate that it follows a Certification. An individual authorized to take fective. In this case, appropriate documentation racially nondiscriminatory policy either by show- official action on behalf of a school that claims would include copies of the tapes or scripts ing that it currently enrolls students of racial mi- to be racially nondiscriminatory as to students used and records showing that there was an nority groups in meaningful numbers or, except must certify annually, under penalties of perjury, adequate number of announcements. The doc- for local community schools, when minority stu- on Schedule E (Form 990 or 990-EZ) or Form umentation also would include proof that these dents aren't enrolled in meaningful numbers, 5578, Annual Certification of Racial Nondiscri- announcements were made during hours when that its promotional activities and recruiting ef- mination for a Private School Exempt From they were likely to be communicated to all seg- forts in each geographic area were reasonably Federal Income Tax, whichever applies, that to ments of the general community, that they were designed to inform students of all racial seg- the best of his or her knowledge and belief the long enough to convey the message clearly, ments in the general communities within the school has satisfied all requirements that apply, and that they were broadcast on radio or televi- area of the availability of the school. The ques- as previously explained. sion stations likely to be listened to by substan- tion as to whether a school demonstrates such Failure to comply with the guidelines ordina- tial numbers of members of all racial segments a policy satisfactorily will be determined on the rily will result in the proposed revocation of the of the general community. Announcements basis of the facts and circumstances of each exempt status of a school. must be made during the period of the school's case. solicitation for students or, in the absence of a Recordkeeping requirements. With The IRS recognizes that the failure by a solicitation program, during the school's regis- certain exceptions, given later, each school drawing its students from local commun- RECORDS tration period. exempt private school must maintain ities to enroll racial minority group students may the following records for a minimum period of 3 Method three. Rev. Proc. 2019-22, not necessarily indicate the absence of a ra- years, beginning with the year after the year of 2019-22 I.R.B. 1260 modifies Revenue Proce- cially nondiscriminatory policy when there are compilation or acquisition. dure 75-50, 1975-2 C.B. 587, to reflect techno- relatively few or no such students in these com- 1. Records indicating the racial composition logical advances since its publication and pro- munities. Actual enrollment is, however, a of the student body, faculty, and adminis- vides a third method for a private school to meaningful indication of a racially nondiscrimi- trative staff for each academic year. satisfy the requirement contained in section natory policy in a community in which a public

Chapter 3 Section 501(c)(3) Organizations Page 27 Page 28 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

2. Records sufficient to document that schol- sections 501(c)(26) or 501(c)(27), which are • Elimination of prejudice and discrimination, arship and other financial assistance is discussed in chapter 4, or to charitable risk • Defense of human and civil rights secured awarded on a racially nondiscriminatory pools, discussed next. by law, and basis. • Combating community deterioration and juvenile delinquency. 3. Copies of all materials used by or on be- Charitable Risk Pools half of the school to solicit contributions. The rest of this section contains a description of the information to be provided by certain spe- 4. Copies of all brochures, catalogs, and ad- A charitable risk pool is treated as organized cific organizations. This information is in addi- vertising dealing with student admissions, and operated exclusively for charitable purpo- tion to the required inclusions described in programs, and scholarships. (Schools ad- ses if it satisfies all of the following require- chapter 1, and other statements requested on vertising nationally or in a large geo- ments: Form 1023 or 1023-EZ. Each of the following graphic segment or segments of the Uni- 1. Is organized and operated only to pool in- organizations must submit the information de- ted States need only maintain a record surable risks of its members (not including scribed. sufficient to indicate when and in what risks related to medical malpractice) and publications their advertisements were to provide information to its members Charitable organization supporting educa- placed.) about loss control and risk management, tion. Submit information showing how your or- 2. Consists only of members that are section ganization supports education — for example, The racial composition of the student body, fac- 501(c)(3) organizations exempt from tax contributes to an existing educational institu- ulty, and administrative staff can be determined under section 501(a), tion, endows a professorial chair, contributes in the same manner as that described at the be- toward paying teachers' salaries, or contributes 3. Is organized under state law authorizing ginning of this section. However, a school can't to an educational institution to enable it to carry this type of risk pooling, discontinue maintaining a system of records on research. that reflect the racial composition of its stu- 4. Is exempt from state income tax (or will be Scholarships. If the organization awards dents, faculty, and administrative staff used on after qualifying as a section 501(c)(3) or- or plans to award scholarships, complete November 6, 1975, unless it substitutes a differ- ganization), Schedule H of Form 1023. Also, submit the fol- ent system that compiles substantially the same 5. Has obtained at least $1,000,000 in lowing: information, without advance approval of the startup capital from nonmember charitable IRS. 1. Criteria used for selecting recipients, in- organizations, cluding the rules of eligibility. The IRS doesn't require that a school release 6. Is controlled by a board of directors elec- any personally identifiable records or personal 2. How and by whom the recipients are or ted by its members, and information except in accordance with the re- will be selected. quirements of the Family Educational Rights 7. Is organized under documents requiring 3. If awards are or will be made directly to in- and Privacy Act of 1974. Similarly, the IRS that: dividuals, whether information is required doesn't require a school to keep records pro- a. Each member be a section 501(c)(3) assuring that the student remains in hibited under state or federal law. organization exempt from tax under school. Exceptions. The school doesn't have to in- section 501(a), 4. If awards are or will be made to recipients dependently maintain these records for IRS use b. Each member that receives a final de- of a particular class, for example, children if both of the following are true. termination that it no longer qualifies of employees of a particular employer— 1. Substantially the same information has under section 501(c)(3) notify the pool a. Whether any preference is or will be been included in a report or reports filed immediately, and accorded an applicant by reason of with an agency or agencies of federal, c. Each insurance policy issued by the the parent's position, length of em- state, or local governments, and this infor- pool provide that it won't cover events ployment, or salary, mation is current within 1 year. occurring after a final determination b. Whether as a condition of the award 2. The school maintains copies of these re- described in (b). the recipient must upon graduation ports from which this information is readily accept employment with the com- obtainable. pany, and If these reports don't include all of the informa- Other Section 501(c)(3) c. Whether the award will be continued tion required, as discussed earlier, records pro- Organizations even if the parent's employment ends. viding such remaining information must be maintained by the school for IRS use. 5. A copy of the scholarship application form In addition to the information required for all or- and any brochures or literature describing Failure to maintain records. Failure to ganizations, as described earlier, you should in- the scholarship program. maintain or to produce the required records and clude any other information described in this information, upon proper request, will create a section. Hospital. If you are organized to operate a presumption that the organization has failed to charitable hospital, complete and attach Sec- comply with these guidelines. Charitable Organizations tion I of Schedule C, Form 1023. See Rev. Proc. 2019–22 for more informa- If your hospital was transferred to you from tion on private school's racially nondiscrimina- If your organization is applying for recognition of proprietary ownership, complete and attach tory policy requirements. exemption as a charitable organization, it must Schedule G of Form 1023. You must attach a show that it is organized and operated for pur- list showing: poses that are beneficial to the public interest. 1. The names of the active and courtesy staff Organizations Providing Some examples of this type of organization are members of the proprietary hospital, as Insurance those organized for: well as the names of your medical staff • Relief of the poor, the distressed, or the members after the transfer to nonprofit underprivileged, An organization described in sections 501(c)(3) ownership, and Advancement of religion, or 501(c)(4) may be exempt from tax only if no • Advancement of education or science, 2. The names of any doctors who continued substantial part of its activities consists of pro- • Erection or maintenance of public build- to lease office space in the hospital after viding commercial-type insurance. • ings, monuments, or works, its transfer to nonprofit ownership and the However, this rule doesn't apply to • Lessening the burdens of government, state-sponsored organizations described in • Lessening of neighborhood tensions,

Page 28 Chapter 3 Section 501(c)(3) Organizations Page 29 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

amount of rent paid. Submit also an ap- 6. Whether there is an arrangement to pro- In determining whether an admittedly reli- praisal showing the fair rental value of the vide, directly or indirectly, a deduction for gious organization is also a church, the IRS rented space. the cost of litigation that is for the private doesn't accept every assertion that the organi- benefit of the donor. zation is a church. Because beliefs and practi- Clinic. Schedule C, Form 1023, is also de- ces vary widely, there is no single definition of signed to encompass outpatient clinics. If you Acceptance of attorneys' fees. A non- the word church for tax purposes. The IRS con- are organized to operate a clinic, provide infor- profit public-interest law firm can accept attor- siders the facts and circumstances of each or- mation regarding: neys' fees in public-interest cases if the fees are ganization applying for church status. paid directly by its clients and the fees aren't 1. A description of the facilities and services, more than the actual costs incurred in the case. Convention or association of churches. 2. To whom the services are offered, such as Upon undertaking a representation, the organi- Any organization that is otherwise a convention the public at large or a specific group, zation can't withdraw from the case because or association of churches won't fail to qualify the litigant is unable to pay the fee. as a church merely because the membership of 3. How charges are determined, such as on Firms can accept fees awarded or approved the organization includes individuals as well as a profit basis, to recover costs, or at less by a court or an administrative agency and paid churches or because the individuals have vot- than cost, by an opposing party if the firms don't use the ing rights in the organization. 4. By whom administered and controlled, likelihood or probability of fee awards as a consideration in the selection of cases. All fee Integrated auxiliaries. An organization is 5. Whether any of the professional staff (that awards must be paid to the organization and an integrated auxiliary of a church if all the fol- is, those who perform or will perform the not to its individual staff attorneys. Instead, a lowing are true. clinical services) also serve or will serve in public-interest law firm can reasonably compen- 1. The organization is described both in sec- an administrative capacity, and sate its staff attorneys, but only on a straight tions 501(c)(3) and 509(a)(1), 509(a)(2), 6. How compensation paid the professional salary basis. Private attorneys, whose services or 509(a)(3). staff is or will be determined. are retained by the firm to assist it in particular cases, can be compensated by the firm, but 2. It is affiliated with a church or a convention or association of churches. Organization providing loans. If you make, only on a fixed fee or salary basis. or will make, loans for charitable and educa- The total amount of all attorneys' fees (court 3. It is internally supported. An organization tional purposes, submit the following informa- awarded and those received from clients) is internally supported unless both of the tion. mustn't be more than 50% of the total cost of following are true. operations of the organization's legal functions, 1. An explanation of the circumstances un- calculated over a 5-year period. a. It offers admissions, goods, services, der which such loans are, or will be, made. If, to carry out its program, an organization or facilities for sale, other than on an incidental basis, to the general public 2. Criteria for selection, including the rules of violates applicable canons of ethics, disrupts (except goods, services, or facilities eligibility. the judicial system, or engages in any illegal action, the organization will jeopardize its exemp- sold at a nominal charge or for a small 3. How and by whom the recipients are or tion. part of the cost). will be selected. b. It normally gets more than 50% of its 4. Manner of repayment of the loan. Religious Organizations support from a combination of govern- 5. Security required, if any. mental sources, public solicitation of To determine whether an organization meets contributions, and receipts from the 6. Interest charged, if any, and when paya- the religious purposes test of section 501(c)(3), sale of admissions, goods, perform- ble. the IRS maintains two basic guidelines. ance of services, or furnishing of fa- 7. Copies in duplicate of the loan application cilities in activities that aren't unrela- 1. That the particular religious beliefs of the and any brochures or literature describing ted trades or businesses. organization are truly and sincerely held. the loan program. Special rule. Men's and women's organi- 2. That the practices and rituals associated zations, seminaries, mission societies, and Public-interest law firms. If your organization with the organization's religious belief or youth groups that satisfy (1) and (2) shown ear- was formed to litigate in the public interest (as creed aren't illegal or contrary to clearly lier are integrated auxiliaries of a church even if opposed to providing legal services to the defined public policy. they aren't internally supported. poor), such as in the area of protection of the Therefore, your group (or organization) may not In order for an organization (including a environment, you should submit the following church and religious organization) to qualify for information. qualify for treatment as an exempt religious organization for tax purposes if its actions, as tax exemption, no part of its net earnings can in- 1. How the litigation can reasonably be said contrasted with its beliefs, are contrary to well ure to any individual. to be representative of a broad public in- established and clearly defined public policy. If Although an individual is entitled to a chari- terest rather than a private one. there is a clear showing that the beliefs (or doc- table deduction for contributions to a church, the assignment or similar transfer of compensa- 2. Whether the organization will accept fees trines) are sincerely held by those professing tion for personal services to a church generally for its services. them, the IRS won't question the religious nature of those beliefs. doesn't relieve a taxpayer of federal income tax 3. A description of the cases litigated or to be liability on the compensation, regardless of the litigated and how they benefit the public Churches. Although a church, its integrated motivation behind the transfer. generally. auxiliaries, or a convention or association of 4. Whether the policies and program of the churches isn't required to file Form 1023 to be Scientific Organizations organization are the responsibility of a exempt from federal income tax or to receive tax deductible contributions, the organization board or committee representative of the You must show that your organization's re- may find it advantageous to obtain recognition public interest, which is neither controlled search will be carried on in the public interest. of exemption. See Form 1023, Schedule A. In by employees or persons who litigate on Scientific research will be considered to be in this event, you should submit information show- behalf of the organization nor by any or- the public interest if the results of the research ing that your organization is a church, synago- ganization that isn't itself an organization (including any patents, copyrights, processes, gue, association or convention of churches, reli- described in this chapter. or formulas) are made available to the public on gious order, or religious organization that is an a nondiscriminatory basis; if the research is per- 5. Whether the organization is operated, integral part of a church, and that it is engaged formed for the United States or a state, county, through sharing of office space or other- in carrying out the function of a church. wise, in a way to create identification or or municipal government; or if the research is confusion with a particular private law firm. carried on for one of the following purposes.

Chapter 3 Section 501(c)(3) Organizations Page 29 Page 30 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

1. Aiding in the scientific education of college national or international amateur sports compe- Organizations that fall into the excluded cat- or university students. tition but only if none of its activities involve pro- egories are generally those that either have viding athletic facilities or equipment. The sec- broad public support or actively function in a 2. Obtaining scientific information that is pub- ond type is a Qualified amateur sports supporting relationship to those organizations. lished in a treatise, thesis, trade publica- organization (discussed below). The difference Organizations that test for public safety also are tion, or in any other form that is available is that a qualified amateur sports organization excluded. to the interested public. can provide athletic facilities and equipment. 3. Discovering a cure for a disease. Application to IRS. Even if an organization Donations to either type of amateur athletic falls within one of the categories excluded from 4. Aiding a community or geographical area organization are deductible as charitable contri- the definition of private foundation, it will be pre- by attracting new industry to the commun- butions on the donor's federal income tax re- sumed to be a private foundation, with some ex- ity or area, or by encouraging the develop- turn. However, no deduction is allowed if there ceptions, unless it files a timely Form 1023 or ment or retention of an industry in the is a direct personal benefit to the donor or any Form 1023-EZ with the IRS showing it isn't a community or area. other person other than the organization. private foundation. This application requirement Scientific research, for exemption purposes, applies to an organization regardless of when it doesn't include activities of a type ordinarily in- Qualified amateur sports organization. An was organized. The only exceptions to this re- cidental to commercial or industrial operations organization will be a qualified amateur sports quirement are those organizations that are ex- such as the ordinary inspection or testing of ma- organization if it is organized and operated: cepted from the requirement of filing Form 1023 or 1023-EZ as discussed, earlier, under Organi- terials or products, or the designing or con- 1. Exclusively to foster national or interna- zations Not Required To File Form 1023. structing of equipment, buildings, etc. tional amateur sports competition, and When to file application. If an organiza- If you engage or plan to engage in research, 2. Primarily to conduct national or interna- tion has to file the application, it must do so submit all of the following. tional competition in sports or to support and develop amateur athletes for that within 27 months from the end of the month in 1. An explanation of the nature of the re- competition. which it was organized. search. If your organization is newly applying for rec- The organization's membership can be local or ognition of exemption as an organization descri- 2. A brief description of research projects regional in nature. bed in this chapter (a section 501(c)(3) organi- completed or presently being engaged in. zation) and you wish to establish that your 3. How and by whom research projects are Prevention of Cruelty organization is a public charity rather than a pri- determined and selected. vate foundation, you must complete the appli- to Children or Animals cable lines of Part VII of Form 1023 or Part IV of 4. Whether you have contracted or spon- Form 1023-EZ. See Application for Recognition sored research, or contemplated doing so, Examples of activities that may qualify this type of Exemption, earlier in this chapter, for more in- and, if so, names of past sponsors or of organization for exempt status are: formation. grantors, terms of grants or contracts, to- In determining the date on which a corpora- gether with copies of any executed con- 1. Preventing children from working in haz- tion is organized for purposes of applying for tracts or grants. ardous trades or occupations, recognition of section 501(c)(3) status, the IRS 5. Disposition made or to be made of the re- 2. Promoting high standards of care for labo- looks to the date the corporation came into ex- sults of your research, including whether ratory animals, and istence under the law of the state in which it is preference has been or will be given to incorporated. For example, where state law pro- 3. Providing funds to pet owners to have their any organization or individual either as to vides that existence of a corporation begins on pets spayed or neutered to prevent over- results or time of release. the date its articles are filed by a certain state breeding. official in the appropriate state office, the corpo- 6. Who will retain ownership or control of any ration is considered organized on that date. patents, copyrights, processes, or formu- Later nonsubstantive amendments to the ena- las resulting from your research. Private Foundations bling instrument won't change the date of or- 7. A copy of publications or other media ganization, for purposes of the filing require- showing reports of your research activi- and Public Charities ment. ties. Only reports of your research activities or those conducted on your behalf, as It is important that you determine if your organi- Application filed late. An organization that distinguished from those of your creators zation is a private foundation. Most organiza- states it is a private foundation when it files its or members conducted in their individual tions exempt from income tax (as organizations application for recognition of exemption after capacities, should be submitted. described in section 501(c)(3)) are presumed to the 27-month period will be treated as a section be private foundations unless they notify the 501(c)(3) organization and as a private founda- IRS within a specified period of time that they tion only from the date it files its application, Literary Organizations meet the requirements of section 509(a) to be rather than the date that it was created or first treated as other than a private foundation. This became described in section 501(c)(3). The or- If your organization is established to operate a notice requirement applies to most section ganization may obtain retroactive exemption, book store or engage in publishing activities of 501(c)(3) organizations regardless of when they however, if it establishes that it qualifies for re- any nature (printing, publication, or distribution were formed. See Form 1023, Part VII. lief from the 27-month deadline. of your own material or that printed or published An organization that states it is a publicly by others and distributed by you), explain fully Private Foundations supported charity when it files its application for the nature of the operations, including whether recognition of exemption after the 27-month pe- sales are or will be made to the general public, riod can't be treated as a section 501(c)(3) or- the type of literature involved, and how these Every organization that qualifies for tax exemp- ganization before the date it files the applica- activities are related to your stated purposes. tion as an organization described in section tion, except as discussed above. Financial 501(c)(3) is a private foundation unless it falls support received before that date can't be used into one of the categories specifically excluded for purposes of determining whether the organi- Amateur Athletic from the definition of that term (referred to in zation is publicly supported. However, an or- Organizations sections 509(a)(1), 509(a)(2), 509(a)(3), or ganization that can reasonably be expected to 509(a)(4)). In effect, the definition divides these meet the support requirements (discussed later There are two types of amateur athletic organi- organizations into two classes, namely private under Public Charities) when it applies for zations that can qualify for tax-exempt status. foundations and public charities. Public chari- tax-exempt status will be classified as a publicly The first type is an organization that fosters ties are discussed later. supported charity and not a private foundation.

Page 30 Chapter 3 Section 501(c)(3) Organizations Page 31 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Excise taxes on private foundations. There nor retain any excess business holdings as de- Including items of support in qualifying is an excise tax on the net investment income of fined in section 4943(c) of the Internal Revenue ! support (the numerator of the fraction) most domestic private foundations. In addition, Code, or the corresponding section of any fu- CAUTION or excluding items of support from total excise taxes may be imposed on the private ture federal tax code; nor make any invest- support (the denominator of the fraction) may foundation or disqualified persons if the founda- ments in a manner as to incur tax liability under decide whether an organization is excluded tion or disqualified persons have engaged in section 4944 of the Internal Revenue Code, or from the definition of a private foundation, and certain transactions or activities. Managers may the corresponding section of any future federal thus from the liability for certain excise taxes. It also be subject to excise tax for their role in ap- tax code; nor make any taxable expenditures as is very important to classify items of support proving the activity. See Chapter 5 for more in- defined in section 4945 (d) of the Internal Reve- correctly. formation on excise taxes. nue Code, or the corresponding section of any future federal tax code. Governing instrument. A private foundation Section 509(a)(1) Organizations can't be tax exempt nor will contributions to it be Effect of state law. A private foundation's deductible as charitable contributions unless its governing instrument will be considered to meet Section 509(a)(1) organizations include: governing instrument contains special provi- these charter requirements if valid provisions of 1. A church or a convention or association of sions in addition to those that apply to all organ- state law have been enacted that: churches (section 170(b)(1)(A)(i)), izations described in section 501(c)(3). 1. Require it to act or refrain from acting so 2. An educational organization such as a Sample governing instruments. The fol- as not to subject the foundation to the school or college (section 170(b)(1)(A)(ii)), lowing samples of governing instrument provi- taxes imposed on prohibited transactions, sions illustrate the special charter requirements or 3. A hospital or medical research organiza- that apply to private foundations. Draft A is a tion operated in conjunction with a hospital 2. Treat the required provisions as contained (section 170(b)(1)(A)(iii)), sample of provisions in articles of incorporation; in the foundation's governing instrument. Draft B, a trust indenture. 4. Endowment funds operated for the benefit The IRS has published a list of states with of certain state and municipal colleges and Draft A this type of law. The list is in Revenue Ruling universities (section 170(b)(1)(A)(iv)), 75-38, 1975-1 C.B. 161 (or later update). 5. A governmental unit (section 170(b)(1)(A) General (v)), Public Charities 1. The corporation will distribute its income 6. An agricultural research organization (sec- for each tax year at a time and in a manner tion 170(b)(1)(A)(xi)), and as not to become subject to the tax on un- A private foundation is any organization descri- distributed income imposed by section bed in Section 501(c)(3), unless it falls into one 7. A publicly supported organization (section 4942 of the Internal Revenue Code, or the of the categories specifically excluded from the 170(b)(1)(A)(vi)). corresponding section of any future fed- definition of that term in section 509(a), which eral tax code. lists four basic categories of exclusions. These Church. The characteristics of a church are categories are discussed under the Section discussed earlier in this chapter under Religious 2. The corporation won't engage in any act of 509(a)(1), 509(a)(2), 509(a)(3), and 509(a)(4) Organizations. self-dealing as defined in section 4941(d) Organizations headings that follow this intro- of the Internal Revenue Code, or the cor- duction. See Section 509(a)(1) Organizations, Educational organizations. An educational responding section of any future federal etc. organization that qualifies as a public charity tax code. under section 170(b)(1)(A)(ii) is one whose pri- If your organization falls into one of these mary function is to present formal instruction 3. The corporation won't retain any excess categories, it isn't a private foundation and you business holdings as defined in section that normally maintains a regular faculty and should state this in Part VII of Form 1023 or Part curriculum and that normally has a regularly en- 4943(c) of the Internal Revenue Code, or IV of Form 1023-EZ. the corresponding section of any future rolled body of pupils or students in attendance federal tax code. If your organization doesn't fall into one of at the place where it regularly carries on its edu- these categories, it is a private foundation and cational activities. The term includes institutions 4. The corporation won't make any invest- is subject to the applicable rules and restrictions such as primary, secondary, preparatory, or ments in a manner as to subject it to tax until it terminates its private foundation status. high schools, and colleges and universities. It under section 4944 of the Internal Reve- Some private foundations also qualify as private includes federal, state, and other publicly sup- nue Code, or the corresponding section of operating foundations; these are discussed ported schools that otherwise come within the any future federal tax code. near the end of this chapter. definition. It doesn't include organizations en- 5. The corporation won't make any taxable gaged in both educational and noneducational expenditures as defined in section Generally speaking, a large class of organi- activities, unless the latter are merely incidental 4945(d) of the Internal Revenue Code, or zations excluded under section 509(a)(1) and to the educational activities. A recognized uni- the corresponding section of any future all organizations excluded under section 509(a) versity that incidentally operates a museum or federal tax code. (2) depend upon a support test. This test is sponsors concerts is an educational organiza- used to assure a minimum percentage of tion. However, the operation of a school by a broad-based public support in the organiza- museum doesn't necessarily qualify the mu- Draft B tion's total support pattern. Thus, in the follow- seum as an educational organization. ing discussions, when the one-third support test An exempt organization that operates a tu- Any other provisions of this instrument notwith- (see Qualifying as Publicly Supported, later) is standing, the trustees shall distribute its income toring service for students on a one-to-one ba- referred to, it means the following fraction nor- sis in their homes, maintains a small center to for each tax year at a time and in a manner as mally must equal at least one-third. not to become subject to the tax on undistrib- test students to determine their need for tutor- uted income imposed by section 4942 of the In- ing, and employs tutors on a part-time basis Qualifying support ternal Revenue Code, or the corresponding isn't an educational organization for these pur- section of any future federal tax code. Total support poses. Nor is an exempt organization that conducts an internship program by placing college and university students with cooperating gov- Any other provisions of this instrument not- ernment agencies an educational organization. withstanding, the trustees won't engage in any act of self-dealing as defined in section 4941(d) Hospitals and medical research organiza- of the Internal Revenue Code, or the corre- tions. A hospital described in section 170(b)(1) sponding section of any future federal tax code; (A)(iii) is an organization whose principal

Chapter 3 Section 501(c)(3) Organizations Page 31 Page 32 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

purpose or function is to provide hospital or requirements under section 6033(b) related to the donor is subject to reduction for certain ordi- medical care or either medical education or sections 501(r) and 4959. See Regulations sec- nary income and capital gain property, the fair medical research. A rehabilitation institution, tions 1.501(r)-1 through 1.501(r)-7. market value of the property is taken into ac- outpatient clinic, or community mental health or count. drug treatment center may qualify as a hospital Correction and disclosure procedures if its principal purpose or function is providing under section 501(r). Revenue Procedure Indirect contribution. An example of an hospital or medical care. If the accommodations 2015–21 provides correction and disclosure indirect contribution from the public is the re- of an organization qualify as being part of a skil- procedures under which certain failures to meet ceipt by the organization of its share of the pro- led nursing facility, that organization may qualify the requirements of section 501(r) will be exceeds of an annual collection campaign of a as a hospital if its principal purpose or function cused for purposes of sections 501(r)(1) and community chest, community fund, or united is providing hospital or medical care. 501(r)(2)(B). See Rev. Proc. 2015–21, 2015-13 fund. I.R.B. 817, or later guidance. Exceptions. The term hospital doesn't in- Governmental units. A governmental unit de- clude convalescent homes, homes for children Medical research organization. A medi- scribed in section 170(b)(1)(A)(v) includes a or the aged, or institutions whose principal pur- cal research organization must be directly en- state, a possession of the United States, or a pose or function is to train handicapped individ- gaged in the continuous active conduct of medi- political subdivision of either of the foregoing, or uals to pursue a vocation. An organization that cal research in conjunction with a hospital, and the United States or the District of Columbia. mainly provides medical education or medical that activity must be the organization's principal research won't be considered a hospital, unless purpose or function. Agricultural research organizations. Agri- it is also actively engaged in providing medical cultural research organizations described in or hospital care to patients on its premises or in Endowment funds. Organizations operated section 170(b)(1)(A)(ix) operated in conjunction its facilities, on an in-patient or out-patient ba- for the benefit of certain state and municipal col- with a land-grant college or university or a sis, as an integral part of its medical education leges and universities may be endowment non-land-grant college of agriculture may now or medical research functions. funds described in section 170(b)(1)(A)(iv) . qualify for public charity status. See Instructions A cooperative hospital service organization They are organized and operated exclusively for Form 1023 for more information. to: that meets the requirements of section 501(e) will qualify as a hospital. 1. Receive, hold, invest, and administer Publicly supported organizations. An or- property for a college or university, and ganization is a publicly supported organization if Hospitals participating in provider-spon- it is one that normally receives a substantial part sored organizations. An organization can be 2. Make expenditures to or for the benefit of of its support from a governmental unit or from treated as organized and operated exclusively a college or university. the general public. for a charitable purpose even if it owns and op- The college or university must be: Types of organizations that generally qualify erates a hospital that participates in a pro- are: vider-sponsored organization, whether or not 1. An agency or instrumentality of a state or • Museums of history, art, or science, the provider-sponsored organization is tax ex- political subdivision, or • Libraries, empt. For section 501(c)(3) purposes, any per- 2. Owned or operated by: • Community centers to promote the arts, son with a material financial interest in the pro- • Organizations providing facilities for the vider-sponsored organization is treated as a a. A state or political subdivision, or support of an opera, symphony orchestra, private shareholder or individual with respect to b. An agency or instrumentality of one or ballet, or repertory drama, or for some the hospital. more states or political subdivisions. other direct service to the general public, and Requirements for section 501(c)(3) hos- The phrase “expenditures to or for the bene- pitals under the Affordable Care Act. The • Organizations such as the American Red fit of a college or university” includes expendi- Cross or the United Way. Affordable Care Act (ACA), enacted March 23, tures made for any one or more of the normal 2010, added requirements that hospital organi- functions of a college or university. These ex- zations must satisfy in order to be described in penditures include those for: Qualifying as Publicly Supported section 501(c)(3), as well as reporting and excise taxes. 1. Acquiring and maintaining real property An organization will qualify as publicly suppor- Requirements for Charitable Hospitals. comprising part of the campus area, ted under section 170(b)(1)(A)(vi) if it passes Section 501(r), added to the Code by the ACA, 2. Erecting (or participating in erecting) col- the one-third support test. If it fails that test, it imposes requirements on section 501(c)(3) or- lege or university buildings, may qualify under the facts and circumstances ganizations that operate one or more hospital test. An organization may also qualify as pub- facilities (hospital organizations). Each section 3. Acquiring and maintaining equipment and licly supported under section 509(a)(2). See 501(c)(3) hospital organization is required to furnishings used for, or in conjunction with, Section 509(a)(2) Organizations, later. meet four general requirements on a fa- normal functions of colleges and universi- cility-by-facility basis: ties, One-third support test. An organization will • establish written financial assistance and 4. Libraries, qualify as publicly supported under section emergency medical care policies, 170(b)(1)(A)(vi) if it normally receives at least • limit amounts charged for emergency or 5. Scholarships, and one-third of its total support from governmental other medically necessary care to individu- 6. Student loans. units, from contributions made directly or indi- als eligible for assistance under the hospi- rectly by the general public, or from a combina- tal's FAP, The organization must normally receive a tion of these sources. For a definition of sup- • make reasonable efforts to determine substantial part of its support from the United port, see Support, later. whether an individual is eligible for assis- States or any state or political subdivision, or Definition of normally for one-third sup- tance under the hospital’s FAP before en- from direct or indirect contributions from the port test. An organization will be considered gaging in extraordinary collection actions general public, or from a combination of these as normally meeting the one-third support test against the individual, and sources. under section 170(b)(1)(A)(vi) for its current tax • conduct a community health needs as- Support. Support doesn't include income year and the next tax year if, for the current tax sessment (CHNA) at least once every received in the exercise or performance by the year and the 4 tax years immediately before the three years. (This CHNA requirement is ef- organization of its charitable, educational, or current tax year, the organization meets the fective for tax years beginning after March other purpose or function constituting the basis one-third support test on an aggregate basis. 23, 2012). for exemption. See also Computation period for public support The ACA also added section 4959, which In determining the amount of support re- (Special computation period for new organiza- imposes an excise tax for failure to meet the ceived by an organization for a contribution of tions) later, in this discussion. CHNA requirements, and added reporting property when the value of the contribution by

Page 32 Chapter 3 Section 501(c)(3) Organizations Page 33 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Facts and circumstances test. The facts and long as a sufficient combination of factors exists the public rather than the personal or private in- circumstances test is for organizations failing to to show compliance. terest of a limited number of donors will be con- meet the one-third support test. If your organi- sidered in determining whether the organization zation fails to meet the one-third support test, it Additional requirements (the five public is publicly supported. may still be treated as a publicly supported or- support factors). In addition to the two re- An organization will meet this requirement if ganization described in section 170(b)(1)(A)(vi) quirements of the facts and circumstances test, it has a governing body composed of: if it normally receives a substantial part of its the following five public support factors will be 1. Public officials acting in their public ca- support from governmental units, from direct or considered in determining whether an organiza- pacities, indirect contributions from the general public, or tion is publicly supported. However, an organi- from a combination of these sources. To qual- zation generally doesn't have to satisfy all of the 2. Individuals selected by public officials act- ify, an organization must meet the ten-per- factors. The factors relevant to each case and ing in their public capacities, cent-of-support requirement and the attraction the weight accorded to any one of them may 3. Persons having special knowledge or ex- of public support requirement. These require- differ depending upon the nature and purpose pertise in the particular field or discipline in ments establish, under all the facts and circum- of the organization and the length of time it has which the organization is operating, and stances, that an organization normally receives existed. The combination of factors that an or- a substantial part of its support from govern- ganization normally must meet doesn't have to 4. Community leaders, such as elected or mental units or from direct or indirect contribu- be the same for each 4-year period as long as a appointed officials, members of the clergy, tions from the general public. The organization sufficient combination of factors exists to show educators, civic leaders, or other such also must be in the nature of a publicly suppor- that the organization is publicly supported. persons representing a broad cross-sec- ted organization, taking into account five differ- 1. Percentage of financial support fac- tion of the views and interests of the com- ent factors. See Additional requirements (the tor. When an organization normally receives at munity. five public support factors), later. least 10% but less than one-third of its total sup- In a membership organization, the governing Ten-percent-of-support requirement. port from public or governmental sources, the body also should include individuals elected by The percentage of support normally received by percentage of support received from those a broadly based membership according to the an organization from governmental units, from sources will be considered in determining organization's governing instrument or bylaws. contributions made directly or indirectly by the whether the organization is publicly supported. general public, or from a combination of these As the percentage of support from public or 4. Availability of public facilities or serv- sources must be substantial. An organization governmental sources increases, the burden of ices factor. The fact that an organization gen- won't be treated as normally receiving a sub- establishing the publicly supported nature of the erally provides facilities or services directly for stantial amount of governmental or public sup- organization through other factors decreases, the benefit of the general public on a continuing port unless the total amount of governmental while the lower the percentage, the greater the basis is evidence that the organization is pub- and public support normally received is at least burden. licly supported. Examples are: 10% of the total support normally received by If the percentage of the organization's sup- • A museum or library that is open to the that organization. port from the general public or governmental public, sources is low because it receives a high per- • A symphony orchestra that gives public Attraction of public support require- centage of its total support from investment in- performances, ment. An organization must be organized and come on its endowment funds, the organization • A conservation organization that provides operated in a manner to attract new and addi- will be treated as complying with this factor if educational services to the public through tional public or governmental support on a con- the endowment fund was originally contributed the distribution of educational materials, or tinuous basis. An organization will meet this re- by a governmental unit or by the general public. • An old-age home that provides domiciliary quirement if it maintains a continuous and bona However, if the endowment funds were origi- or nursing services for members of the fide program for solicitation of funds from the nally contributed by a few individuals or mem- general public. general public, community, or membership bers of their families, this fact will increase the The fact that an educational or research institu- group involved, or if it carries on activities de- burden on the organization to establish compli- tion regularly publishes scholarly studies widely signed to attract support from governmental ance with other factors. Facts pertinent to years used by colleges and universities or by mem- units or other charitable organizations descri- before the 4 tax years immediately before the bers of the general public is also evidence that bed in section 509(a)(1). In determining current tax year also may be considered. the organization is publicly supported. whether an organization maintains a continuous Similarly, the following factors are also evi- and bona fide program for solicitation of funds 2. Sources of support factor. If an organi- dence that an organization is publicly suppor- from the general public or community, consider- zation normally receives at least 10% but less ted. ation will be given to whether the scope of its than one-third of its total support from public or fundraising activities is reasonable in light of its governmental sources, the fact that it receives 1. Participating in, or sponsoring, the pro- charitable activities. Consideration also will be the support from governmental units or directly grams of the organization by members of given to the fact that an organization may, in its or indirectly from a representative number of the public having special knowledge or ex- early years of existence, limit the scope of its persons, rather than receiving almost all of its pertise, public officials, or civic or com- solicitation to persons who would be most likely support from the members of a single family, munity leaders. to provide seed money sufficient to enable it to will be considered in determining whether the 2. Maintaining a definitive program by the or- begin its charitable activities and expand its so- organization is publicly supported. In determin- ganization to accomplish its charitable licitation program. ing what is a representative number of persons, consideration will be given to the type of organi- work in the community, such as slum Definition of normally for facts and cir- zation involved, the length of time it has existed, clearance or developing employment op- cumstances test. An organization will nor- and whether it limits its activities to a particular portunities. mally meet the requirements of the facts and community or region or to a special field that 3. Receiving a significant part of its funds circumstances test for its current tax year and can be expected to appeal to a limited number from a public charity or governmental the next tax year if, for the current tax year and of persons. Facts pertinent to years before the 4 agency to which it is in some way held ac- the 4 tax years immediately before the current tax years immediately before the current tax countable as a condition of the grant, con- tax year, the organization meets the ten-per- year also may be considered. tract, or contribution. cent-of-support and the attraction of public support requirements on an aggregate basis and 3. Representative governing body fac- 5. Additional factors pertinent to mem- satisfies a sufficient combination of the factors tor. The fact that an organization has a govern- bership organizations. The following are ad- discussed later. The combination of factors that ing body that represents the broad interests of ditional factors in determining whether a mem- an organization normally must meet doesn't bership organization is publicly supported. have to be the same for each 4-year period as 1. Whether the solicitation for dues-paying members is designed to enroll a

Chapter 3 Section 501(c)(3) Organizations Page 33 Page 34 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

substantial number of persons in the com- will be classified as a public charity for its first 5 the public. The IRS publishes such notices from munity or area, or in a particular profession years, regardless of the public support actually time to time in the Internal Revenue Bulletin, or field of special interest (taking into ac- received during this period. Beginning with the IRS.gov/irb/. Grantor and contributors can also count the size of the area and the nature of organization's sixth tax year, the organization find information about an organization’s exempt the organization's activities). will qualify as publicly supported if it meets the status under section 501(c)(3) and its status as one-third support test or the facts and circum- a public charity or private foundation from Tax- 2. Whether membership dues for individual stances test for its sixth year (based on support Exempt Organization Search. However, a gran- (rather than institutional) members have received in its second through sixth tax years), tor or contributor can’t rely on a detrermination been fixed at rates designed to make or as a carryover for its fifth tax year (based on letter or information on Tax-Exempt Organiza- membership available to a broad cross support received in its first through fifth tax tion Search if the grantor or contributor was re- section of the interested public, rather than years). If the organization is required to file sponsible for, or aware of, the act or failure to to restrict membership to a limited number Form 990 or 990-EZ, it must establish that it act that resulted in the organization's loss of of persons. meets the public support test each year on classification as a publicly supported organiza- 3. Whether the activities of the organization Schedule A (Form 990 or 990-EZ). tion. will be likely to appeal to persons having some broad common interest or purpose, Reasonable expectation of public sup- Support. For purposes of publicly supported such as educational activities in the case port. An organization that can reasonably be organizations, the term support includes (but of alumni associations, musical activities expected to meet the one-third support test or isn't limited to): in the case of symphony societies, or civic the facts and circumstances test during its first 1. Gifts, grants, contributions, or membership affairs in the case of parent-teacher asso- 5 years is one that can show that its organiza- fees, ciations. tional structure, current or proposed programs and activities, and actual or intended method of 2. Net income from unrelated business activ- Special rule. The fact that an organization operation can reasonably be expected to attract ities, whether or not those activities are has normally met the one-third support test re- the type of broadly based support from the gen- carried on regularly as a trade or business, quirements for a current tax year, but is unable eral public, public charities, and governmental normally to meet the requirements for a later tax units that is necessary to meet the public sup- 3. Gross investment income, year, won't in itself prevent the organization port requirements discussed earlier under Qual- 4. Tax revenues levied for the benefit of an from meeting the requirements of the facts and ifying As Publicly Supported. organization and either paid to or spent on circumstances test for the later tax year. Example. Organization Y was formed in behalf of the organization, and Example. X is recognized as an organiza- January 2016 and uses a December 31 tax 5. The value of services or facilities furnished tion described in section 501(c)(3). On the ba- year. After September 9, 2016, and before De- by a governmental unit to an organization sis of support received during tax years 2016, cember 31, 2016, Organization Y filed a Form without charge (except services or facili- 2017, 2018, 2019, and 2020, it meets the 1023 requesting recognition of exemption as an ties generally furnished to the public with- one-third support test for tax year 2020 (the cur- organization described in section 501(c)(3) and out charge). rent tax year). X also meets the one-third sup- in sections 170(b)(1)(A)(vi) and 509(a)(1). In its Amounts that aren't support. The term port test for 2021, as the immediately succeed- application, Organization Y established that it support doesn't include: ing tax year. can reasonably be expected to meet the In tax years 2017, 2018, 2019, 2020, and one-third support test. Organization Y receives 1. Any amount received from the exercise or 2021, in the aggregate, X doesn't receive at a determination letter that it is an organization performance by an organization of the pur- least one-third of its support from governmental described in section 501(c)(3) and sections pose or function constituting the basis for units referred to in section 170(c)(1), from con- 170(b)(1)(A)(vi) and 509(a)(1) effective as of its exemption (in general, these amounts tributions made directly or indirectly by the gen- the date of formation. include amounts received from any activity eral public, or from a combination of these sour- Organization Y is described in sections the conduct of which is substantially rela- ces. X still meets the one-third support test for 170(b)(1)(A)(vi) and 509(a)(1) for its first 5 tax ted to the furtherance of the exempt pur- tax year 2021 based on the aggregate support years (tax years ending December 31, 2016, pose or function, other than through the received for tax years 2016 through 2020. through December 31, 2020). Organization Y production of income), or In tax years 2018, 2019, 2020, 2021, and can qualify as a public charity beginning with 2. Contributions of services for which a de- 2022, in the aggregate, X doesn't receive at the tax year ending December 31, 2020, if Or- duction isn't allowed. least one-third of its support from governmental ganization Y meets the one-third support test or facts and circumstances test for the tax years units referred to in section 170(c)(1), from con- These amounts are excluded from both the nu- ending December 31, 2017, through December tributions made directly or indirectly by the gen- merator and the denominator of the fractions in 31, 2021, or for the tax years ending December eral public, or from a combination of these sour- determining compliance with the one-third sup- 31, 2016, through December 31, 2020. ces. X doesn't meet the one-third support test port test and ten-percent-of-support require- for tax year 2022. Determinations of public support status. ment. The following discusses an exception to Based on the aggregate support and other An organization may request a determination this general rule. factors listed in Regulations section 1.170A-9(f) letter that it is described in section 170(b)(1)(A) Organizations dependent primarily on (3)(iii)(A) through (E) for tax years 2017, 2018, (vi). This request is made on Form 1023 or gross receipts from related activities. Or- 2019, 2020, and 2021, X meets the facts and Form 1023-EZ, or at such other time as the organizations won't satisfy the one-third support circumstances test for tax year 2020 and for tax ganization believes it is described in section test or the ten-percent-of-support requirement if year 2022 (as the immediately succeeding tax 170(b)(1)(A)(vi). The IRS may revoke the sec- they receive: year). Therefore, X is still an organization de- tion 170(b)(1)(A)(vi) determination letter if, on scribed in section 170(b)(1)(A)(vi) for tax year examination, the organization has not met the 1. Almost all support from gross receipts 2022 even though X didn't meet the one-third requirements. The IRS may also revoke the from related activities, and support test for that year. section 170(b)(1)(A)(vi) determination letter if 2. An insignificant amount of support from the organization's application for a determina- governmental units (without regard to Special computation period for new organi- tion contained an omission or inaccurate mate- amounts referred to in (3) in the list of zations (Computation period for public sup- rial information. port). If, at the time of applying for tax-exempt items included in support) and contribu- status, an organization can reasonably be ex- Reliance by grantors or contributors. As tions made directly or indirectly by the pected to meet the one-third support test or the a general rule, grantors or contributors may rely general public. facts and circumstances test during its first 5 tax on a determination that an organization is de- years, the organization will qualify as publicly scribed in section 170(b)(1)(A)(vi) until notice of Example. Z, an organization described in supported for its first 5 years. The organization change of status of the organization is made to section 501(c)(3), is controlled by Thomas Blue, its president. Z received $500,000 during the

Page 34 Chapter 3 Section 501(c)(3) Organizations Page 35 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

current tax year and the 4 tax years immediately received from a governmental unit under cir- Example 1. M, a national foundation for the before its current tax year under a contract with cumstances in which the amount would be trea- encouragement of the musical arts, is a publicly the Department of Transportation, under which ted as a grant will generally constitute support supported organization. George Spruce gives Z engaged in research to improve a particular from a governmental unit. See the discussion of M a donation of $5,000 without imposing any vehicle used primarily by the Federal Govern- Grants, later, under Section 509(a)(2) Organi- restrictions or conditions upon the gift. M later ment. During the same period, the only other zations. makes a $5,000 grant to X, an organization de- support received by Z was $5,000 in small con- voted to giving public performances of chamber tributions primarily from Z's employees and Medicare and Medicaid payments. Medi- music. Since the grant to X is treated as being business associates. The $500,000 is gross re- care and Medicaid payments are received from received from M, it is fully includible in the nu- ceipts from a related activity and not support contracts entered into with state and federal merator of X's support fraction for the tax year from a governmental unit, because the services governmental units. However, payments are of receipt. are provided to serve the direct and immediate made for services already provided to eligible needs of the payor rather than primarily to con- individuals, rather than to encourage or enable Example 2. Assume M is the same organi- fer a direct benefit on the public. Because of an organization to provide services to the pub- zation described in Example 1. Tom Grove this fact, and because Z's contributions from the lic. The individual patient, not a governmental gives M a donation of $10,000, but requires that public are insignificant, Z doesn't meet the unit, actually controls the ultimate recipient of M spend the money to support organizations one-third support test or the ten-percent-of-sup- these payments by selecting the health care or- devoted to the advancement of contemporary port requirement. ganization. As a result, these payments aren't American music. M has complete discretion as For the rules that apply to organizations that considered support from a governmental unit. to the organizations of the type described to fail to qualify as section 509(a)(1) publicly sup- Medicare and Medicaid payments are gross re- which it will make a grant. M decides to make ported organizations because of these provi- ceipts derived from the exercise or performance grants of $5,000 each to Y and Z, both being or- sions, see Section 509(a)(2) Organizations, of exempt activities and, therefore, aren't inclu- ganizations described in section 501(c)(3) and later. See also Gross receipts from a related ac- ded in the term support. devoted to furthering contemporary American tivity in the discussion on section 509(a)(2) or- music. Since the grants to Y and Z are treated ganizations. Support from the general public. In deter- as having been received from M, Y and Z each mining whether the one-third support test or the may include one of the $5,000 grants in the nu- Membership fees. Membership fees are ten-percent-of-support requirement is met, in- merator of its support fraction. Although the included in the term support if they are paid to clude in your computation support from direct or donation to M was conditioned upon the use of provide support for the organization rather than indirect contributions from the general public. the funds for a particular purpose, M was free to to buy admissions, merchandise, services, or This includes contributions from an individual, select the ultimate recipient. the use of facilities. trust, or corporation but only to the extent that the total contributions from the individual, trust, Example 3. N is a national foundation for Support from a governmental unit. For pur- or corporation, during the current tax year and the encouragement of art and is a publicly sup- poses of the one-third support test and the the 4-year period immediately before the cur- ported organization. Grants to N are permitted ten-percent-of-support requirement, the term rent tax year, aren't more than 2% of the organi- to be earmarked for particular purposes. O, support from a governmental unit includes any zation's total support for the same period. which is an art workshop devoted to training amounts received from a governmental unit, in- Thus, a contribution by any one individual young artists and which is claiming status as a cluding donations or contributions and amounts will be included in full in the denominator of the publicly supported organization, persuades C, a received on a contract entered into with a gov- fraction used in the one-third support test or the private foundation, to make a grant of $25,000 ernmental unit for the performance of services, ten-percent-of-support requirement. However, to N. C is a disqualified person with respect to or from a government research grant. However, the contribution will be included in the numera- O. C makes the grant to N with the understand- these amounts aren't support from a govern- tor only to the extent that it isn't more than 2% of ing that N would be bound to make a grant to O mental unit for these purposes if they constitute the denominator. In applying the 2% limit, all in the sum of $25,000, in addition to a matching amounts received from the exercise or perform- contributions made by a donor and by any per- grant of N's funds to O in the sum of $25,000. ance of the organization's exempt functions. son in a special relationship to the donor (cer- Only the $25,000 received directly from N is Any amount paid by a governmental unit to tain Disqualified persons discussed under Ab- considered a grant from N. The other $25,000 is an organization won't be treated as received sence of control by disqualified persons, later) an indirect contribution from C to O and is to be from the exercise or performance of its exempt are considered made by one person. The 2% excluded from the numerator of O's support function if the purpose of the payment is primar- limit doesn't apply to support received from gov- fraction to the extent it exceeds the 2% limit. ily to enable the organization to provide a serv- ernmental units or to contributions from other ice to, or maintain a facility for, the direct benefit publicly supported charities, except as provided Unusual grants. In applying the 2% limit to de- of the public (regardless of whether part of the under Grants from public charities, later. termine whether the one-third support test or expense of providing the service or facility is the ten-percent-of-support requirement is met, Indirect contributions. The term indirect paid for by the public), rather than to serve the exclude contributions that are considered un- contributions from the general public includes direct and immediate needs of the payor. This usual grants from both the numerator and de- contributions received by the organization from includes: nominator of the appropriate percent-of-support organizations (such as publicly supported or- fraction. Generally, unusual grants are substan- 1. Amounts paid to maintain library facilities ganizations) that normally receive a substantial tial contributions or bequests from disinterested that are open to the public, part of their support from direct contributions parties if the contributions: 2. Amounts paid under government pro- from the general public, except as provided un- grams to nursing homes or homes for the der Grants from public charities, next. 1. Are attracted by the publicly supported nature of the organization, aged to provide health care or domiciliary Grants from public charities. Contribu- services to residents of these facilities, tions received from a governmental unit or from 2. Are unusual or unexpected in amount, and and a publicly supported organization (including a 3. Would adversely affect, because of the 3. Amounts paid to child placement or child church that meets the requirements for being size, the status of the organization as nor- guidance organizations under government publicly supported) aren't subject to the 2% limit mally being publicly supported. (The or- programs for services rendered to children unless the contributions represent amounts ei- ganization must otherwise meet the sup- in the community. ther expressly or impliedly earmarked by a do- port test in that year without benefit of the nor to the governmental unit or publicly suppor- grant or contribution.) These payments are mainly to enable the recip- ted organization as being for, or for the benefit ient organization to provide a service or main- of, the particular organization claiming a pub- For a grant (see Grants, later) that meets the retain a facility for the direct benefit of the public, licly supported status. quirements for exclusion, if the terms of the rather than to serve the direct and immediate granting instrument require that the funds be needs of the payor. Furthermore, any amount paid to the recipient organization over a period

Chapter 3 Section 501(c)(3) Organizations Page 35 Page 36 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

of years, the amount received by the organiza- determination will be at the sole discretion of Six contributions (each in excess of tion each year under the terms of the grant may the IRS. $12,000—2% of total support) 6 × 72,000 be excluded for that year. However, no item of Grants and contributions that fail to qualify $12,000 ...... gross investment income (defined under Sec- for exclusion will affect the way the support $202,000 tion 509(a)(2) Organizations, later) may be ex- tests are applied. See Additional requirements cluded under this rule. (the five public support factors), earlier. M's support from governmental units and from If a determination is requested, in addition to direct and indirect contributions from the gen- Characteristics of an unusual grant. A the characteristics listed earlier under Charac- eral public for the 2018 tax year normally ex- grant or contribution will be considered an un- teristics of an unusual grant, the following fac- ceeds one-third of M's total support usual grant if the previous three factors apply tors may be considered by the IRS in determin- ($202,000/$600,000 = 33.67 percent) for the and if it has all of the following characteristics. If ing if the grant or contribution is an unusual applicable period (2015 through 2019). M these factors and characteristics apply, then grant. meets the one-third support test for 2019 and is even without the benefit of an advance ruling, therefore publicly supported for the tax years 1. Whether the contribution was a bequest or grantors or contributors have assurance that 2020 and 2021. they won't be considered responsible for sub- a transfer while living. A bequest will be given more favorable consideration than a stantial and material changes in the organiza- Example 2. N is recognized as an organi- transfer while living. tion's sources of support status. See section zation described in section 501(c)(3). It was 7.08 of Rev. Proc. 2018-32, 2018-23 I.R.B. 739. 2. Whether, before the receipt of the contri- created to maintain public gardens containing 1. The grant or contribution isn't made by a bution, the organization has carried on an botanical specimens and displaying statuary person (or related person) who created active program of public solicitation and and other art objects. The facilities, works of art, the organization or was a substantial con- exempt activities and has been able to at- and a large endowment were all contributed by tributor to the organization before the grant tract a significant amount of public sup- a single contributor. The members of the gov- or contribution. port. erning body of the organization are unrelated to its creator. The gardens are open to the public 3. Whether, before the year of contribution, 2. The grant or contribution isn't made by a without charge and attract many visitors each the organization met the one-third support person (or related person) who is in a po- year. For the current tax year and the 4 tax test without benefit of any exclusions of sition of authority, such as a foundation years preceding the current tax year, 95% of unusual grants. manager, or who otherwise has the ability the organization's total support was received to exercise control over the organization. 4. Whether the organization may reasonably from investment income from its original endow- Similarly, the grant or contribution isn't be expected to attract a significant amount ment. N also maintains a membership society made by a person (or related person) who, of public support after the contribution. that is supported by members of the general because of the grant or contribution, ob- Continued reliance on unusual grants to public who wish to contribute to the upkeep of tains a position of authority or the ability to fund an organization's current operating the gardens by paying a small annual member- otherwise exercise control over the organi- expenses (as opposed to providing new ship fee. Over the 5-year period in question, zation. endowment funds) may be evidence that these fees from the general public constituted 3. The grant or contribution is in the form of the organization can't reasonably be ex- the remaining 5% of the organization's total cash, readily marketable securities, or as- pected to attract future support from the support. Under these circumstances, N doesn't sets that directly further the organization's general public. meet the one-third support test for its current tax year. Furthermore, since only 5% was re- exempt purposes, such as a gift of a paint- 5. Whether the organization has a represen- ceived from the general public, N doesn't satisfy ing to a museum. tative governing body. the 10 percent support limitation under Regula- 4. The donee organization has received a fi- tions section 1.170A-9(f)(3)(i), and therefore nal determination letter classifying it as a Comprehensive Examples doesn't qualify as publicly supported under the publicly supported organization and the facts and circumstances test. Because N has organization is actively engaged in a pro- Example 1. M is recognized as an organi- failed to satisfy the 10 percent support limita- gram of activities in furtherance of its ex- zation described in section 501(c)(3). For the tion, none of the other requirements or factors empt purpose. years 2016 through 2020 (the applicable period in Regulations section 1.170A-9(f)(3)(iii)(A) 5. No material restrictions or conditions have for the tax year 2020 under Regulations section through (E) can be considered in determining been imposed by the grantor or contributor 1.170A-9(f)(3)), M received support (as defined whether N qualifies as a publicly supported or- upon the organization in connection with in paragraphs Regulations section 1.170A-9(f) ganization. For its current tax year, N isn't an or- the grant or contribution. (6) through (8)) of $600,000 from the following ganization described in section 170(b)(1)(A)(vi). sources: 6. If the grant or contribution is intended for Example 3. O, an art museum, is recog- operating expenses, rather than capital Investment Income ...... $300,000 nized as an organization described in section items, the terms and amount of the grant City Y (a governmental unit described in 40,000 501(c)(3). In 1930, O was founded in S City by or contribution are expressly limited to 1 section 170(c)(1)) ...... members of a single family to collect, preserve, year's operating expenses. United Way (an organization described in 40,000 interpret, and display to the public important section 170(b)(1)(A)(vi)) ...... works of art. O is governed by a Board of Trust- Determination request. Before any grant Contributions ...... 220,000 ees that originally consisted almost entirely of or contribution is made, a potential grantee or- Total support ...... $600,000 ganization can request a determination as to members of the founding family. However, whether the grant or contribution may be exclu- since 1945, members of the founding family or ded as an unusual grant. This request can be For tax year 2020, M's public support is compu- persons standing in relationship to the mem- filed by the grantee organization by submitting ted as follows: bers of that family described in section 4946(a) Form 8940, Request for Miscellaneous Deter- (1)(C) through (G) have annually constituted less than one-fifth of the Board of Trustees. The mination, supporting documents described in One-third of total support ...... $200,000 the Instructions to Form 8940, and the appropri- remaining board members are citizens of S City Support from a governmental unit ate user fee. The organization must submit all from a variety of professions and occupations described in section 170(c)(1) ...... $40,000 information necessary to support a determina- who represent the interests and views of the Indirect contributions from the general people of S City in the activities carried on by tion, including information relating to the factors public (United Way) ...... 40,000 the organization rather than the personal or pri- and characteristics listed in the preceding para- Contributions by various donors (no one graphs. If a favorable determination is issued, having made contributions that total more vate interests of the founding family. O solicits the determination can be relied upon by the than $12,000—2% of total support) .... 50,000 contributions from the general public, and for grantor or contributor of the particular contribu- the current tax year and each of the 4 tax years tion in question. The issuance of the immediately preceding the current tax year, O

Page 36 Chapter 3 Section 501(c)(3) Organizations Page 37 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

has received total contributions (in small sums tax year and the 4 immediately preceding tax satisfies Regulations section 1.170A-9(f)(3)(ii). of less than $100, none of which exceeds 2 per- years, as follows. Because of its method of operating, Q also has cent of O's total support for such period) in ex- a greater burden of establishing its publicly sup- cess of $10,000. These contributions from the Contributions ...... $520,000 ported nature. Based on these facts and on Q's general public represent 25 percent of the or- Receipts from performances ...... 100,000 failure to receive favorable consideration under ganization's total support for that 5-year period. $620,000 the remaining factors of Regulations section For the same period, investment income from Less: 1.170A-9(f)(3)(iii), Q doesn't satisfy the facts several large endowment funds has constituted Receipts from performances (excluded, and circumstances test and therefore doesn't 75 percent of O's total support. O expends sub- see Support) ...... 100,000 qualify as a publicly supported organization. stantially all of its annual income for its exempt Total support ...... $520,000 purposes and thus depends on the funds it an- T Community Chest (indirect support from Community Trusts nually solicits from the public as well as its in- the general public) ...... $120,000 vestment income in order to carry out its activi- Two contributions (each over $10,400—2% Community trusts are often established to at- 20,800 ties on a normal and continuing basis and to of total support) 2 × $10,400 ...... tract large contributions of a capital or endow- acquire new works of art. O has, for the entire Total support from general public ...... $140,800 ment nature for the benefit of a particular com- period of its existence, been open to the public munity or area. Often these contributions come and more than 300,000 people (from S City and P's support from the general public, directly and initially from a small number of donors. While elsewhere) have visited the museum in the cur- indirectly, doesn't meet the one-third support the community trust generally has a governing rent tax year and the 4 years immediately pre- test ($140,800/$520,000 = 27% of total sup- body composed of representatives of the partic- ceding the current tax year. port). However, because P receives 27 percent ular community or area, its contributions are of- Under these circumstances, O doesn't meet of its total support from the general public, it ten received and maintained in the form of sep- the one-third support test for its current year be- meets the 10 percent support limitation under arate trusts or funds that are subject to varying cause it has received only 25 percent of its total Regulations section 1.170A-9(f)(3)(i). P also degrees of control by the governing body. support for the applicable 5-year period from meets the requirements of Regulations section the general public. However, under the facts set 1.170A-9(f)(3)(ii). As a result of satisfying these To qualify as a publicly supported organiza- forth, O has met the 10 percent support limita- requirements and factors, P is considered to tion, a community trust must meet the one-third tion under Regulations section 1.170A-9(f)(3)(i), meet the facts and circumstances test and support test, explained earlier under Qualifying as well as the requirements of Regulations sec- therefore qualifies as a publicly supported or- as Publicly Supported. If it can't meet that test, it tion 1.170A-9(f)(3)(ii). Under all of the facts set ganization for its current tax year and the imme- must be organized and operated so as to attract forth, O is considered as meeting the require- diately succeeding tax year. new and additional public or governmental sup- ments of the facts and circumstances test on port on a continuous basis sufficient to meet the the basis of satisfying Regulations section Example 5. Q is recognized as an organi- facts and circumstances test, also explained 1.170A-9(f)(3)(iii)(A) through (D). O is therefore zation described in section 501(c)(3) and it is a earlier. Community trusts are generally able to publicly supported for its current tax year and philanthropic organization. Q was founded in satisfy the attraction of public support require- the immediately succeeding tax year. 1965 by C for the purpose of making annual ment (as contained in the facts and circumstan- contributions to worthy charities. C created Q Example 4. In 1960, the P Philharmonic ces test) if they seek gifts and bequests from a as a charitable trust by transferring $500,000 wide range of potential donors in the community Orchestra was organized in T City by a local worth of appreciated securities to Q. music society and a local women's club to or area served, through banks or trust compa- Under the trust agreement, C and two other nies, through attorneys or other professional present to the public a wide variety of musical family members are the sole trustees of Q and programs intended to foster music appreciation persons, or in other appropriate ways that call are vested with the right to appoint successor attention to the community trust as a potential in the community. P is recognized as an organi- trustees. In each of the current tax year and the zation described in section 501(c)(3). The or- recipient of gifts and bequests made for the 4 tax years immediately preceding the current benefit of the community or area served. A chestra is composed of professional musicians tax year, Q received $12,000 in investment in- who are paid by the association. Twelve per- community trust, however, doesn't have to en- come from its original endowment. Each year Q gage in periodic, community-wide, fundraising formances, open to the public, are scheduled solicits funds by operating a charity ball at C's each year. A small admission charge is made campaigns directed toward attracting a large residence. Guests are invited and asked to number of small contributions in a manner simi- for each of these performances. In addition, make contributions of $100 per couple. During several performances are staged annually with- lar to campaigns conducted by a community the 5-year period involved, $15,000 was re- chest or a united fund. out charge. ceived from the proceeds of these events. C During the current tax year and the 4 tax and his family have also made contributions to Separate trusts or funds. Any community years immediately preceding the current tax Q of $25,000 over the 5-year period at issue. Q trust may be treated as a single entity for public year, P received separate contributions of makes disbursements each year of substan- support purposes, rather than as an aggrega- $200,000 each from A and B (not members of a tially all of its net income to the public charities tion of separate funds, in which case all qualify- single family) and support of $120,000 from the chosen by the trustees. ing funds associated with that organization T Community Chest, a public federated fund- Q's sources of support for the current tax (whether a trust, not-for-profit corporation, unin- raising organization operating in T City. P de- year and the 4 tax years immediately preceding corporated association, or a combination pends on these funds to carry out its activities the current tax year are as follows: thereof) will be treated as component parts of and will continue to depend on contributions of the organization for public support purposes. this type to be made in the future. P has also Investment income ...... $60,000 begun a fundraising campaign in an attempt to Contributions ...... $40,000 Single entity. To be treated as a single en- expand its activities for the coming years. tity for public support purposes, a community Total support ...... $100,000 P is governed by a Board of Directors com- trust must meet all of the following require- posed of five individuals. A faculty member of a Contributions from the general public .... $15,000 ments. local college, the president of a local music so- One contribution (over $2,000—2% of total 1. The organization must be commonly ciety, the head of a local banking institution, a support) 1 × $2,000 ...... 2,000 known as a community trust, fund, founda- prominent doctor, and a member of the govern- Total support from general public ...... $17,000 ing body of the local Chamber of Commerce tion, or other similar name conveying the currently serve on the Board and represent the Q's support from the general public doesn't concept of a capital or endowment fund to interests and views of the community in the ac- meet the one-third support test support charitable activities in the com- tivities carried on by P. ($17,000/$100,000 = 17% of total support). munity or area it serves. For P's current tax year, its sources of sup- Even though it does meet the ten-per- 2. All funds of the organization must be sub- port are computed on the basis of the current cent-of-support requirement, its method of so- ject to a common governing instrument (or licitation makes it questionable whether Q a master trust or agency agreement) that

Chapter 3 Section 501(c)(3) Organizations Page 37 Page 38 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

may be embodied in a single (or several) Section 509(a)(2) Organizations ceives no more than one-third of its support in document(s) containing common lan- each tax year from the total of: guage. Section 509(a)(2) excludes certain types of 1. Gross investment income, and broadly based, publicly supported organiza- 3. The organization must have a common tions from private foundation status. Generally, 2. The excess (if any) of unrelated business governing body (or distribution committee) an organization described in section 509(a)(2) taxable income from unrelated trades or that either directs or, in the case of a fund may also fit the description of a publicly suppor- businesses acquired after June 30, 1975, designated for specified beneficiaries, ted organization under section 509(a)(1). There over the tax imposed on that income. monitors the distribution of all funds exclu- are, however, two basic differences. sively for charitable purposes. The govern- Gross investment income. Gross invest- ing body must have the power in the gov- 1. For section 509(a)(2) organizations, the ment income means the gross amount of in- erning instrument, the instrument of term support includes items of support dis- come from interest, dividends, payments with transfer, the resolutions or bylaws of the cussed earlier (under Support, in the dis- respect to securities loans, rents, and royalties, governing body, a written agreement, or cussion of Section 509(a)(1) Organiza- but it doesn't include any income that would be otherwise— tions) and income from activities directly included in computing tax on unrelated busi- a. To modify any restriction or condition related to their exempt function. This in- ness income from trades or businesses. come isn't included in meeting the support on the distribution of funds for any Definition of normally. Both support tests specified charitable purposes or to test for a publicly supported organization under section 509(a)(1). are computed on the basis of the nature of the specified organizations if in the sole organization's normal sources of support. An or- judgment of the governing body (with- 2. Section 509(a)(2) places a limit on the to- ganization will be considered to have normally out the necessity of the approval of tal gross investment income and unrelated met both tests for its current tax year and the any participating trustee, custodian, or business taxable income (in excess of the tax year immediately following, if it meets those agent), the restriction or condition be- unrelated business tax) an organization tests on the basis of the total support received comes, in effect, unnecessary, inca- may have, while section 509(a)(1) doesn't. for the current tax year and the 4 tax years im- pable of fulfillment, or inconsistent mediately before the current tax year. with the charitable needs of the com- To be excluded from private foundation munity or area served, treatment under section 509(a)(2), an organiza- Computation period for public support. If at b. To replace any participating trustee, tion must meet two support tests. the time of applying for tax-exempt status, an custodian, or agent for breach of fidu- 1. The one-third support test. organization can reasonably be expected to ciary duty under state law, and meet the one-third support test and the 2. The not-more-than-one-third support test. not-more-than-one-third support test during its c. To replace any participating trustee, first 5 tax years, the organization will qualify for etc., for failure to produce a reasona- Both these tests are designed to ensure that classification as a public charity under section ble return of net income over a rea- an organization excluded from private founda- 509(a)(2) for its first 5 years. Beginning with the sonable period of time. (The govern- tion treatment is responsive to the general pub- organization's sixth tax year, the organization ing body will determine what is lic, rather than to the private interests of a limi- will be described in section 509(a)(2) if it meets reasonable.) ted number of donors or other persons. the one-third support test and 4. The organization must prepare periodic fi- not-more-than-one-third support test for its sixth One-third support test. The one-third support nancial reports treating all of the funds that year (based on support received in its second test will be met if an organization normally re- are held by the community trust, either di- through sixth tax years) or as a carryover for its ceives more than one-third of its support in rectly or in component parts, as funds of fifth tax year (based on support received in its each tax year from any combination of: the organization. first through fifth tax years). If the organization is 1. Gifts, grants, contributions, or membership required to file Form 990 or 990-EZ, it must es- A community trust can meet the requirement fees, and tablish that it meets the one-third support test in (3) above even if its exercise of the powers in and not-more-than-one-third support test each (3)(a), (b), or (c) is reviewable by an appropriate 2. Gross receipts from admissions, sales of year on Schedule A (Form 990 or 990-EZ). state authority. merchandise, performance of services, or furnishing facilities in an activity that isn't Reasonable expectation of public sup- Component part. To be treated as a com- an unrelated trade or business, subject to port. An organization that can reasonably be ponent part of a community trust (rather than as certain limits, discussed below under Limit expected to meet the one-third support test and a separate trust or a not-for-profit corporation on gross receipts, later. not-more-than-one-third support test under sec- for public support purposes), a trust or fund: tion 509(a)(2) during its first 5 tax years is one For this purpose, the support must be from 1. Must be created by gift, bequest, legacy, that can show that its organizational structure, permitted sources, which include: devise, or other transfer to a community current or proposed programs and activities, • Section 509(a)(1) organizations, described trust that is treated as a single entity (de- and actual or intended method of operation can earlier, scribed above), and reasonably be expected to attract the type of • Governmental units, described under Sec- broadly based support from the general public, 2. May not be directly or indirectly subjected tion 509(a)(1) Organizations, earlier, and public charities, and governmental units that is by the transferor to any material restriction • Persons other than Disqualified persons necessary to meet these tests. The facts that or condition with respect to the transferred (defined under Section 509(a)(3) Organi- are relevant to this determination and the assets. zations), later. weight accorded each fact may differ from case to case. An organization can't reasonably be Grantors and contributors. Grantors, con- Limit on gross receipts. In computing the expected to meet the one-third support test and tributors, or distributors to a community trust amount of support received from gross receipts the not-more-than-one-third support test when may rely on the public charity status, which the under (2) above, gross receipts from related ac- the facts indicate that an organization is likely organization has claimed in a timely filed notice, tivities received from any person or from any during its first 5 tax years to receive less than on or before the date the IRS informs the public bureau or similar agency of a governmental unit one-third of its support from permitted sources (through such means as publication in the Inter- are includible in any tax year only to the extent or to receive more than one-third of its support nal Revenue Bulletin) that such reliance has ex- the gross receipts aren't more than the greater from gross investment income and unrelated pired. However, if the grantor, contributor, or of $5,000 or 1% of the organization's total sup- business taxable income. distributor acquires knowledge that the IRS has port in that year. All pertinent facts and circumstances are notified the community trust that it has failed to taken into account in determining whether the establish that it is a public charity, then reliance Not-more-than-one-third support test. This organizational structure, programs, or activities, on the claimed status expires at the time such test will be met if an organization normally re- and method of operation of an organization will knowledge is acquired.

Page 38 Chapter 3 Section 501(c)(3) Organizations Page 39 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

give that organization a reasonable expectation Characteristics of an unusual grant. A 1. Whether the contribution was a bequest or that it will meet the support tests. Some perti- grant or contribution will be considered an un- a transfer while living. A bequest will ordi- nent factors considered are: usual grant if the above three factors apply and narily be given more favorable considera- it has all of the following characteristics. If these tion than a transfer while living. 1. Whether the organization has or will have factors and characteristics apply, then even a governing body that is composed of per- 2. Whether, before the contribution, the or- without the benefit of an advance ruling, gran- sons having special knowledge in the par- ganization carried on an actual program of tors or contributors have assurance that they ticular field in which the organization is op- public solicitation and exempt activities won't be considered responsible for an act that erating or of community leaders, such as and was able to attract a significant results in an organization's change of support elected officials, members of the clergy, amount of public support. status. See Rev. Proc. 2018-32, 2018-23 I.R.B. and educators, or, in the case of a mem- 739. 3. Whether the organization may reasonably bership organization, of individuals elec- be expected to attract a significant amount ted under the organization’s governing in- 1. The grant or contribution isn't made by a of public support after the contribution. strument or bylaws by a broadly based person (or related person) who created Continued reliance on unusual grants to membership, the organization or was a substantial con- fund an organization's current operating tributor to the organization before the grant 2. Whether a substantial part of the organiza- expenses can be evidence that the organi- or contribution. tion’s initial funding is to be provided by zation can't attract future support from the the general public, by public charities, or 2. The grant or contribution isn't made by a general public. by government grants rather than by a person (or related person) who is in a po- 4. Whether the organization met the limited number of grantors or contributors sition of authority, such as a foundation one-third support test in the past without who are disqualified persons with respect manager, or who otherwise has the ability the benefit of any exclusions of unusual to the organization, to exercise control over the organization. grants. Similarly, the grant or contribution isn't 3. Whether a substantial proportion of the or- made by a person (or related person) who, 5. Whether the organization has a represen- ganization’s initial funds are placed, or will because of the grant or contribution, ob- tative governing body. remain, in an endowment and whether the tains a position of authority or the ability to investment of those funds is unlikely to re- otherwise exercise control over the organi- Example 1. Y, an organization described in sult in more than one-third of its total sup- zation. section 501(c)(3), was created by Marshall port being received from gross investment Pine, the holder of all the common stock in M income and from unrelated business taxa- 3. The grant or contribution is in the form of corporation, Lisa, Marshall's wife, and Edward ble income in excess of the tax imposed cash, readily marketable securities, or as- Forest, Marshall's business associate. The pur- on that income, sets that directly further the organization's pose of Y was to sponsor and equip athletic exempt purposes, such as a gift of a paint- 4. Whether an organization that carries on teams composed of underprivileged children in ing to a museum. fundraising activities has developed a spe- the community. Each of the three creators cific plan for solicitation of funds on a com- 4. The donee organization has received ei- makes small cash contributions to Y. Marshall, munity or area-wide basis, ther an advance ruling or final determina- Lisa, and Edward have been active participants tion letter classifying it as a publicly sup- in the affairs of Y since its creation. Y regularly 5. Whether an organization that carries on ported organization and, except for an raises small amounts of contributions through community service activities has a specific organization operating under an advance fundraising drives and selling admission to program to carry out its work in the com- ruling or determination letter, the organiza- some of the sponsored sporting events. The op- munity, tion is actively engaged in a program of erations of Y are carried out on a small scale, 6. Whether membership dues for individual activities in furtherance of its exempt pur- usually being restricted to the sponsorship of (rather than institutional) members of an pose. two to four baseball teams of underprivileged organization that carries on education or children. 5. No material restrictions or conditions have other exempt activities for or on behalf of In 2011, M Corporation recapitalizes and been imposed by the grantor or contributor members have been fixed at rates de- creates a first and second class of 6 percent upon the organization in connection with signed to make membership available to a nonvoting preferred stock, most of which is held the grant or contribution. broad cross section of the public rather by Marshall and Lisa. In 2012, Marshall contrib- than to restrict membership to a limited 6. If the grant or contribution is intended for utes 49 percent of his common stock in M to Y. number of persons, and operating expenses, rather than capital Marshall's contribution of M's common stock items, the terms and amount of the grant was substantial and constitutes 90 percent of 7. Whether an organization that provides or contribution are expressly limited to one Y's total support for 2012. A combination of the goods, services, or facilities is or will be re- year's operating expenses. facts and circumstances of the determining fac- quired to make its services, facilities, per- tors preclude Marshall's contribution of M's formances, or products available (regard- Determination request. If there is any common stock in 2012 from being excluded as less of whether a fee is charged) to the doubt that a grant or contribution can be exclu- an unusual grant under Temporary Regulations general public, public charities, or govern- ded as an unusual grant, the grantee organiza- section 1.509(a)-3T(c)(3) for purposes of deter- mental units rather than to a limited num- tion can request a determination by submitting mining whether Y meets the one-third support ber of persons or organizations. Form 8940, Request for Miscellaneous Deter- test under section 509(a)(2). mination, supporting documents described in Unusual grants. An unusual grant can be ex- the Instructions to Form 8940 and the appropri- Example 2. M was organized in 2011 to cluded from the support test computation if it: ate user fee. The IRS has the sole discretion of promote the appreciation of ballet in a particular 1. Was attracted by the publicly supported issuing a determination, but if a favorable deter- region of the United States. Its principal activi- nature of the organization, mination is issued, it can be relied on by the ties consist of erecting a theater for the perform- grantor or contributor for purposes of a charita- ance of ballet and the organization and opera- 2. Was unusual or unexpected in amount, ble contributions deduction and by the organi- tion of a ballet company. M receives a and zation for purposes of the exclusion for unusual determination letter that it is an organization de- 3. Would, because of its size, adversely af- grants. scribed in section 501(c)(3) and that it is a pub- fect the status of the organization as nor- In addition to the characteristics listed lic charity described in section 509(a)(2). The mally meeting the one-third support test. above, the following factors may be considered governing body of M consists of nine prominent (The organization must otherwise meet by the IRS in determining if the grant or contri- unrelated citizens residing in the region who the test in that year without benefit of the bution is an unusual grant. have either an expertise in ballet or a strong in- grant or contribution.) terest in encouraging appreciation of the art form.

Chapter 3 Section 501(c)(3) Organizations Page 39 Page 40 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

In 2012, Z, a private foundation, proposes to Organization Search is only available online at Research leading to the development of tan- make a grant of $500,000 in cash to M to pro- Tax-Exempt Organization Search. However, gible products for the use or benefit of a payor vide sufficient capital for M to commence its ac- this won't apply if the grantor or contributor was generally will be treated as a service provided tivities. Although Albert Cedar, the creator of Z, responsible for, or aware of, the act or failure to to serve the direct and immediate needs of the is one of the nine members of M's governing act that resulted in the organization's loss of payor, while basic research or studies carried body, was one of M's original founders, and classification as a publicly supported organiza- on in the physical or social sciences generally continues to lend his prestige to M's activities tion. will be treated as primarily to confer a direct and fundraising efforts, Albert doesn't, directly benefit upon the general public. or indirectly, exercise any control over M. By Gifts and contributions. Any payment of Medicare and Medicaid payments are gross the close of its first tax year, M also has re- money or transfer of property without adequate receipts from the exercise or performance of an ceived a significant amount of support from a consideration is considered a gift or contribu- exempt function. The individual patient, not a number of smaller contributions and pledges tion. When payment is made or property is governmental unit, actually controls the ultimate from members of the general public. M charges transferred as consideration for admissions, recipient of these payments. Therefore, Medi- admission to the ballet performances to the sales of merchandise, performance of services, care and Medicaid receipts for services provi- general public. or furnishing facilities to the donor, the status of ded to each patient are included as gross re- Although the support received in 2012 won't the payment or transfer under section 170(c) ceipts to the extent they aren't more than the impact M's status as a public charity for its first determines whether and to what extent the pay- greater of $5,000 or 1% of the organization's to- 5 tax years, it will be relevant to the determina- ment or transfer is a gift or contribution as dis- tal support for the tax year. tion of whether M meets the one-third support tinguished from gross receipts from related ac- test under section 509(a)(2) for the 2016 tax tivities. Membership fees distinguished from gross year, using the computation period 2012 The amount includible in computing support receipts. The fact that a membership organi- through 2016. Within the appropriate time- from gifts, grants, or contributions of property or zation provides services, admissions, facilities, frame, M may submit a request for a determina- use of property is the fair market or rental value or merchandise to its members as part of its tion letter that the $500,000 contribution from Z of the property at the date of the gift or contribu- overall activities won't, in itself, result in the qualifies as an unusual grant. tion. classification of fees received from members as Under the above circumstances, even gross receipts subject to the $5,000 or 1% limit though Albert was a founder and member of the Example. P is a local agricultural club and rather than membership fees. However, if an or- governing body of M, M may exclude Z's contri- is an organization described in section 501(c) ganization uses membership fees as a means bution of $500,000 in 2012 as an unusual grant (3). It makes awards at its annual fair for out- of selling admissions, merchandise, services, or under Regulations section 1.509(a)-3T(c)(3) for standing specimens of produce and livestock to the use of facilities to members of the general purposes of determining whether M meets the encourage interest and proficiency by young public who have no common goal or interest one-third support test under section 509(a)(2) people in farming and raising livestock. Most of (other than the desire to buy the admissions, for 2016. these awards are cash or other property dona- merchandise, services, or use of facilities), the ted by local businessmen. When the awards fees aren't membership fees but are gross re- Gifts, contributions, and grants distin- are made, the donors are given recognition for ceipts. their donations by being identified as the donor guished from gross receipts. In determining On the other hand, to the extent the basic of the award. The recognition given to donors is whether an organization normally receives purpose of the payment is to provide support for merely incidental to the making of the award to more than one-third of its support from permit- the organization rather than to buy admissions, worthy youngsters. For these reasons, the don- ted sources, include all gifts, contributions, and merchandise, services, or the use of facilities, ations are contributions. The amount includible grants received from permitted sources in the the payment is a membership fee. numerator of the support fraction in each tax in computing support is equal to the cash con- year. However, gross receipts from admissions, tributed or the fair market value of other prop- Bureau defined. The term bureau or similar sales of merchandise, performance of services, erty on the dates contributed. agency of a governmental unit for determining or furnishing facilities, in an activity that isn't an Grants. Grants often contain certain terms amounts subject to the $5,000 or 1% limit unrelated trade or business, are includible in and conditions imposed by the grantor. Be- means a specialized operating unit of the exec- the numerator of the support fraction in any tax cause of the imposition of terms and conditions, utive, judicial, or legislative branch of govern- year only to the extent that the amounts re- the frequent similarity of public purposes of ment in which business is conducted under cer- ceived from any person or from any bureau or grantor and grantee, and the possibility of bene- tain rules and regulations. Since the term similar agency of a governmental unit aren't fit to the grantor, amounts received as grants for bureau refers to a unit functioning at the operat- more than the greater of $5,000 or 1% of sup- carrying on exempt activities are sometimes dif- ing, as distinct from the policy-making, level of port. ficult to distinguish from amounts received as government, it normally means a subdivision of a department of government. The term wouldn't Determinations of public support status. gross receipts from carrying on exempt activities. usually include those levels of government that An organization may request a determination are basically policy-making or administrative, letter that it is described in section 509(a)(2). In distinguishing the term gross receipts from the term grants, the term gross receipts such as the office of the Secretary or Assistant This request is made on Form 1023 or Form Secretary of a department, but would consist of 1023-EZ, or at such other time as the organiza- means amounts received from an activity that isn't an unrelated trade or business, if a specific the highest operational level under the pol- tion believes it is described in section 509(a)(2). icy-making or administrative levels. The IRS may revoke the section 509(a)(2) de- service, facility, or product is provided to serve Amounts received from a unit functioning at termination letter if, upon examination, the or- the direct and immediate needs of the payor the policy-making or administrative level of gov- ganization has not met the requirements. The rather than primarily to confer a direct benefit on ernment are treated as received from one bu- IRS may also revoke the section 509(a)(2) de- the general public. In general, payments made reau or similar agency of the unit. Units of a termination letter if the organization’s applica- primarily to enable the payor to realize or re- governmental agency above the operating level tion for determination contained an omission or ceive some economic or physical benefit as a are combined and considered a separate bu- inaccurate material information. result of the service, facility, or product obtained will be treated as gross receipts by the payee. reau for this purpose. Thus, an organization that Reliance by grantors or contributors. For example, a profit-making organization, has gross receipts from both a policy-making or Grantors or contributors may rely on a determi- primarily for its own betterment, contracts with a administrative unit and an operational unit of a nation that an organization is described in sec- nonprofit organization for a service from that or- department will be treated as having gross re- tion 509(a)(2) until notice of change of status of ganization. Any payments received by the non- ceipts from two bureaus. For this purpose, the the organization is made to the public (such as profit organization (whether from the profit-mak- Departments of Air Force, Army, and Navy are by publication in the Internal Revenue Bulletin, ing organization or from another nonprofit) for separate departments and each has its own or Tax-Exempt Organization Search, either of similar services are primarily for the benefit of policy-making, administrative, and operating which can be searched at IRS.gov.). See Rev. the payor and are therefore gross receipts, units. Proc. 2018-32, 2018-23 I.R.B. 739. Tax-Exempt rather than grants.

Page 40 Chapter 3 Section 501(c)(3) Organizations Page 41 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example 1. The Bureau for Africa and the Example. X, an organization described in More than one type of relationship may exist Bureau for Latin America are considered sepa- section 501(c)(3), is organized and operated to between a supporting organization and a pub- rate bureaus. Each is an operating unit under provide living facilities for needy widows of de- licly supported organization. Any relationship, the Administrator of the Agency for International ceased servicemen. X charges the widows a however, must ensure that the supporting or- Development, a policy-making official. If an or- small rental fee for the use of the facilities. ganization will be responsive to the needs or ganization had gross receipts from both of Since X is accomplishing its exempt purpose demands of, and will be an integral part of or these bureaus, the amount of gross receipts through the rental of the facilities, the support maintain a significant involvement in, the opera- from each would be subject to the greater of received from the widows is considered gross tions of one or more publicly supported organi- $5,000 or the 1% limit. receipts from a related exempt activity. How- zations. ever, if X rents part of its facilities to persons Example 2. A bureau is an operating unit having no relationship to X's exempt purpose, The Type I and Type II relationships rely on under the administrative office of the Executive the support received from these rentals will be majority control of the governing body of the Director. The subdivisions of the bureau are considered gross investment income or unrela- supporting organization by the publicly suppor- Geographic Areas and Project Development ted business taxable income. ted organization. They have the same rules for Staff. If an organization had gross receipts from meeting the tests under requirement (1) and are these subdivisions, the total gross receipts from Section 509(a)(3) Organizations discussed in Category one, below. The oper- these subdivisions would be considered gross ated in connection with relationship requires receipts from the same bureau and would be Section 509(a)(3) excludes from the definition that the supporting organization be responsive subject to the greater of $5,000 or the 1% limit. of private foundation those organizations that to and have operational relationships with pub- meet all of the three following requirements. licly supported organizations. This third relation- Grants from public charities. For purposes ship has different rules for meeting the require- of the one-third support test, grants received 1. The organization must be organized and ment (1) tests and is discussed separately in from a section 509(a)(1) organization (public operated exclusively for the benefit of, to Category two, later. charity) are generally includible in full in com- perform the functions of, or to carry out the puting the numerator of the support fraction for purposes of one or more specified organi- Supported organizations. Supported organi- that tax year. zations as described in sections 509(a)(1) zations are organizations described in section However, if the amount received is consid- or 509(a)(2). These section 509(a)(1) and 509(a)(1) or 509(a)(2) for whose benefit the ered an indirect contribution from one of the 509(a)(2) organizations are commonly supporting organization is organized and oper- public charity's donors, it will retain its character called publicly supported organizations. ated. A section 501(c)(4), (c)(5), or (c)(6) organ- as a contribution from the donor, and if, for ex- 2. The organization has one of three types of ization that would be described in section ample, the donor is a substantial contributor to relationships with one or more organiza- 509(a)(2) if it were a 501(c)(3) organization may the ultimate recipient, the amount is excluded tions described in sections 509(a)(1) or be treated as a 509(a)(2) organization for pur- from the numerator of the support fraction. If a 509(a)(2). It must be: poses of these rules, and therefore may be a public charity makes both an indirect contribu- supported organization as well, subject to cer- tion from its donor and an additional grant to the a. Operated, supervised, or controlled tain restrictions. See Supporting other than sec- ultimate recipient, the indirect contribution is by one or more section 509(a)(1) or tion 501(c)(3) organizations, later. treated as made first. 509(a)(2) organizations (Type I sup- An indirect contribution is one that is ex- porting organization), Organizations controlled by donors. Gener- ally, if a Type I or Type III supporting organiza- pressly or impliedly earmarked by the donor as b. Supervised or controlled in connection supports an organization that is controlled being for, or for the benefit of, a particular recip- tion with one or more section 509(a) by a donor, the supporting organization is trea- ient rather than for a particular purpose. (1) or 509(a)(2) organizations (Type II ted as a private foundation (rather than as a supporting organization), or Method of accounting. An organization's sup- public charity). Type I and Type III organizations port is determined under the same accounting c. Operated in connection with one or may not accept any gifts or contributions from: more section 509(a)(1) or 509(a)(2) method that it uses in keeping its books and 1. Any person (other than an organization organizations (Type III supporting or- that it otherwise uses to report on its Form 990 described in section 509(a)(1), (2), or (4)) ganization). or 990-EZ, if it is required to file Form 990 or who controls, directly or indirectly, either 990-EZ. For example, if a grantor makes a grant 3. The organization mustn't be controlled di- alone or together with persons listed in (2) to an organization payable over a term of years, rectly or indirectly by disqualified persons or (3) below, the governing body of a sup- the grant will be includible in the support frac- (defined later) other than foundation man- ported organization; tion of the grantee organization under the ac- agers and other than one or more organi- 2. A family member of a person described in counting method it regularly uses in keeping its zations described in section 509(a)(1) or (1), above; or books. 509(a)(2). 3. A 35-percent controlled entity. Gross receipts from a related activity. Section 509(a)(3) differs from the other pro- When the charitable purpose of an organization visions of section 509 that describe a publicly Category one - Type I and Type II support- described in section 501(c)(3) is accomplished supported organization. Instead of describing ing organizations. This category includes or- through furnishing facilities for a rental fee or an organization that conducts a particular kind ganizations either operated, supervised, or con- loans to a particular class of persons, such as of activity or that receives financial support from trolled by (Type I) or supervised or controlled in aged, sick, or needy persons, the support re- the general public, section 509(a)(3) describes connection with (Type II) organizations descri- ceived from those persons will be considered organizations that have established certain rela- bed in section 509(a)(1) or 509(a)(2) (which can gross receipts from a related exempt activity tionships in support of section 509(a)(1) or be either domestic or foreign). rather than gross investment income or unrela- 509(a)(2) organizations. Thus, an organization These kinds of organizations have a govern- ted business taxable income. can qualify as other than a private foundation ing body that either includes a majority of mem- However, if the organization also furnishes even though it may be funded by a single do- bers elected or appointed by one or more pub- facilities or loans to persons who aren't mem- nor, family, or corporation (with certain excep- licly supported organizations (Type I) or that bers of a particular class and furnishing the fa- tions described in Organizations controlled by consists of the same persons that control or cilities or funds doesn't contribute importantly to donors, later). This kind of funding ordinarily manage the publicly supported organizations accomplishing the organization's exempt purpo- would indicate private foundation status, but a (Type II). If an organization is to qualify under ses, the support received from furnishing the fa- section 509(a)(3) organization has limited pur- this category, it also must meet an organiza- cilities or funds will be considered rents or inter- poses and activities and gives up a significant tional test and an operational test, and mustn't est and will be treated as gross investment degree of independence. be controlled by disqualified persons. These re- income or unrelated business taxable income. quirements are covered later in this discussion.

Chapter 3 Section 501(c)(3) Organizations Page 41 Page 42 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Type I - Operated, supervised, or con- For example, articles stating that an organi- its specified supported organizations. These trolled by. The Type I relationship presuppo- zation is formed to perform the publishing func- activities may include making payments to or ses a substantial degree of direction over the tions of a specified university are enough to for the use of, or providing services or facilities policies, programs, and activities of a support- comply with the organizational test. A Type I or for, individual members of the charitable class ing organization by its supported organizations. Type II supporting organization meets these re- benefited by its supported organization(s). The relationship required is comparable to that quirements if the purposes set forth in its arti- For example, a supporting organization may of a parent and subsidiary, in which the subsid- cles are similar to but no broader than the pur- make a payment indirectly through another un- iary is under the direction of, and is accountable poses set forth in the articles of its controlling related organization to a member of a charitable or responsible to, the parent organization. This organizations. However, a Type I or Type II sup- class benefited by a specified publicly suppor- relationship is typically established when the porting organization that supports a publicly ted organization, but only if the payment is a supported organization(s) may regularly appoint supported section 501(c)(4), 501(c)(5), or grant to an individual rather than a grant to an or elect a majority of the directors or trustees of 501(c)(6) organization (see Supporting other organization. Similarly, a supporting organiza- the supporting organization. than section 501(c)(3) organizations, later) tion may support or benefit a section 501(c)(3) meets these requirements if its articles require it organization, other than a private foundation, Type II - Supervised or controlled in to carry on charitable, etc., activities within the that is operated, supervised, or controlled di- connection with. An organization that is su- meaning of section 170(c)(2). rectly by or in connection with its supported or- pervised or controlled in connection with one or ganization(s). However, a supporting organiza- more section 509(a)(1) or 509(a)(2) organiza- Limits. An organization isn't organized ex- tion's activities may not further its purpose other tions is a Type II supporting organization. The clusively for the purposes specified in require- than supporting or benefiting its supported or- control or management of the supporting organ- ment (1) if its articles expressly permit it to oper- ganization(s). ization must be vested in the same persons that ate to support or to benefit any organization control or manage the publicly supported or- other than the specified publicly supported or- Operational test — permissible activi- ganization. In order for an organization to be su- ganizations. It won't meet the organizational test ties. A supporting organization may make pay- pervised or controlled in connection with a sup- even though the actual operations of the organi- ments to its supported organization(s) or to per- ported organization, common supervision or zation have been exclusively for the benefit of missible beneficiaries, or may carry on control by the persons supervising or controlling the specified publicly supported organizations. independent activities or programs that support both organizations must exist to ensure that the or benefit its supported organization(s). All such supporting organization will be responsive to Specified organizations. All supporting support, however, must be limited to permissi- the needs and requirements of the supported organizations must ensure that their supported ble beneficiaries described earlier. The support- organization. This relationship is typically estab- organizations are specified in their articles. ing organization also may engage in fundraising lished when a majority of the directors or trust- However, Type I and Type II supporting organi- activities, such as solicitations, fundraising din- ees of the supporting organization also serve as zations have greater flexibility regarding how ners, and unrelated trade or business, to raise directors or trustees of one or more supported their supported organizations may be “speci- funds for its supported organization(s) or for the organizations. fied”. permissible beneficiaries. Type I and Type II supporting organizations Organizational and operational tests. Like may specify their supported organizations: Absence of control by disqualified persons. all supporting organizations, Type I and II sup- 1. By name, The third requirement an organization must porting organizations must be both organized meet to qualify as a supporting organization re- and operated exclusively for the purposes set 2. By class or purpose designated in a man- quires that the organization not be controlled di- out in requirement (1) at the beginning of this ner sufficient to identify the supported or- rectly or indirectly by one or more disqualified section. If an organization fails to meet either ganizations, or persons (other than foundation managers or the organizational or the operational test, it can't 3. By demonstrating that the supporting or- one or more publicly supported organizations). qualify as a supporting organization. ganization and its supported organiza- Disqualified persons. For the purposes of tion(s) have a historic and continuing rela- Organizational test. An organization is or- the rules discussed in this publication, the fol- tionship, because of which a substantial ganized exclusively for one or more of the pur- lowing persons are considered disqualified per- identity of interests has developed be- poses specified in requirement (1) only if its arti- sons: tween or among the organizations. cles of organization: 1. All substantial contributors to the founda- 1. Limit the purposes of the organization to The articles of a Type I or Type II supporting or- tion. one or more of those purposes, ganization may also: 2. All foundation managers of the foundation. 1. Permit the substitution of one publicly sup- 2. Don’t expressly empower the organization 3. An owner of more than 20% of: to engage in activities that aren't in further- ported organization within a designated ance of those purposes, class for another publicly supported or- a. The total combined voting power of a ganization either in the same or a different corporation that is (during such own- 3. Specify (as explained later under Speci- class designated in the articles, ership) a substantial contributor to the fied organizations) the publicly supported foundation, organizations on whose behalf the organi- 2. Permit the supporting organization to op- zation is operated, and erate for the benefit of new or additional b. The profits interest of a partnership publicly supported organizations of the that is (during such ownership) a sub- 4. Don’t expressly empower the organization same or a different class designated in the stantial contributor to the foundation, to operate to support or benefit any organi- articles, or or zation other than the ones specified in item (3). 3. Permit the supporting organization to vary c. The beneficial interest of a trust or un- the amount of its support among different incorporated enterprise that is (during In meeting the organizational test, the or- publicly supported organizations within the such ownership) a substantial contrib- ganization's purposes as stated in its articles class or classes of organizations designa- utor to the foundation. can be as broad as, or more specific than, the ted by the articles. purposes set forth in requirement (1) at the be- 4. A member of the family of any of the indi- ginning of the discussion of Section 509(a)(3) See also the rules considered under the Organ- viduals just listed. Organizations. Therefore, an organization that izational test, in the later discussion for organi- 5. A corporation of which more than 35% of by the terms of its articles is formed for the ben- zations in Category two - Type III supporting or- the total combined voting power is owned efit of one or more specified publicly supported ganizations.. by persons just listed. organizations will, if it otherwise meets the other Operational test — permissible benefi- 6. A partnership of which more than 35% of requirements, be considered to have met the ciaries. A supporting organization must en- the profits interest is owned by persons organizational test. gage solely in activities that support or benefit described in (1), (2), (3), or (4).

Page 42 Chapter 3 Section 501(c)(3) Organizations Page 43 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

7. A trust, or estate, of which more than 35% organizations. Type I and Type II supporting or- supported organization and the possibility of the beneficial interest is owned by per- ganizations are deemed to accomplish these of its operating for the benefit of other than sons described in (1), (2), (3), or (4). responsiveness and integral part requirements a publicly supported organization is re- by virtue of the control relationships discussed mote, or Remember, however, that foundation man- earlier. However, a Type III supporting organi- 3. Permit the supporting organization to vary agers and publicly supported organizations zation isn't subject to the same level of control the amount of its support between differ- aren't disqualified persons for purposes of this by its supported organization(s). Therefore, ent designated organizations, as long as it control requirement. Type III supporting organizations must pass meets the requirements of the integral-part If a person who is a disqualified person with separate responsiveness and integral part test (discussed later) with respect to at respect to a supporting organization, such as a tests, in addition to the organizational and op- least one beneficiary organization. substantial contributor, is appointed or designa- erational tests applicable to all supporting or- ted as a foundation manager of the supporting ganizations. Type III supporting organizations If the remote possibility referred to in (2) organization by a supported organization to mustn't be controlled by disqualified persons comes to pass and the supporting organization serve as its representative, that person is still a (as described earlier), and may not receive con- thereafter operates for the benefit of an organi- disqualified person. tributions from certain controlling donors (see zation that isn't a publicly supported organiza- An organization is considered controlled for Contributions from controlling donors, later). In tion, it will no longer qualify under section this purpose if the disqualified persons, by com- addition, a Type III supporting organization may 509(a)(3). bining their votes or positions of authority, can not support any organization not organized in require the organization to perform any act that the United States. Operational test. The operational rules de- significantly affects its operations or can pre- Functional Integration. A Type III support- scribed earlier for Type I and Type II supporting vent the organization from performing the act. ing organization may be “functionally-integra- organizations apply as well to Type III support- This includes, but isn't limited to, the right of any ted” or “non-functionally integrated” depending ing organizations (see Operational test - per- substantial contributor or spouse to designate on the manner in which it meets the integral part missible beneficiaries, and Operational test - annually the recipients from among the suppor- test (see Integral part test - functionally-integra- permissible activities, earlier). In addition, a ted organizations of the income from his or her ted, and Integral part test - non-functionally inte- Type III supporting organization must operate in contribution. Except as explained under Proof grated, later). Type III functionally-integrated a manner consistent with the requirements of of independent control, next, a supporting or- supporting organizations are subject to fewer the responsiveness test and the integral part ganization will be considered to be controlled restrictions and requirements than Type III test, discussed later. directly or indirectly by one or more disqualified non-functionally integrated supporting organiza- persons if the voting power of those persons is tions. In particular, distributions from private Responsiveness test. A Type III supporting 50% or more of the total voting power of the or- foundations to Type III non-functionally integra- organization must be responsive to the needs ganization's governing body, or if one or more ted supporting organizations aren't qualifying or demands of its supported organization(s). To of those persons has the right to exercise veto distributions for purposes of satisfying a private meet this test, the supported organizations power over the actions of the organization. foundation's required annual distributions under must (1) elect one or more officers, directors, or Thus, if the governing body of a foundation section 4942, and may be taxable expenditures trustees; (2) have one or more officers, direc- is composed of five trustees, none of whom has under section 4945. tors, or trustees of the supported organiza- a veto power over the actions of the foundation, tion(s) serving simultaneously as officers, direc- and no more than two trustees are at any time Organizational test. The organizational tors, or trustees of the supporting organization; disqualified persons, the foundation isn't con- test for a Type III supporting organization is or (3) maintain a close and continuous working sidered controlled directly or indirectly by one or generally the same as for a Type I or Type II relationship with the officers, directors, or trust- more disqualified persons by reason of this fact supporting organization (described earlier). ees of the supporting organization. In addition, alone. However, all pertinent facts and circum- However, Type III supporting organizations are as a result of this representation or close work- stances (including the nature, diversity, and in- more limited regarding how their supported or- ing relationship, the supported organization(s) come yield of an organization's holdings, the ganizations must be “specified” in their articles. must have a significant voice in the investment length of time particular stocks, securities, or A Type III supporting organization's articles policies of the supporting organization, the tim- other assets are retained, and its manner of ex- must specify its supported organization(s) by ing of grants and the manner of making them, ercising its voting rights with respect to stocks name, or the organization must demonstrate the selection of recipients, and generally the in which members of its governing body also that the supporting organization and its suppor- use of the income or assets of the supporting have some interest) are considered in determin- ted organization(s) have a historic and continu- organization. ing whether a disqualified person does in fact ing relationship, because of which a substantial indirectly control an organization. identity of interests has developed between or Notification requirement. In each tax among the organizations. “Class or purpose” year, the Type III supporting organization Proof of independent control. An organi- designations don't satisfy the organizational test mustn'tify each supported organization of its zation is permitted to establish to the satisfac- for Type III supporting organizations. However, support and provide a copy of the supporting tion of the IRS that disqualified persons don't di- a Type III supporting organization's articles organization's most recently filed Form 990 or rectly or indirectly control it. For example, in the may: 990-EZ and copies of any amendments to its case of a religious organization operated in articles, bylaws, or other governing documents. connection with a church, the fact that the ma- 1. Permit a publicly supported organization jority of the organization's governing body is that is designated by class or purpose Integral part test - functionally integra- composed of lay persons who are substantial rather than by name to be substituted for ted. A Type III supporting organization may contributors to the organization won't disqualify the publicly supported organization or or- satisfy the integral part test as functionally-inte- the organization under section 509(a)(3) if a ganizations designated by name in the ar- grated in one of three ways: representative of the church, such as a bishop ticles, but only if the substitution is condi- or other official, has control over the policies tioned upon the occurrence of an event 1. Engaging in activities substantially all of and decisions of the organization. that is beyond the control of the supporting which directly further the exempt purposes organization, such as loss of exemption, of its supported organization(s) and which, Category two - Type III supporting organi- substantial failure or abandonment of op- but for the supporting organization's in- zations. This category includes organizations erations, or dissolution of the organization volvement, the supported organization operated in connection with one or more organi- or organizations designated in the articles, would normally engage in; zations described in section 509(a)(1) or 509(a) 2. Permit the supporting organization to op- 2. Being the parent of, appointing a majority (2). erate for the benefit of an organization that of the directors or trustees of, and exercis- All supporting organizations must be re- isn't a publicly supported organization, but ing a substantial degree of direction over sponsive to the needs and demands of, and only if the supporting organization is cur- the policies, programs, and activities of its must constitute an integral part of or maintain rently operating for the benefit of a publicly supported organizations; or significant involvement in, their supported

Chapter 3 Section 501(c)(3) Organizations Page 43 Page 44 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

3. Supporting a governmental entity. 1. The supporting organization meets all the by the former organization will be prorated requirements previously specified (the or- among the latter organizations. Direct furtherance activities. For purpo- ganizational tests, the operational test, In determining whether a relationship exists ses of the test in item (1), activities “directly fur- and one of the relationship tests and not between an organization seeking 509(a)(3) sta- ther” a supported organization's exempt purpo- be controlled by disqualified persons). tus (supporting organization) and one or more ses only if conducted by the supporting organizations seeking 509(a)(2) status (benefi- organization itself. Direct furtherance activities 2. The section 501(c)(4), 501(c)(5), or 501(c) ciary organizations) for the purpose of avoiding include holding title to and managing ex- (6) organization would be described in private foundation status, all pertinent facts and empt-use assets, but not fundraising or invest- section 509(a)(2) if it was a charitable or- circumstances will be taken into account. The ing and managing non-exempt-use assets. ganization described in section 501(c)(3). following facts may be used as evidence that Grantmaking may qualify as direct furtherance This provision allows separate charitable such a relationship wasn't established or activities if the requirements of Regulations sec- funds of certain noncharitable organiza- availed of to avoid classification as a private tion 1.509(a)-4(i)(4)(ii)(D) are met. tions to be described in section 509(a)(3) foundation. Integral part test - non-functionally inte- if the noncharitable organizations receive grated. A Type III supporting organization that their support and otherwise operate in the 1. The supporting organization is operated to doesn't satisfy the integral part test as function- manner specified by section 509(a)(2). support or benefit several specified benefi- ally-integrated will still qualify as a Type III ciary organizations. non-functionally integrated supporting organiza- Special rules of attribution. To determine 2. The beneficiary organization has a sub- tion if it satisfies a distribution requirement and whether an organization meets the stantial number of dues-paying members an attentiveness requirement. Alternatively, cer- not-more-than-one-third support test in section who have an effective voice in the man- tain trusts established before November 20, 509(a)(2), amounts received by the organiza- agement of both the supporting and the 1970 may qualify if they meet the requirements tion from an organization that seeks to be a sec- beneficiary organizations. of Regulations section 1.509(a)-4(i)(5)(i)(9). tion 509(a)(3) organization because of its sup- Distribution Requirement. A Type III port of the organization are deemed gross 3. The beneficiary organization is composed non-functionally integrated supporting organiza- investment income (rather than gifts or contribu- of several membership organizations, tion must distribute a certain amount annually to tions) to the extent they are gross investment in- each of which has a substantial number of or for the benefit of its supported organiza- come of the distributing organization. (This rule members, and the membership organization(s). That amount is equal to the greater of also applies to amounts received from a chari- tions have an effective voice in the man- 85% of the organization's adjusted net income table trust, corporation, fund, association, or agement of the supporting and beneficiary and 3.5 percent of the fair market value of the similar organization that is required by its gov- organizations. organization's non-exempt-use assets (with erning instrument or otherwise to distribute, or 4. The beneficiary organization receives a certain adjustments). See Regulations section that normally does distribute, at least 25% of its substantial amount of support from the 1.509(a)-4(i)(5) and (8) for more information re- adjusted net income to the organization, and general public, public charities, or govern- garding the distribution requirement and valua- whose distribution normally comprises at least mental grants. tion of non-exempt-use assets. See Regula- 5% of its adjusted net income.) All income that tions section 1.509(a)-4(i)(6) for more is gross investment income of the distributing 5. The supporting organization uses its funds information regarding what distributions or ex- organization will be considered distributed first to carry on a meaningful program of activi- penditures count towards the distribution re- by that organization. If the supporting organiza- ties to support or benefit the beneficiary quirement. tion makes distributions to more than one or- organization and, if the supporting organi- Attentiveness Requirement. Each year, a ganization, the amount of gross investment in- zation were a private foundation, this use Type III non-functionally integrated supporting come considered distributed will be prorated would be sufficient to avoid the imposition organization must distribute one-third or more among the distributees. of the tax on failure to distribute income. of the amount that it must distribute that year to Also, treat amounts paid by an organization 6. The operations of the beneficiary and sup- one or more supported organizations that are to provide goods, services, or facilities for the porting organizations are managed by dif- attentive to the operations of the supporting or- direct benefit of an organization seeking section ferent persons, and each organization per- ganization and to which the supporting organi- 509(a)(2) status (rather than for the direct bene- forms a different function. zation is responsive. A supported organization fit of the general public) in the same manner as is “attentive” for these purposes if the amount amounts received by the latter organization. 7. The supporting organization isn't able to received by the supported organization from the These amounts will be treated as gross invest- exercise substantial control or influence supporting organization: ment income to the extent they are gross in- over the beneficiary organization because vestment income of the organization spending the beneficiary organization receives sup- 1. Equals at least 10 percent of the suppor- the amounts. An organization seeking section port or holds assets that are disproportion- ted organization's total support for the year 509(a)(2) status must file a separate statement ately large in comparison with the support in question; with its annual information return, Form 990 or received or assets held by the supporting 2. was necessary to avoid interruption of a 990-EZ, listing all amounts received from sup- organization. particular function or activity of the suppor- porting organizations. ted organization; or Effect on 509(a)(3) organizations. If a bene- Relationships created for avoidance purpo- ficiary organization fails to meet either of the 3. was, based on all facts and circumstances ses. If a relationship between an organization support tests of section 509(a)(2) due to these (including evidence of actual attentive- seeking section 509(a)(3) status and an organi- provisions, and the beneficiary organization is ness), a sufficient part of the supported or- zation seeking section 509(a)(2) status is estab- one for whose support the organization seeking ganization's total support to ensure atten- lished or used to avoid classification as a pri- section 509(a)(3) status is operated, then the tiveness. vate foundation with respect to either supporting organization won't be considered to organization, then the character and amount of be operated exclusively to support or benefit Supporting other than section 501(c)(3) or- support received by the section 509(a)(3) or- one or more section 509(a)(1) or 509(a)(2) organizations. An organization operated in con- ganization will be attributed to the section ganizations and therefore wouldn't qualify for junction with a social welfare organization, labor 509(a)(2) organization for purposes of deter- section 509(a)(3) status. or agricultural organization, business league, mining whether the latter meets the support chamber of commerce, or other organization tests under section 509(a)(2). If this type of rela- Request change in public charity classifica- described in section 501(c)(4), 501(c)(5), or tionship is established or used between an or- tion. A section 501(c)(3) tax-exempt organiza- 501(c)(6) may qualify as a supporting organiza- ganization seeking 509(a)(3) status and two or tion seeking to change its public charity classifi- tion under section 509(a)(3) and therefore not more organizations seeking 509(a)(2) status, cation from a section 509(a)(3) supporting be classified as a private foundation if both the the amount and character of support received organization to a section 509(a)(1) or 509(a)(2) following conditions are met. organization must file Form 8940, Request for

Page 44 Chapter 3 Section 501(c)(3) Organizations Page 45 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Miscellaneous Determination. See the Instruc- dures to be followed in determining whether a 2. Minimum investment return. tions to Form 8940 for more information regard- potential grantee is a Type I, Type II or functioning supporting material and applicable user ally integrated Type III supporting organization. Assets test. A private foundation will meet fees. See Notice 2014–4, 2014-2 I.R.B. 274 (exten- the assets test if substantially more than half ded as described in the preamble to the 2015 fi- (65% or more) of its assets are: For more information about applying for sec- nal regulations regarding the distribution re- 1. Devoted directly to the active conduct of tion 501(c)(3) status see Life Cycle of a Private quirement for non-functionally integrated Type its exempt activity, to a functionally related Foundation at IRS.gov. III supporting organizations (T.D. 9746)). business, or to a combination of the two, 2. Stock of a corporation that is controlled by Classification under section 509(a). If an or- Section 509(a)(4) Organizations the foundation (by ownership of at least ganization is described in section 509(a)(1), 80% of the total voting power of all classes and is also described in either Section 509(a)(2) Section 509(a)(4) excludes from classification of stock entitled to vote and at least 80% or Section 509(a)(3), it will be treated as a sec- as private foundations those organizations that of the total shares of all other classes of tion 509(a)(1) organization. The organization qualify under section 501(c)(3) as organized stock) and substantially all (at least 85%) should file Form 8940, Request for Miscellane- and operated for the purpose of testing prod- the assets of which are devoted as provi- ous Determination, if it wishes to receive a letter ucts for public safety. Generally, these organi- ded above, or showing a change in classification. zations test consumer products to determine their acceptability for use by the general public. 3. Any combination of (1) and (2). Reliance by grantors and contributors. Once an organization has received a ruling or This test is intended to apply to organizations Loss of Qualification as Public such as museums and libraries. determination letter classifying it as an organi- Charity zation described in Section 509(a)(1), Section Support test. A private foundation will 509(a)(2), or Section 509(a)(3), the treatment of If your organization ceases to qualify as a public meet the support test if: grants and contributions and the status of gran- charity under section 509(a)(1) – (4), it be- tors and contributors to the organization will 1. Substantially all (at least 85%) of its sup- comes a private foundation. The organization port (other than gross investment income) generally not be affected by reason of a later must file Form 990-PF, Return of Private Foun- revocation by the IRS of the organization's clas- is normally received from the general pub- dation or Section 4947(a)(1) Trust Treated as a sification until the date on which notice of lic and five or more unrelated exempt or- Private Foundation to satisfy its filing obligation. change of status is made to the public (gener- ganizations, The organization can no longer file Form 990, ally by publication in the Internal Revenue Bul- 990-EZ or 990-N. A private foundation retains 2. Not more than 25% of its support (other letin) or another applicable date, if any, speci- that status unless or until it terminates its private than gross investment income) is normally fied in the public notice. In appropriate cases, foundation status under section 507. received from any one exempt organiza- however, the treatment of grants and contribution, and tions and the status of grantors and contributors to an organization described in Section 509(a) Private Operating 3. Not more than 50% of its support is nor- (1), Section 509(a)(2), or Section 509(a)(3) may Foundations mally received from gross investment in- be affected pending verification of the contin- come. ued classification of the organization. Notice to Private foundations are divided into 2 catego- This test is intended to apply to special-purpose this effect will be made in a public announce- ries -- nonoperating private foundations and pri- foundations, such as learned societies and as- ment by the IRS. In these cases, the effect of vate operating foundations. Nonoperating foun- sociations of libraries. grants and contributions made after the date of dations generally accomplish their charitable the announcement will depend on the statutory purpose by making grants to other charities. Endowment test. A foundation will meet qualification of the organization as an organiza- Operating foundations make qualifying distribu- the endowment test if it normally makes qualify- tion described in Section 509(a)(1), Section tions directly for the active conduct of their edu- ing distributions directly for the active conduct 509(a)(2), or Section 509(a)(3). cational, charitable, and religious purposes. of its exempt function of at least two-thirds of its minimum investment return. The preceding paragraph shall not ap- Most of the restrictions and requirements The minimum investment return for any pri- ply if the grantor or contributor: ! that apply to private foundations also apply to vate foundation for any tax year is 5% of the ex- CAUTION private operating foundations. However, there cess of the total fair market value of all assets of 1. Had knowledge of the revocation of the are advantages to being classified as a private the foundation (other than those used directly in ruling or determination letter classifying operating foundation. For example, a private the active conduct of its exempt purpose) over the organization as an organization descri- operating foundation (as compared to a private the amount of indebtedness incurred to acquire bed in section 509(a)(1), 509(a)(2), or foundation) can be the recipient of grants from a those assets. 509(a)(3), or private foundation without having to distribute In determining whether the amount of quali- 2. Was in part responsible for, or was aware the funds received currently within 1 year, and fying distributions is at least two-thirds of the or- of, the act, the failure to act, or the sub- the funds nevertheless may be treated as quali- ganization's minimum investment return, the or- stantial and material change on the part of fying distributions by the donating private foun- ganization isn't required to trace the source of the organization that gave rise to the revo- dation; charitable contributions to a private op- the expenditures to determine whether they cation. erating foundation qualify for a higher charitable were derived from investment income or from deduction limit on the donor's tax return; and contributions. the excise tax on net investment income doesn't This test is intended to apply to organiza- Interim guidance for supporting organiza- apply to an exempt operating foundation (a pri- tions such as research organizations that actions and grantors. Notice 2014-4 provides vate operating foundation that meets certain ad- tively conduct charitable activities but whose further interim guidance for section 509(a)(3) ditional requirements - see Exempt operating personal services are so great in relationship to supporting organizations and their grantors foundations, later). charitable assets that the cost of those services about the application of certain requirements can't be met out of small endowments. A private operating foundation is any private enacted as part of the Pension Protection Act of foundation that meets the assets test, the sup- Exempt operating foundations. The ex- 2006. The notice provides transitional rules for port test, or the endowment test, and makes cise tax on net investment income doesn't apply Type III supporting organizations that want to qualifying distributions directly, for the active to an exempt operating foundation. An exempt qualify as “functionally integrated” because they conduct of its activities for which it was organ- operating foundation for the tax year is any pri- support governmental entities. The notice also ized, of substantially all (85% or more) of the vate foundation that: provides additional interim guidance for private lesser of its: foundations and sponsoring organizations that 1. Is an operating foundation, as described maintain donor-advised funds on the proce- 1. Adjusted net income, or previously,

Chapter 3 Section 501(c)(3) Organizations Page 45 Page 46 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

2. Has been publicly supported for at least 2. Any attempt to influence any legislation Lobbying nontaxable amount. The lob- 10 tax years or was an operating founda- through communication with any member bying nontaxable amount for any organization tion on January 1, 1983, or for its last tax or employee of a legislative body or with for any tax year is the lesser of $1,000,000 or: year ending before January 1, 1983, any government official or employee who 1. 20% of the exempt purpose expenditures may participate in the formulation of legis- 3. Has a governing body that, at all times if the exempt purpose expenditures aren't lation (direct lobbying). during the tax year, is broadly representa- over $500,000, tive of the general public and consists of However, the term attempting to influence legis- 2. $100,000 plus 15% of the excess of the individuals no more than 25% of whom are lation doesn't include the following activities. exempt purpose expenditures over disqualified individuals, and 1. Making available the results of nonparti- $500,000 if the exempt purpose expendi- 4. Doesn't have any officer, at any time dur- san analysis, study, or research. tures are over $500,000 but not over ing the tax year, who is a disqualified indi- $1,000,000, vidual. 2. Examining and discussing broad social, economic, and similar problems. 3. $175,000 plus 10% of the excess of the The foundation must obtain a determination let- exempt purpose expenditures over 3. Providing technical advice or assistance ter from the IRS recognizing this special status $1,000,000 if the exempt purpose expen- (where the advice would otherwise consti- (see Existing organization, later). ditures are over $1,000,000 but not over tute the influencing of legislation) to a gov- $1,500,000, or ernmental body or to a committee or other New organization. If you are applying for subdivision thereof in response to a writ- 4. $225,000 plus 5% of the excess of the ex- recognition of exemption as an organization de- ten request by that body or subdivision. empt purpose expenditures over scribed in section 501(c)(3) and you wish to es- $1,500,000 if the exempt purpose expen- tablish that your organization is a private oper- 4. Appearing before, or communicating with, ditures are over $1,500,000. ating foundation, you should complete Part VII any legislative body about a possible deci- of your exemption application (Form 1023). sion of that body that might affect the exis- The term exempt purpose expenditures Existing organization. If you are an exist- tence of the organization, its powers and means the total of the amounts paid or incurred ing organization seeking reclassification as a duties, its tax-exempt status, or the deduc- (including depreciation and amortization, but private operating foundation or as an exempt tion of contributions to the organization. not capital expenditures) by an organization for operating foundation, you must file Form 8940, the tax year to accomplish its exempt purposes. 5. Communicating with a government official Request for Miscellaneous Determination. In addition, it includes: or employee, other than: 1. Administrative expenses paid or incurred a. A communication with a member or for the organization's exempt purposes, employee of a legislative body (when Lobbying Expenditures and the communication would otherwise In general, if a substantial part of the activities constitute the influencing of legisla- 2. Amounts paid or incurred for the purpose of your organization consists of carrying on tion), or of influencing legislation, whether or not the legislation promotes the organization's propaganda or otherwise attempting to influ- b. A communication with the principal exempt purposes. ence legislation, your organization will not qual- purpose of influencing legislation. ify for exemption under section 501(c)(3). How- Exempt purpose expenditures don't include Also excluded are communications between an ever, a public charity (other than a church, an amounts paid or incurred to or for: integrated auxiliary of a church or of a conven- organization and its bona fide members about tion or association of churches, or a member of legislation or proposed legislation of direct inter- 1. A separate fundraising unit of the organi- an affiliated group of organizations that includes est to the organization and the members, un- zation, or less these communications directly encourage a church, etc.) may elect instead an expendi- 2. One or more other organizations, if the the members to attempt to influence legislation ture test under section 501(h) as an alternative amounts are paid or incurred primarily for or directly encourage the members to urge non- to measure its lobbying activity. Under the Sec- fundraising. tion 501(h) test, the lobbying limit is defined in members to attempt to influence legislation, as terms of expenditures for influencing legislation explained earlier. Grass roots nontaxable amount. The instead of whether lobbying is a substantial part grass roots nontaxable amount for any organi- of the organization's activities. Private founda- Lobbying expenditures limits. If a public zation for any tax year is 25% of the lobbying tions can't make this election. charity makes the election under section 501(h) nontaxable amount for the organization for that to be subject to the lobbying expenditures limits tax year. Making the election. Use Form 5768, Elec- rules (instead of the substantial part of activities tion/Revocation of Election by an Eligible Sec- test), it won't lose its tax-exempt status under Years for which election is effective. Once tion 501(c)(3) Organization To Make Expendi- section 501(c)(3), unless it normally makes: an organization elects to come under these pro- tures To Influence Legislation, to make the • Lobbying expenditures that are more than visions, the election will be in effect for all tax election. The form must be signed and post- 150% of the lobbying nontaxable amount years that end after the date of the election and marked within the first tax year to which it ap- for the organization for each tax year, or begin before the organization revokes this elec- plies. If the form is used to revoke the election, • Grass roots expenditures that are more tion. it must be signed and postmarked before the than 150% of the grass roots nontaxable first day of the tax year to which it applies. amount for the organization for each tax Note. These elective provisions for lobby- Eligible section 501(c)(3) organizations that year. ing activities by public charities don't apply to a have made the election to be subject to the lim- See Tax on excess expenditures to influence church, an integrated auxiliary of a church or of its on lobbying expenditures must use Part II-A legislation, later, in this section. a convention or association of churches, or a of Schedule C (Form 990 or 990-EZ) to figure member of an affiliated group of organizations these limits. Lobbying expenditures. These are any that includes a church, etc., or a private founda- expenditures that are made for the purpose of tion. Moreover, these provisions won't apply to Attempting to influence legislation. At- attempting to influence legislation, as discussed any organization for which an election isn't in ef- tempting to influence legislation, for this pur- earlier under Attempting to influence legislation. fect. pose, means: Grass roots expenditures. This term re- Expenditures of affiliated organizations. If 1. Any attempt to influence any legislation fers only to those lobbying expenditures that two or more section 501(c)(3) organizations are through an effort to affect the opinions of are made to influence legislation by attempting members of an affiliated group of organizations the general public or any segment thereof to affect the opinions of the general public or and at least one of these organizations has (grass roots lobbying), and any segment thereof. made the election regarding the treatment of

Page 46 Chapter 3 Section 501(c)(3) Organizations Page 47 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

certain lobbying expenditures, then the determi- (churches, etc.) that can't make the election dis- that are formed primarily to promote the candi- nation as to whether excess lobbying expendi- cussed earlier. dacy (or prospective candidacy) of an individual tures has been made and the determination as for public office and by organizations that are to whether the expenditure limits, described Tax on disqualifying lobbying expendi- effectively controlled by a candidate and are earlier, has been exceeded by more than 150% tures. The law imposes a tax on certain organi- used primarily to promote that candidate. will be made as though the affiliated group is zations if they no longer qualify under section one organization. 501(c)(3) by reason of having made disqualify- Correction of expenditure. A correction of a political expenditure is the recovery, if possi- If the group has excess lobbying expendi- ing lobbying expenditures. An additional tax ble, of all or part of the expenditure and the es- tures, each organization for which the election may be imposed on the managers of those or- tablishment of safeguards to prevent future po- is effective for the year will be treated as an organizations. litical expenditures. ganization that has excess lobbying expendi- Tax on organization. Organizations that tures in an amount that equals the organiza- lose their exemption under section 501(c)(3) Status after loss of exemption for lobbying tion's proportionate share of the group's excess due to lobbying activities generally will be sub- or political activities. As explained earlier, an lobbying expenditures. Further, if the expendi- ject to an excise tax of 5% of the lobbying ex- organization can lose its tax-exempt status un- ture limits described in this section are excee- penditures. The tax doesn't apply to private der section 501(c)(3) because of lobbying activ- ded by more than 150%, each organization for foundations. Also, the tax doesn't apply to or- ities or participation or intervention in a political which the election is effective for that year will ganizations that have elected the lobbying limits campaign on behalf of or in opposition to a can- lose its tax-exempt status under section 501(c) of section 501(h) or to churches or church-rela- didate for public office. If this happens to an or- (3). ted organizations that can't elect these limits. ganization, it can't later qualify for exemption Two organizations will be considered mem- This tax must be paid by the organization. under section 501(c)(4). bers of an affiliated group of organizations if: Tax on managers. Managers may also be 1. The governing instrument of one of the or- liable for a 5% tax on the lobbying expenditures ganizations requires it to be bound by de- that result in the disqualification of the organiza- cisions of the other organization on legis- tion. For the tax to apply, a manager would lative issues, or have to agree to the expenditures knowing that 2. The governing board of one of the organi- the expenditures were likely to result in the or- zations includes persons who: ganization's not being described in section 4. 501(c)(3). No tax will be imposed if the manag- a. Are specifically designated represen- er's agreement isn't willful and is due to reason- tatives of the other organization or are able cause. members of the governing board, offi- Other Section cers, or paid executive staff members Excise taxes on political expenditures. The of the other organization, and law imposes an excise tax on the political ex- 501(c) b. Have enough voting power to cause penditures of section 501(c)(3) organizations. A or prevent action on legislative issues two-tier tax is imposed on both the organiza- by the controlled organization by com- tions and the managers of those organizations. Organizations bining their votes. Taxes on organizations. An initial tax of Tax on excess expenditures to influence 10% of certain political expenditures is imposed legislation. If an election for a tax year is in ef- on a charitable organization. A second tax of Introduction fect for an organization and that organization 100% of the expenditure is imposed if the politi- This chapter contains specific information for exceeds the lobbying expenditures limits, an cal expenditure that resulted in the imposition of certain organizations described in section excise tax of 25% of the excess lobbying ex- the initial (first-tier) tax isn't corrected within a 501(c), other than those organizations that are penditures for the tax year will be imposed. Ex- specified period. These taxes must be paid by described in section 501(c)(3). Section 501(c) cess lobbying expenditures for a tax year, in the organization. (3) organizations are covered in chapter 3 of this case, means the greater of: Taxes on managers. An initial tax of 21/2% this publication. The Table of Contents at the beginning of 1. The amount by which the lobbying expen- of the amount of certain political expenditures this publication, as well as the Organization ditures made by the organization during (up to $5,000 for each expenditure) is imposed Reference Chart, may help you locate at a the tax year are more than the lobbying on a manager of an organization who agrees to glance the type of organization discussed in this nontaxable amount for the organization for such expenditures knowing that they are politi- chapter. that tax year, or cal expenditures. No tax will be imposed if the manager's agreement wasn't willful and was 2. The amount by which the grass roots ex- due to reasonable cause. A second tax of 50% penditures made by the organization dur- of the expenditures (up to $10,000 for each ex- ing the tax year are more than the grass penditure) is imposed on a manager if he or she 501(c)(4) - Civic Leagues roots nontaxable amount for the organiza- refuses to agree to a correction of the expendi- and Social Welfare tion for that tax year. tures that resulted in the imposition of the initial Eligible organizations that have made the elec- (first-tier) tax. For purposes of these taxes, an Organizations tion to be subject to the limits on lobbying ex- organization manager is generally an officer, di- penditures and that owe the tax on excess lob- rector, trustee, or any employee having author- If your organization isn't organized for profit and bying expenditures (as computed in Part II-A of ity or responsibility concerning the organiza- will be operated primarily to promote social wel- Schedule C (Form 990)) must file Form 4720, tion's political expenditures. These taxes must fare to benefit the community, it may qualify for Return of Certain Excise Taxes Under Chapters be paid by the manager of the organization. exemption under section 501(c)(4). 41 and 42 of the Internal Revenue Code, to re- Political expenditures. Generally, political port and pay the tax. Notice requirement. Every new section expenditures that will trigger these taxes are 501(c)(4) organization must use Form 8976, Organization that no longer qualifies. An amounts paid or incurred by a section 501(c)(3) Notice of Intent to Operate Under Section organization that no longer qualifies for exemp- organization in any participation or intervention 501(c)(4), to provide notice to the Internal Rev- tion under section 501(c)(3) because of sub- in any political campaign for or against any can- enue Service. The organization must file Form stantial lobbying activities won't at any time didate for public office. Political expenditures in- 8976 within 60 days of establishment. Providing thereafter be treated as an organization descri- clude publication or distribution of statements notice on Form 8976 is not a determination that bed in section 501(c)(4). This provision, for these purposes. Political expenditures also the IRS recognizes your organization as exempt however, doesn't apply to certain organizations include certain expenditures by organizations under section 501(c)(4).

Chapter 4 Other Section 501(c) Organizations Page 47 Page 48 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Optional application for recognition of ex- Retirement benefit program. An organization owns and maintains are open to the general emption. Your organization may (but is not re- established by its members that has as its pri- public and not just its own members. It also quired to) file Form 1024-A, Application for Rec- mary activity providing supplemental retirement must show that it doesn't engage in exterior ognition of Exemption under Section 501(c)(4), benefits to its members or death benefits to maintenance of private homes. to apply for recognition of exemption from fed- their beneficiaries doesn't qualify as an exempt A homeowners' association that isn't exempt eral income tax under section 501(c)(4). The social welfare organization. It may qualify under under section 501(c)(4) and that is a condomin- discussion that follows describes the informa- another paragraph of section 501(c) depending ium management association, a residential real tion you must provide when applying. For appli- on all the facts. estate management association, or a timeshare cation procedures, see chapter 1. However, a nonprofit association that is es- association generally can elect under the provi- tablished, maintained, and funded by a local sions of section 528 to receive certain tax bene- To qualify for exemption under section government to provide the only retirement ben- fits that, in effect, permit it to exclude its exempt 501(c)(4), no part of the organization's net earn- efits to a class of employees may qualify as a function income from its gross income. ings can inure to the benefit of any private social welfare organization under section 501(c) shareholder or individual. If the organization (4). Other organizations. Other nonprofit organi- provides an excess benefit to certain persons, zations that qualify as social welfare organiza- an excise tax may be imposed. See Excise tax Tax treatment of donations. Donations to tions include: on excess benefit transactions, under Excess volunteer fire companies are deductible on the • An organization operating an airport that is Benefit Transactions in chapter 5 for more infor- donor's federal income tax return, but only if on land owned by a local government, mation about this tax. made for exclusively public purposes. However, which supervises the airport's operation, contributions to civic leagues or other section and that serves the general public in an Examples. Types of organizations that are 501(c)(4) organizations generally aren't deduc- area with no other airport, considered to be social welfare organizations tible as charitable contributions for federal in- • A community association that works to im- are civic associations and volunteer fire compa- come tax purposes. They may be deductible as prove public services, housing, and resi- nies. trade or business expenses, if ordinary and dential parking; publishes a free commun- necessary in the conduct of the taxpayer's busi- ity newspaper; sponsors a community Nonprofit operation. You must submit evi- ness. However, see Deduction not allowed for sports league, holiday programs, and dence that your organization is organized and dues used for political or legislative activities, meetings; and contracts with a private se- will be operated on a nonprofit basis. However, under 501(c)(6) - Business Leagues, etc. for curity service to patrol the community, such evidence, including the fact that your or- more information. A community association devoted to pre- ganization is organized under a state law relat- • serving the community's traditions, archi- ing to nonprofit corporations, won't in itself es- For more information on social welfare or- tecture, and appearance by representing it tablish a social welfare purpose. ganizations, see Life Cycle of a Social Welfare before the local legislature and administra- Organization. Social welfare. To establish that your organi- tive agencies in zoning, traffic, and parking zation is operated primarily to promote social matters, welfare, you should submit evidence with your Specific Organizations • An organization that tries to encourage in- application showing that your organization will dustrial development and relieve unem- operate primarily to further (in some way) the The following information should be contained ployment in an area by making loans to common good and general welfare of the peo- in the application form and accompanying businesses so they will relocate to the ple of the community (such as by bringing about statements of certain types of civic leagues or area, and civic betterment and social improvements). social welfare organizations. • An organization that holds an annual festi- val of regional customs and traditions. An organization that restricts the use of its facilities to employees of selected corporations Volunteer fire companies. If your organiza- and their guests is primarily benefiting a private tion wishes to obtain exemption as a volunteer group rather than the community. It therefore fire company or similar organization, you should 501(c)(5) - Labor, doesn't qualify as a section 501(c)(4) organiza- submit evidence that its members are actively Agricultural and tion. Similarly, an organization formed to repre- engaged in firefighting and similar disaster as- sent member-tenants of an apartment complex sistance, whether it actually owns the firefight- Horticultural doesn't qualify, since its activities benefit the ing equipment, and whether it provides any as- member-tenants and not all tenants in the com- sistance for its members, such as death and Organizations munity. However, an organization formed to medical benefits in case of injury to them. promote the legal rights of all tenants in a partic- If your organization doesn't have an inde- If you are a member of an organization that ular community may qualify under section pendent social purpose, such as providing rec- wants to obtain recognition of exemption from 501(c)(4) as a social welfare organization. reational facilities for members, it may be ex- federal income tax as a labor, agricultural, or empt under section 501(c)(3). In this event, horticultural organization, you should submit an Political activity. Promoting social welfare your organization should file Form 1023. application on Form 1024. You must indicate in doesn't include direct or indirect participation or your application for exemption and accompany- intervention in political campaigns on behalf of Homeowners' associations. A membership ing statements that no part of the organization's or in opposition to any candidate for public of- organization formed by a real estate developer net earnings will inure to the benefit of any fice. However, if you submit proof that your or- to own and maintain common green areas, member. In addition, you should follow the pro- ganization is organized primarily to promote so- streets, and sidewalks and to enforce cove- cedure for obtaining recognition of exempt sta- cial welfare, it can obtain exemption even if it nants to preserve the appearance of the devel- tus described in chapter 1. Submit any addi- participates legally in some political activity on opment should show that it is operated for the tional information that may be required, as behalf of or in opposition to candidates for pub- benefit of all the residents of the community. described in this section. lic office. See the discussion in chapter 2 under The term community generally refers to a geo- Political Organization Income Tax Return. graphical unit recognizable as a governmental Tax treatment of donations. Contributions to subdivision, unit, or district thereof. Whether a labor, agricultural, and horticultural organiza- Social or recreational activity. If social activi- particular association meets the requirement of tions aren't deductible as charitable contribu- ties will be the primary purpose of your organi- benefiting a community depends on the facts tions on the donor's federal income tax return. zation, you shouldn't file an application for ex- and circumstances of each case. Even if an However, such payments may be deductible as emption as a social welfare organization but area represented by an association isn't a com- business expenses if they are ordinary and nec- you may qualify for exemption as a social club munity, the association can still qualify for ex- essary in the conduct of the taxpayer's trade or described in section 501(c)(7). emption if its activities benefit a community. business. For more information about certain The association should submit evidence that limits affecting the deductibility of these busi- areas such as roadways and park land that it ness expenses, see Deduction not allowed for

Page 48 Chapter 4 Other Section 501(c) Organizations Page 49 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

dues used for political or legislative activities, improvement of marketing or other business interest, the purpose of which is to promote that under 501(c)(6) - Business Leagues, etc. conditions in one or more lines of business, common interest and not to engage in a regular rather than the improvement of production tech- business of a kind ordinarily carried on for profit. niques or the betterment of the conditions of Trade associations and professional associa- Labor Organizations persons engaged in agriculture, the organizations are considered business leagues. tion must qualify for exemption as a business A labor organization is an association of work- league, board of trade, or other organization, as Chamber of commerce. A chamber of com- ers who have combined to protect and promote discussed next in the section on 501(c)(6) or- merce usually is composed of the merchants the interests of the members by bargaining col- ganizations. and traders of a city. lectively with their employers to secure better working conditions, wages, and similar benefits. The primary purpose of exempt agricultural Board of trade. A board of trade often con- and horticultural organizations must be to better sists of persons engaged in similar lines of busi- To show that your organization has the pur- the conditions of those engaged in agriculture pose of a labor organization, you should include ness. For example, a nonprofit organization or horticulture, develop more efficiency in agri- formed to regulate the sale of a specified agri- in your organizing document or accompanying culture or horticulture, or improve the products. statements (submitted with your exemption ap- cultural commodity to assure equal treatment of plication) information establishing that the or- The following list contains some examples producers, warehouse workers, and buyers is a ganization is organized to better the conditions of activities that show an agricultural or horticul- board of trade. of workers, improve the grade of their products, tural purpose. Chambers of commerce and boards of trade usually promote the common economic inter- and develop a higher degree of efficiency in 1. Promoting various cooperative agricul- their respective occupations. In addition, no net ests of all the commercial enterprises in a given tural, horticultural, and civic activities trade community. earnings of the organization can inure to the among rural residents by a state, farm, or benefit of any member. home bureau. Real estate board. A real estate board con- Composition of membership. While a labor 2. Exhibiting livestock, farm products, and sists of members interested in improving the organization generally is composed of employ- other characteristic features of agriculture business conditions in the real estate field. It ees or representatives of the employees (in the and horticulture. isn't organized for profit and no part of the net form of collective bargaining agents) and similar earnings inures to the benefit of any private 3. Testing soil for members and nonmem- employee groups, evidence that an organiza- shareholder or individual. bers of the farm bureau on a cost basis, tion's membership consists mainly of workers the results of the tests and other recom- doesn't in itself indicate an exempt purpose. Professional football leagues. The Internal mendations being furnished to the com- You must show in your application that your or- Revenue Code specifically defines professional munity members to educate them in soil ganization has the purposes described in the football leagues as exempt organizations under treatment. preceding paragraph. These purposes can be section 501(c)(6). They are exempt whether or accomplished by a single labor organization 4. Guarding the purity of a specific breed of not they administer a pension fund for football acting alone or by several organizations acting livestock. players. together through a separate organization. 5. Encouraging improvements in the produc- General purpose. You must indicate in the tion of fish on privately owned fish farms. Benefits to members. The payment by a la- material submitted with your application that bor organization of death, sick, accident, and 6. Negotiating with processors for the price your organization will be devoted to the im- similar benefits to its individual members with to be paid to members for their crops. provement of business conditions of one or funds contributed by its members, if made un- more lines of business as distinguished from der a plan to better the conditions of the mem- For more information on agricultural or horti- the performance of particular services for indi- bers, doesn't preclude exemption as a labor or- cultural organizations, see Life Cycle of an vidual persons. It must be shown that the condi- ganization. However, an organization doesn't Agricultural or Horticultural Organization. tions of a particular trade or the interests of the qualify for exemption as a labor organization if community will be advanced. Merely indicating its primary activity is to provide a strike fund that the name of the organization or the object of the is controlled by private individuals who control- 501(c)(6) - local statute under which it is created isn't led the organization that paid benefits to work- enough to demonstrate the required general ers. Business Leagues, etc. purpose. For more information on labor organizations, If your organization wants to apply for recogni- Line of business. This term generally re- see Life Cycle of a Labor Organization. tion of exemption from federal income tax as a fers either to an entire industry or to all compo- nonprofit business league, chamber of com- nents of an industry within a geographic area. It Agricultural and merce, real estate board, or board of trade, it doesn't include a group composed of busi- Horticultural Organizations should file Form 1024. For a discussion of the nesses that market a particular brand within an procedure to follow, see chapter 1. industry.

Agricultural and horticultural organizations are Your organization must indicate in its appli- Common business interest. A common busi- connected with raising livestock, cultivating cation form and attached statements that no ness interest of all members of the organization land, raising and harvesting crops or aquatic re- part of its net earnings will inure to the benefit of must be established by the application docu- sources, cultivating useful or ornamental plants, any private shareholder or individual and that it ments. and similar pursuits. isn't organized for profit or organized to engage in an activity ordinarily carried on for profit (even Examples. Activities that would tend to il- For the purpose of these provisions, aquatic if the business is operated on a cooperative ba- lustrate a common business interest are: resources include only animal or vegetable life, sis or produces only sufficient income to be but not mineral resources. The term harvesting, 1. Promotion of higher business standards self-sustaining). in this case, includes fishing and related pur- and better business methods and encour- suits. In addition, your organization must be pri- agement of uniformity and cooperation by marily engaged in activities or functions that are a retail merchants association, Agricultural organizations are often de- the basis for its exemption. It must be primarily signed to encourage the development of better 2. Education of the public in the use of credit, supported by membership dues and other in- agricultural and horticultural products through a come from activities substantially related to its 3. Establishment of uniform casualty rates system of awards, using income from entry exempt purpose. and compilation of statistical information fees, gate receipts, and donations to meet the by an insurance rating bureau operated by necessary expenses of upkeep and operation. A business league, in general, is an associa- casualty insurance companies, When the activities are directed toward the tion of persons having some common business

Chapter 4 Other Section 501(c) Organizations Page 49 Page 50 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

4. Establishment and maintenance of the in- to support the promotion, defeat, or repeal of interest in the activities of the organization. For tegrity of a local commercial market, legislation that is of direct interest to the organi- purposes of this requirement, it isn't necessary zation. Any dues or assessments directly rela- that net earnings be actually distributed. Even 5. Operation of a trade publication primarily ted to such activities aren't deductible by the undistributed earnings can benefit members. intended to benefit an entire industry, and taxpayer, since the individuals being contacted, Examples of this include a decrease in mem- 6. Encouragement of the use of goods and who aren't members of the organization, are a bership dues or an increase in the services the services of an entire industry (such as a segment of the general public. club provides to its members without a corre- lawyer referral service whose main pur- sponding increase in dues or other fees paid for pose is to introduce individuals to the use Tax treatment of donations. Contributions to club support. However, fixed-fee payments to of the legal profession in the hope that organizations described in this section aren't members who bring new members into the club they will enter into lawyer-client relation- deductible as charitable contributions on the aren't an inurement of the club's net earnings, if ships on a paying basis as a result). donor's federal income tax return. They may be the payments are reasonable compensation for deductible as trade or business expenses if or- performance of a necessary administrative Improvement of business conditions. dinary and necessary in the conduct of the tax- service. Generally, this must be shown to be the pur- payer's business. pose of the organization. This isn't established For more information on business leagues, Purposes. To show that your organization by evidence of particular services that provide a see Life Cycle of a Business League (Trade possesses the characteristics of a club within convenience or economy to individual members Association) on IRS.gov. the meaning of the exemption law, you should in their businesses, such as advertising that submit evidence with your application that per- carries the name of members, interest-free sonal contact, commingling, and fellowship ex- loans, assigning exclusive franchise areas, op- 501(c)(7) - Social and ist among members. You must show that mem- eration of a real estate multiple listing system, bers are bound together by a common objective or operation of a credit reporting agency. Recreation Clubs of pleasure, recreation, and other nonprofitable purposes. Stock or commodity exchange. A stock or If your club is organized for pleasure, recrea- Fellowship need not be present between commodity exchange isn't a business league, tion, and other similar nonprofitable purposes each member and every other member of a chamber of commerce, real estate board, or and substantially all of its activities are for these club if it is a material part in the life of the organ- board of trade and isn't exempt under section purposes, it should file Form 1024 to apply for ization. A statewide or nationwide organization 501(c)(6). recognition of exemption from federal income that is made up of individual members, but is tax. divided into local groups, satisfies this require- Legislative activity. An organization that is ment if fellowship is a material part of the life of exempt under section 501(c)(6) can work for In applying for recognition of exemption, you each local group. the enactment of laws to advance the common should submit the information described in this The term other nonprofitable purposes business interests of the organization's mem- section. Also see chapter 1 for the procedures means other purposes similar to pleasure and bers. to follow. recreation. For example, a club that, in addition Deduction not allowed for dues used for Typical organizations that should file for rec- to its social activities, has a plan for the pay- political or legislative activities. A taxpayer ognition of exemption as social clubs include: ment of sick and death benefits isn't operating can't deduct the part of dues or other payments • College alumni associations that aren't de- exclusively for pleasure, recreation, and other to a business league, trade association, labor scribed in chapter 3 under Alumni associa- nonprofitable purposes. union, or similar organization that is reported to tion, Limited membership. The membership in the taxpayer by the organization as having been • College fraternities or sororities operating a social club must be limited. To show that your used for any of the following activities. chapter houses for students, organization has a purpose that would charac- • Country clubs, 1. Influencing legislation. terize it as a club, you should submit evidence • Amateur hunting, fishing, tennis, swim- with your application that there are limits on ad- 2. Participating or intervening in a political ming, and other sport clubs, mission to membership consistent with the campaign for, or against, any candidate • Dinner clubs that provide a meeting place, character of the club. for public office. library, and dining room for members, A social club that issues corporate member- • Hobby clubs, 3. Trying to influence the general public, or ship is dealing with the general public in the • Garden clubs, and form of the corporation's employees. Corporate part of the general public, with respect to • Variety clubs. elections, legislative matters, or referen- members of a club aren't the kind of members contemplated by the law. Gross receipts from dums (also known as grass roots lobby- Discrimination prohibited. Your organization ing). these members would be a factor in determin- won't be recognized as tax exempt if its charter, ing whether the club qualifies as a social club. bylaws, or other governing instrument, or any 4. Communicating directly with certain exec- See Gross receipts from nonmembership written policy statement provides for discrimina- utive branch officials to try to influence sources., later. Bona fide individual member- tion against any person on the basis of race, their official actions or positions. ships paid for by a corporation wouldn't have an color, or religion. See Dues Used for Lobbying or Political Activi- effect on the gross receipts source. However, a club that in good faith limits its The fact that a social club may have an as- ties under Required Disclosures in chapter 2 for membership to the members of a particular reli- more information. sociate (nonvoting) class of membership won't gion to further the teachings or principles of that be, in and of itself, a cause for nonrecognition of De minimis exception. In-house expendi- religion and not to exclude individuals of a par- exemption. However, if one membership class tures of $2,000 or less for the year for activities ticular race or color won't be considered as dis- pays substantially lower dues and fees than an- (1) – (4) listed earlier won't prevent a deduction criminating on the basis of religion. Also, the re- other membership class, although both classes for dues if the dues meet all other tests to be striction on religious discrimination doesn't enjoy the same rights and privileges in using deductible as a business expense. apply to a club that is an auxiliary of a fraternal the club facilities, there may be an inurement of beneficiary society (discussed later) if that soci- income to the benefited class, resulting in a de- Grass roots lobbying. A tax-exempt trade ety is described in section 501(c)(8) and ex- nial of the club's exemption. association, labor union, or similar organization empt from tax under section 501(a) and limits is considered to be engaging in grass roots lob- its membership to the members of a particular Support. In general, your club should be bying if it contacts prospective members or religion. supported solely by membership fees, dues, calls upon its own members to contact their em- and assessments. However, if otherwise enti- ployees and customers for the purpose of urg- Private benefit prohibited. No part of the or- tled to exemption, your club won't be disquali- ing such persons to communicate with their ganization's net earnings can inure to the bene- fied because it raises revenue from members elected state or Congressional representatives fit of any person having a personal and private

Page 50 Chapter 4 Other Section 501(c) Organizations Page 51 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

through the use of club facilities or in connec- under section 501(c)(25) organizations) rather Payment of benefits. It isn't essential that tion with club activities. than a social club. every member be covered by the society's program of sick, accident, or death benefits. An or- Business activities. If your club will engage in Tax treatment of donations. Donations to ex- ganization can qualify for exemption if most of business, such as selling real estate, timber, or empt social and recreation clubs aren't deducti- its members are eligible for benefits, and the other products or services, it generally will be ble as charitable contributions on the donor's benefits are paid from contributions or dues denied exemption. However, evidence submit- federal income tax return. paid by those members. ted with your application form that your organi- The benefits must be limited to members zation will provide meals, refreshments, or ser- and their dependents. If members will have the vices related to its exempt purposes only to its 501(c)(8) and ability to confer benefits to other than them- own members or their dependents or guests selves and their dependents, exemption won't won't cause denial of exemption. 501(c)(10) - Fraternal be recognized. Facilities open to public. Evidence that Beneficiary Societies Whole-life insurance. Whole-life insur- your club's facilities will be open to the general and Domestic Fraternal ance constitutes a life benefit under section public (persons other than members or their de- 501(c)(8) even though the policy may contain pendents or guests) may cause denial of ex- Societies investment features such as a cash surrender emption. This doesn't mean, however, that any value or a policy loan. dealing with outsiders will automatically deprive This section describes the information to be a club of exemption. Reinsurance pool. Payments by a frater- provided upon application for recognition of ex- nal beneficiary society into a state-sponsored Gross receipts from nonmembership emption by two types of fraternal societies: ben- reinsurance pool that protects participating in- sources. A section 501(c)(7) organization can eficiary and domestic. The major distinction is surers against excessive losses on major medi- receive up to 35% of its gross receipts, includ- that fraternal beneficiary societies provide for cal health and accident insurance won't pre- ing investment income, from sources outside of the payment of life, sick, accident, or other ben- clude exemption as a fraternal beneficiary its membership without losing its tax-exempt efits to their members or their dependents, society. status. Income from nontraditional business ac- while domestic fraternal societies don't provide tivity with members isn't exempt function in- these benefits but rather devote their earnings come, and thus is included as income from to fraternal, religious, charitable, etc., purposes. Domestic Fraternal Societies sources outside of the membership. Of the 35% The procedures to follow in applying for recog- (501(c)(10)) gross receipts listed above, up to 15% of the nition of exemption are described in chapter 1. gross receipts can be derived from the use of If your organization is controlled by a central A domestic fraternal society, order, or associa- the club's facilities or services by the general organization, you should check with your con- tion must file an application for recognition of public. If an organization has outside income trolling organization to determine whether your exemption from federal income tax on Form that is more than these limits, all the facts and unit has been included in a group exemption let- 1024. The application and accompanying state- circumstances will be taken into account in deter or can be added. If so, your organization ments should establish that the organization: termining whether the organization qualifies for need not apply for individual recognition of ex- 1. Is a domestic fraternal organization organ- exempt status. emption. For more information, see Group Ex- ized in the U.S., emption Letter in chapter 1 of this publication. Gross receipts. Gross receipts, for this 2. Operates under the lodge system, purpose, are receipts from the normal and usual Tax treatment of donations. Donations by an (traditionally conducted) activities of the club. 3. Devotes its net earnings exclusively to reli- individual to a domestic fraternal beneficiary so- These receipts include charges, admissions, gious, charitable, scientific, literary, educa- ciety or a domestic fraternal society operating membership fees, dues, assessments, invest- tional, and fraternal purposes, and under the lodge system are deductible as chari- ment income, and normal recurring capital table contributions only if used exclusively for 4. Doesn’t provide for the payment of life, gains on investments. Receipts don't include in- religious, charitable, scientific, literary, or edu- sick, accident, or other benefits to its itiation fees and capital contributions. Unusual cational purposes or for the prevention of cru- members. amounts of income, such as from the sale of a elty to children or animals. clubhouse or similar facility, aren't included in The organization can arrange with insurance gross receipts or in figuring the percentage companies to provide optional insurance to its limits. Fraternal Beneficiary members without jeopardizing its exempt status. Nontraditional activities. Activities con- Societies (501(c)(8)) ducted by a social club need to further its exempt purposes. Traditional business activities A fraternal beneficiary society, order, or associ- 501(c)(4), 501(c)(9), and are those that further a social club's exempt ation must file an application for recognition of purposes. Nontraditional business activities exemption from federal income tax on Form 501(c)(17) - don't further the exempt purposes of a social 1024. The application and accompanying state- club even if conducted solely on a membership ments should establish that the organization: Employees' basis. Nontraditional business activities are pro- 1. Is a fraternal organization, hibited (subject to an insubstantial, trivial, and Associations 2. Operates under the lodge system or for nonrecurrent test) for businesses conducted the exclusive benefit of the members of a with both members and nonmembers. Exam- This section describes the information to be fraternal organization itself operating un- ples of nontraditional business activities include provided upon application for recognition of ex- der the lodge system, and sale of package liquor, take-out food, and emption by the following types of employees' long-term room rental. 3. Provides for the payment of life, sick, acci- associations: dent, or other benefits to the members of 1. A voluntary employees' beneficiary asso- Fraternity foundations. If your organization is the society, order, or association or their ciation (including federal employees' asso- a foundation formed for the exclusive purpose dependents. ciations) organized to pay life, sick, acci- of acquiring and leasing a chapter house to a dent, and similar benefits to members or local fraternity chapter or sorority chapter main- Lodge system. Operating under the lodge their dependents, or designated beneficia- tained at an educational institution and doesn't system means carrying on activities under a ries, if no part of the net earnings of the as- engage in any social or recreational activities, it form of organization that comprises local sociation inures to the benefit of any pri- may be a title holding corporation (discussed branches, chartered by a parent organization vate shareholder or individual, and later under section 501(c)(2) organizations and and largely self-governing, called lodges, chapters, or the like.

Chapter 4 Other Section 501(c) Organizations Page 51 Page 52 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

2. A supplemental unemployment benefit instrument) by which the organization was cre- organization will pay life, sick, accident, supple- trust whose primary purpose is providing ated; a full description of the benefits available mental unemployment, or other similar benefits. for payment of supplemental unemploy- to participants and the terms and conditions of The benefits can be provided directly by your ment benefits. eligibility for benefits (usually contained in a association or indirectly by your association plan document); and, if providing benefits pur- through the payments of premiums to an insur- Both the application form to file and the in- suant to a collective bargaining agreement, a ance company (or fees to a medical clinic). formation to provide are discussed later under copy of that agreement. Benefits can be in the form of medical, clinical, the section that describes your employee asso- or hospital services, transportation furnished for ciation. Chapter 1 describes the procedures to Note. Under section 4976, the reversion of medical care, or money payments. follow in applying for exemption. funds from a section 501(c)(9) organization to the employer who created the beneficiary asso- Nondiscrimination requirements. An organi- Tax treatment of donations. Donations to ciation may subject the employer to a 100% zation that is part of a plan won't be exempt un- these organizations aren't deductible as charita- penalty excise tax on the amount of the rever- less the plan meets certain nondiscrimination ble contributions on the donor's federal income sion. requirements. However, if the organization is tax return. part of a plan that is a collective bargaining Notice requirement. An organization won't be agreement that was the subject of good faith Local Employees' considered tax exempt under this section un- bargaining between employee organizations Associations (501(c)(4)) less the organization gives notice to the IRS and employers, the plan need not meet these that it is applying for recognition of exempt sta- requirements for the organization to qualify as tus. The organization gives notice by filing Form tax exempt. A local association of employees whose mem- 1024. If the notice isn't given by 15 months after A plan meets the nondiscrimination require- bership is limited to employees of a designated the end of the month in which the organization ments only if both of the following statements person or persons in a particular municipality, was created, the organization won't be exempt are true. and whose income will be devoted exclusively for any period before notice is given. An exten- to charitable, educational, or recreational pur- sion of time for filing the notice can be granted 1. Each class of benefits under the plan is poses. A local employees' association must ap- under the same procedures as those described provided under a classification of employ- ply for recognition of exemption by filing Form for section 501(c)(3) organizations in chapter 3 ees that is set forth in the plan and doesn't 1024-A. The organization must submit evidence under Application for Recognition of Exemption. discriminate in favor of employees who that: are highly compensated individuals. 1. It is of a purely local character, Membership. Membership of a section 501(c) 2. The benefits provided under each class of (9) organization must consist of individuals who benefits don't discriminate in favor of 2. Its membership is limited to employees of are employees and have an employment-rela- highly compensated individuals. a designated person or persons in a par- ted common bond. This common bond can be a ticular locality, and common employer (or affiliated employers), A life insurance, disability, severance pay, or supplemental unemployment compensation 3. Its net earnings will be devoted exclusively coverage under one or more collective bargain- benefit doesn't discriminate in favor of highly to charitable, educational, or recreational ing agreements, membership in a labor union, compensated individuals merely because the purposes. or membership in one or more locals of a national or international labor union. benefits available bear a uniform relationship to A local association of employees that has The membership of an association can in- the total compensation, or the basic or regular established a system of paying retirement or clude some individuals who aren't employees, rate of compensation, of employees covered by death benefits, or both, to its members won't provided they have an employment-related the plan. qualify for exemption since the payment of bond with the employee-members. For exam- If a plan provides a benefit for which there is these benefits isn't considered as being for ple, the owner of a business whose employees a nondiscrimination provision provided under charitable, educational, or recreational purpo- are members of the association can be a mem- Chapter 1 of the Internal Revenue Code as a ses. Similarly, a local association of employees ber. An association will be considered com- condition of that benefit being excluded from that is operated primarily as a cooperative buy- posed of employees if 90% of its total member- gross income, these nondiscrimination require- ing service for its members in order to obtain ship on one day of each quarter of its tax year ments don't apply. The benefit will be consid- discount prices on merchandise, services, and consists of employees. ered nondiscriminatory only if it meets the non- activities doesn't qualify for exemption. discrimination provision of the applicable Code Employees. Employees include individuals section. For example, benefits provided under a who became entitled to membership because medical reimbursement plan would meet the Voluntary Employees' they are or were employees. For example, an nondiscrimination requirements for an associa- Beneficiary Associations individual will qualify as an employee even tion, if the benefits meet the nondiscrimination (501(c)(9)) though the individual is on a leave of absence requirements of section 105(h)(3) and 105(h) or has been terminated due to retirement, disa- (4). bility, or layoff. An application for recognition of exemption as a Generally, membership is voluntary if an af- Excluded employees. Certain employees voluntary employees' beneficiary association firmative act is required on the part of an em- who aren't covered by a plan can be excluded must be filed on Form 1024. The material sub- ployee to become a member. Conversely, from consideration in applying these require- mitted with the application must show that your membership is involuntary if the designation as ments. These include employees: organization: a member is due to employee status. However, 1. Who haven't completed 3 years of service, 1. Is a voluntary association of employees, an association will be considered voluntary if employees are required to be members of the 2. Who haven't attained age 21, 2. Will provide for payment of life, sick, acci- organization as a condition of their employment dent, or other benefits to members or their 3. Who are seasonal or less than half-time and they don't incur a detriment (such as a pay- dependents or designated beneficiaries employees, roll deduction) as a result of their membership. and substantially all of its operations are An employer has not imposed involuntary mem- 4. Who aren't in the plan and who are inclu- for this purpose, and bership on the employee if membership is re- ded in a unit of employees covered by a 3. Won't allow any of its net earnings to inure quired as the result of a collective bargaining collective bargaining agreement if the to the benefit of any private individual or agreement or as an incident of membership in a class of benefits involved was the subject shareholder except in the form of sched- labor organization. of good faith bargaining, or uled benefit payments. Payment of benefits. The information submit- To be complete, an application must include a ted with your application must show that your copy of the document (such as the trust

Page 52 Chapter 4 Other Section 501(c) Organizations Page 53 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

5. Who are nonresident aliens and who re- tus. The organization gives notice by filing Form ceive no earned income from the em- 1024. If the notice isn't given by 15 months after ployer that has United States source the end of the month in which the organization 501(c)(12) - Local income. was created, the organization won't be exempt Benevolent Life for any period before such notice is given. An Highly compensated individual. A highly extension of time for filing the notice is granted Insurance Associations, compensated individual is one who: under the same procedures as those described 1. Owned 5 percent or more of the employer for section 501(c)(3) organizations in chapter 3 Mutual Irrigation and at any time during the current year or the under Application for Recognition of Exemption. Telephone Companies, preceding year, Types of payments. You must show that the and Like Organizations 2. Received more than $120,000 in compen- supplemental unemployment compensation sation from the employer for the preceding benefits will be benefits paid to an employee Each of the following organizations apply for year (the amount is annualized for infla- because of the employee's involuntary separa- tion. Go to IRS.gov, and search “Pension recognition of exemption from federal income tion from employment (whether or not the sepa- tax by filing Form 1024. Plan Limitation” for the year), and ration is temporary) resulting directly from a re- 3. Was among the top 20% of employees by duction-in-force, discontinuance of a plant or 1. Benevolent life insurance associations of a compensation for the preceding year. operation, or other similar conditions. In addi- purely local character and like organization, sickness and accident benefits (but not va- tions. However, the employer can choose not to have cation, retirement, or death benefits) may be in- 2. Mutual ditch or irrigation companies and (3) apply. cluded in the plan if these are subordinate to like organizations. the unemployment compensation benefits. Aggregation rules. The employer can 3. Mutual or cooperative telephone compa- choose to treat two or more plans as one plan Diversion of funds. It must be impossible un- nies and like organizations. for purposes of meeting the nondiscrimination der the plan (at any time before the satisfaction requirements. Employees of controlled groups A like organization is an organization that per- of all liabilities with respect to employees under of corporations, trades, or businesses under forms a service comparable to that performed the plan) to use or to divert any of the corpus or common control, or members of an affiliated by any one of the above organizations. income of the trust to any purpose other than service group, are treated as employees of a the payment of supplemental unemployment single employer. Leased employees are treated The information to be provided upon appli- compensation benefits (or sickness or accident as employees of the recipient. cation by each of these organizations is descri- benefits to the extent just explained). bed in this section. For information as to the One employee. A trust created to provide ben- procedures to follow in applying for exemption, Discrimination in benefits. Neither the terms efits to one employee won't qualify as a volun- see chapter 1. of the plan nor the actual payment of benefits tary employees' beneficiary association under can be discriminatory in favor of the company's section 501(c)(9). General requirements. These organizations officers, stockholders, supervisors, or highly must use their income solely to cover losses paid employees. However, a plan isn't discrimi- and expenses, with any excess being returned Supplemental natory merely because benefits bear a uniform to members or retained to cover future losses Unemployment Benefit relationship to compensation or the rate of com- and expenses. They must collect at least 85% Trusts (501(c)(17)) pensation. of their income from members for the sole purpose of meeting losses and expenses. Prohibited transactions and exemption. If A trust or trusts forming part of a written plan your organization is a supplemental unemploy- Mutual character. These organizations, other (established and maintained by an employer, ment benefit trust and has received a denial of than benevolent life insurance associations, his or her employees, or both) providing solely exemption because it engaged in a prohibited must be organized and operated on a mutual or for the payment of supplemental unemployment transaction, as defined by section 503(b), it can cooperative basis. They are associations of compensation benefits must file the application file a claim for exemption in any tax year follow- persons or organizations, or both, banded to- for recognition of exemption on Form 1024. The ing the tax year in which the notice of denial gether to provide themselves a mutually desira- trust must be a valid, existing trust under local was issued. It must file the claim on Form 1024. ble service approximately at cost and on a mu- law and must be evidenced by an executed The organization must include a written decla- tual basis. To maintain the mutual characteristic document. A conformed copy of the plan of ration that it won't knowingly again engage in a of democratic ownership and control, they must which the trust is a part should be attached to prohibited transaction. An authorized principal be so organized and operated that their mem- the application. officer of your organization must make this dec- bers have the right to choose the management, laration under the penalties of perjury. to receive services at cost, to receive a return of To be complete, an application must include If your organization has satisfied all require- any excess of payments over losses and ex- a copy of the document (such as the trust in- ments as a supplemental unemployment bene- penses, and to share in any assets upon disso- strument) by which the organization was cre- fit trust described in section 501(c)(17), it will be lution. ated; a full description of the benefits available notified in writing that it has been recognized as The rights and interests of members in the to participants and the terms and conditions of exempt. However, the organization will be ex- annual savings of the organization must be de- eligibility for benefits (usually contained in a empt only for those tax years after the tax year termined in proportion to their business with the plan document); and, if providing benefits pur- in which the claim for exemption (Form 1024) is organization. Upon dissolution, gains from the suant to a collective bargaining agreement, a filed. Tax year in this case means the estab- sale of appreciated assets must be distributed copy of that agreement. lished annual accounting period of the organi- to all persons who were members during the zation or, if the organization has not established period the assets were owned by the organiza- Note. Under section 4976, the reversion of an annual accounting period, the calendar year. tion in proportion to the amount of business funds from a section 501(c)(17) organization to For more information about the requirements for done during that period. The bylaws mustn't the employer who created the supplemental un- reestablishing an exemption previously denied, provide for forfeiture of a member's rights and employment benefit trust may subject the em- contact the IRS. interest upon withdrawal or termination. ployer to a 100% penalty excise tax on the amount of the reversion. Membership. Membership of a mutual organization consists of those who join the organ- Notice requirement. An organization won't be ization to obtain its services, and have a voice considered tax exempt under this section unin its management. In a stock company, the less the organization gives notice to the IRS stockholders are members. However, a mutual that it is applying for recognition of exempt sta-

Chapter 4 Other Section 501(c) Organizations Page 53 Page 54 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

life insurance organization can't have policy- clude from the computation of the 85% require- The term rental, for this purpose, includes holders other than its members. ment any income received or accrued from: any sale of the right to use the pole (or other structure). Losses and expenses. In furnishing serv- 1. Qualified pole rentals, The 85% requirement is applied on the ba- ices substantially at cost, an organization must 2. Any provision or sale of electric energy sis of an annual accounting period. Failure of an use its income solely for paying losses and ex- transmission services or ancillary service if organization to meet the requirement in a partic- penses. Any excess income not retained in rea- the services are provided on a nondiscri- ular year precludes exemption for that year, but sonable reserves for future losses and expen- minatory open access basis under an has no effect upon exemption for years in which ses belongs to members in proportion to their open access transmission tariff approved the 85% requirement is met. patronage or business done with the organiza- or accepted by the Federal Energy Regu- tion. If such patronage refunds are retained in latory Commission (FERC) or under an in- Gain from the sale or conversion of the or- reasonable amounts for purposes of expanding dependent transmission provider agree- ganization's property isn't considered an and improving facilities, retiring capital indebt- ment approved or accepted by FERC amount received from members in determining edness, acquiring other assets, and unexpec- (other than income received or accrued di- whether the organization's income consists of ted expenses, the organization must maintain rectly or indirectly from a member), amounts collected from members. records sufficient to reflect the equity of each member in the assets acquired with the funds. 3. The provision or sale of electric energy Because the 85% income test is based on distribution services or ancillary services if gross income, capital losses can't be used to Distributions of proceeds. The coopera- the services are provided on a nondiscri- reduce capital gains for purposes of this test. tive may distribute the unexpended balance of minatory open-access basis to distribute collections or assessments remaining on hand electric energy not owned by the mutual or Example. The books of an organization re- at the end of the year to members or patrons electric cooperative company: flect the following for the calendar year. prorated on the basis of their patronage or busi- a. To end-users who are served by dis- ness done with the cooperative. Such distribu- Collections from members ...... $2,400 tribution facilities not owned by the tion represents a refund in the costs of services Short-term capital gains ...... 600 rendered to the member. company or any of its members (other Short-term capital losses ...... 400 than income received or accrued di- Other income ...... None rectly or indirectly from a member), or Gross income ($2,400 + $600 =$3000) ..... 100% The 85% Requirement Collected from members ($2,400) ...... 80% b. Generated by a generation facility not All of the organizations listed above must sub- owned or leased by the company or Since amounts collected from members mit evidence with their application that they re- any of its members and which is di- don't constitute at least 85% of gross income, ceive 85% or more of their gross income from rectly connected to distribution facili- the organization isn't entitled to exemption from their members for the sole purpose of meeting ties owned by the company or any of federal income tax for the year. losses and expenses. Nevertheless, certain its members (other than income re- Voluntary contributions in the nature of gifts items of income are excluded from the compu- ceived or accrued directly or indirectly aren't taken into account for purposes of the tation of the 85% requirement if the organization from a member), 85% computation. is a mutual or cooperative telephone or electric 4. Any nuclear decommissioning transaction, Other tax-exempt income besides gifts is company. or considered as income received from other than members in applying the 85% test. Mutual or cooperative telephone company. 5. Any asset exchange or conversion trans- If the 85% test isn't met, your organization, if A mutual or cooperative telephone company will action. classifiable under this section, won't qualify for exclude from the computation of the 85% re- 6. Grants, contributions, and assistance pro- exemption as any other type of organization de- quirement any income received or accrued vided under the Robert T. Stafford Disas- scribed in this publication. from: ter Relief and Emergency Assistance Act Tax treatment of donations. Donations to an 1. A nonmember telephone company for the or by local, state, or regional governmental organization described in this section aren't de- performance of communication services entities for disasters or emergencies; and ductible as charitable contributions on the do- involving the completion of long distance certain grants or contributions provided by nor's federal income tax return. calls to, from, or between members of the a government entity for electric, communi- mutual or cooperative telephone com- cations, broadband, internet, or other util- Government Grants. In the past, government pany, ity facilities or services. This is effective for taxable years beginning after December grants were not treated as income but as contri- 2. Qualified pole rentals, 31, 2017. butions to capital. Under the Tax Cuts & Jobs Act, Pub. L. No. 115-97 § 13312, section 118 3. The sale of display listings in a directory An electric cooperative's sale of excess fuel was amended so that government grants may furnished to its members, or at cost in the year of purchase isn't income for no longer be treated as capital contributions. In 4. The prepayment of a loan created in 1987, purposes of determining compliance with the 2019, Pub. L. No. 116-94 amended section 1988, or 1989, under section 306A, 306B, 85% requirement. 501(c)(12) to exclude from the 85% require- or 311 of the Rural Electrification Act of ment certain government grants for assistance 1936. Qualified pole rental. The term qualified to mutual and cooperative telephone and elec- pole rental means any rental of a pole (or other tric companies. 5. Grants, contributions, and assistance pro- structure used to support wires) if the pole (or vided under the Robert T. Stafford Disas- other structure) is used: ter Relief and Emergency Assistance Act Local Life Insurance or by local, state, or regional governmental 1. By the telephone or electric company to Associations entities for disasters or emergencies; and support one or more wires that are used certain grants or contributions provided by by the company in providing telephone or electric services to its members, and A benevolent life insurance association or an a government entity for electric, communi- organization seeking recognition of exemption cations, broadband, internet, or other util- 2. Pursuant to the rental to support one or on grounds of similarity to a benevolent life in- ity facilities or services. This is effective for more wires (in addition to wires described surance association must submit evidence taxable years beginning after December in (1)) for use in connection with the trans- upon applying for recognition of exemption that 31, 2017. mission by wire of electricity or of tele- it will be of a purely local character, that its ex- phone or other communications. cess funds will be refunded to members or re- Mutual or cooperative electric company. A tained in reasonable reserves to meet future mutual or cooperative electric company will ex- losses and expenses, and that it meets the 85% income requirement. If an organization issues

Page 54 Chapter 4 Other Section 501(c) Organizations Page 55 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

policies for stipulated cash premiums, or if it re- in the net earnings of a tax-exempt cemetery quires advance deposits to cover the cost of the company or crematorium. Therefore, if property insurance and maintains investments from 501(c)(13) - Cemetery is transferred to the organization in exchange which more than 15% of its income is derived, it Companies for an interest in the organization's net earnings, won't be entitled to exemption. the organization won't be exempt so long as that interest remains outstanding. If your organization wishes to obtain recognition To establish that your organization is of a An equity interest in the organization is an of exemption from federal income tax as a cem- purely local character, it should show that its ac- interest in the net earnings of the organization. etery company or a corporation chartered solely tivities will be confined to a particular commun- However, an interest in the organization that for the purpose of the disposal of human bodies ity, place, or district irrespective of political sub- isn't an equity interest may still be an interest in by burial or cremation, it must file an application divisions. If the activities of an organization are the organization's net earnings. For example, a on Form 1024. For the procedure to follow to limited only by the borders of a state, it can't be bond issued by a cemetery company that pro- file an application, see Application, Approval, purely local in character. A benevolent life insur- vides for a fixed rate of interest and also pro- and Appeal Procedures in chapter 1. ance association that doesn't terminate mem- vides for additional interest payments based on bership when a member moves from the local the income of the organization is considered an area in which the association operates will qual- A nonprofit mutual cemetery company that seeks recognition of exemption should submit interest in the net earnings of the organization. ify for exemption if it meets the other require- Similarly, a convertible debt obligation issued ments. evidence with its application that it is owned and operated exclusively for the benefit of its lot after July 7, 1975, is considered an interest in A copy of each type of policy issued by your owners who hold lots for bona fide burial purpo- the net earnings of the organization. organization should be included with the appli- ses and not for purposes of resale. A mutual Perpetual care organization. A perpetual cation for recognition of exemption. cemetery company that also engages in chari- care organization, including, for example, a table activities, such as the burial of paupers, trust organized to receive, maintain, and admin- Organizations similar to local benevolent will be regarded as operating within this stan- ister funds that it receives from a nonprofit life insurance companies. These organiza- dard. The fact that a mutual cemetery company tax-exempt cemetery under state law and con- tions include those that in addition to paying limits its membership to a particular class of in- tracts, can apply for recognition of exemption death benefits also provide for the payment of dividuals, such as members of a family, won't on Form 1024, even though it doesn't own the sick, accident, or health benefits. However, an affect its status as mutual so long as all the land used for burial. However, the income from organization that pays only sick, accident, or other requirements of section 501(c)(13) are these funds must be devoted exclusively to the health benefits, but not life insurance benefits, met. perpetual care and maintenance of the non- isn't an organization similar to a benevolent life profit cemetery as a whole. Also, no part of the insurance association and shouldn't apply for If your organization is a nonprofit corporation chartered solely for the purpose of the dis- net earnings can inure to the benefit of any pri- recognition of exemption as described in this vate shareholder or individual. section. posal of human bodies by burial or cremation, you should show that it isn't permitted by its In addition, a perpetual care organization Burial and funeral benefit insurance or- charter to engage in any business not necessa- not operated for profit, but established as a civic ganization. This type of organization can ap- rily incident to that purpose. Operating a mortu- enterprise to maintain and administer funds, the ply for recognition of exemption as an organiza- ary isn't permitted. However, selling monu- income of which is devoted exclusively to the tion similar to a benevolent life insurance ments, markers, vaults, and flowers solely for perpetual care and maintenance of an aban- company if it establishes that the benefits are use in the cemetery is permitted if the profits doned cemetery as a whole, may qualify for ex- paid in cash and if it isn't engaged directly in the from these sales are used to maintain the cem- emption. manufacture of funeral supplies or the perform- etery as a whole. Care of individual plots. When funds are ance of funeral services. An organization that received by a cemetery company for the perpet- provides its benefits in the form of supplies and How income can be used. You should show ual care of an individual lot or crypt, a trust is service isn't a life insurance company. Such an that your organization's earnings are or will be created that is subject to federal income tax. organization can seek recognition of exemption used only in one or more of the following ways. Any trust income that is used or permanently from federal income tax, however, as a mutual set aside for the care, maintenance, or beautifi- insurance company other than life. 1. To pay the ordinary and necessary expenses of operating, maintaining, and improv- cation of a particular family burial lot or mauso- ing the cemetery or crematorium. leum crypt isn't deductible in computing the Mutual or Cooperative trust's taxable income. Associations 2. To buy cemetery property. 3. To create a fund that will provide a source Common and preferred stock. A cemetery Mutual ditch or irrigation companies, mutual or of income for the perpetual care of the company that issues common stock can qualify cooperative telephone companies, and like or- cemetery or a reasonable reserve for any for exemption only if no dividends may be paid. ganizations need not establish that they are of a ordinary or necessary purpose. The payment of dividends must be legally pro- purely local character. They can serve noncon- hibited either by the corporation's charter or by No part of the net earnings of your organiza- tiguous areas. applicable state law. tion can inure to the benefit of any private Generally, a cemetery company or cremato- Like organization. A like organization is a shareholder or individual. rium isn't exempt if it issues preferred stock. cooperative or mutual organization that per- However, it can still be exempt if the preferred Ordinary and necessary expenses in con- forms a service similar to mutual ditch, irriga- stock was issued before November 28, 1978, or nection with the operation, management, main- tion, telephone, or electric companies. Exam- was issued after that date under a written plan tenance, and improvement of the cemetery are ples include the following: cooperatives that adopted before that date. The adoption of the permitted, as are reasonable fees for the serv- provide protection of river banks to prevent ero- plan must be shown by the acts of the responsi- ices of a manager. sion, water and sewer services, cable televi- ble officers and appear on the official records of sion, satellite, television, cellular phone serv- Buying cemetery property. Payments the organization. ices, two-way radio service, or natural gas can be made to amortize debt incurred to buy The preferred stock issued either before No- services. land, but can't be in the nature of profit distribu- vember 28, 1978, or under a plan adopted be- tions. You must show the method used to fi- fore that date, must meet all the following re- nance the purchase of the cemetery property quirements. and that the purchase price of the land at the 1. The preferred stock entitles the holders to time of its sale to the cemetery wasn't unrea- dividends at a fixed rate that isn't more sonable. than the greater of the legal rate of interest Except for holders of preferred stock (dis- in the state of incorporation or 8% a year cussed later), no person can have any interest

Chapter 4 Other Section 501(c) Organizations Page 55 Page 56 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

on the value of the consideration for which Similar organizations, formed before Septem- clare that the above information is a true state- the stock was issued. ber 1, 1957, that provide reserve funds for (but ment of facts concerning the credit union. not insurance of shares or deposits in) one of 2. The organization's articles of incorporation the types of savings institutions described in Signature of Officer Title require: (1), (2), or (3) above may be exempt from tax if a. That the preferred stock be retired at 85% or more of the organization's income is par as rapidly as funds become avail- from providing reserve funds and from invest- Other Mutual able from operations, and ments. There is no specific restriction against Financial Organizations b. That all funds not required for the pay- the issuance of capital stock for these ment of dividends on or for the retire- organizations. Every other organization included in this section ment of preferred stock be used by Building and loan associations, savings and must show in its application the state in which the company for the care and im- loan associations, mutual savings banks, and the organization is incorporated and the date of provement of the cemetery property. cooperative banks, other than those described incorporation; the character of the organization; in this section, aren't exempt from tax. How- the purpose for which it was organized; its ac- Tax treatment of donations. Donations to ex- ever, certain corporations organized and oper- tual activities; the sources of its receipts and the empt cemetery companies, corporations char- ated in conjunction with farmers' cooperatives disposition thereof; whether any of its income tered solely for human burial purposes, and can be exempt under section 521. may be credited to surplus or may benefit any perpetual care funds (operated in connection private shareholder or individual; whether the with such exempt organizations) are deductible Application form. The IRS doesn't provide a law relating to loans, investments, and divi- as charitable contributions on the donor's fed- printed application form for the use of organiza- dends is being complied with; and, in general, eral income tax return. However, a donor can't tions described in section 501(c)(14). Any form all facts relating to its operations that affect its deduct a contribution made for the perpetual of written application is acceptable as long as it right to exemption. care of a particular lot or crypt. Payments made shows the information indicated in this section to a cemetery company or corporation as part of and includes a declaration that it is made under The application must include detailed infor- the purchase price of a burial lot or crypt, the penalties of perjury. The application must mation showing either that the organization pro- whether irrevocably dedicated to the perpetual be submitted in duplicate. vides both reserve funds for and insurance of care of the cemetery as a whole or earmarked shares and deposits of its member financial or- for the care of a particular lot, are also not de- ganizations or that the organization provides re- ductible. State-Chartered Credit Unions serve funds for shares or deposits of its members and 85% or more of the organization's 501(c)(14) - Credit Your organization must show on its application income is from providing reserve funds and that it is formed under a state credit union law, from investments. There should be attached a Unions and Other Mutual the state and date of incorporation, and that the conformed copy of the articles of incorporation state credit union law with respect to loans, in- or other document setting forth the permitted Financial Organizations vestments, and dividends, if any, your organiza- powers or activities of the organization; the by- tion is operated in compliance with. laws or other similar code of regulations; and If your organization wants to obtain recognition the latest annual financial statement showing A form of statement furnished to applicants of exemption as a credit union without capital the receipts, disbursements, assets, and liabili- by the Credit Union National Association is ac- stock, organized and operated under state law ties of the organization. ceptable in meeting the application require- for mutual purposes and without profit, it must ments for credit unions, and may be used in- file an application that includes the facts, infor- stead of the statement form of application just mation, and attachments described in this sec- 501(c)(19) - Veterans' described. The following is a reproduction of tion. In addition, it should follow the procedures that form. for filing an application described in Application Organizations Procedures in chapter 1. Claim for Exemption from Federal Income A post or organization of past or present mem- Federal credit unions organized and oper- Tax (Date) The undersigned bers of the Armed Forces of the United States ated in accordance with the Federal Credit Un- (Complete name) Credit Union, must file Form 1024 to apply for recognition of ion Act, as amended, are instrumentalities of Inc., (Complete address, includ- exemption from federal income tax. You should the United States and, therefore, are exempt ing street and number), a credit union operating follow the general procedures outlined in chap- under section 501(c)(1). They are included in a under the credit union law of the State of ter 1. The organization must also meet the qual- group exemption letter issued to the National , claims exemption from federal ifications described in this section. Credit Union Administration. They aren't dis- income tax and supplies the following informa- cussed in this publication. tion relative to its operation. Examples of groups that qualify for exemp- State-chartered credit unions and other mu- 1. Date of incorporation . tion are posts or auxiliaries of the American Le- tual financial organizations file applications for gion, Veterans of Foreign Wars, and similar or- recognition of exemption from federal income 2. It was incorporated under the credit union ganizations. tax under section 501(c)(14). The other mutual law of the State of , and is financial organizations must be corporations or being operated under uniform bylaws To qualify for recognition of exemption, your associations without capital stock organized be- adopted by said state. application should show: fore September 1, 1957, and operated for mu- 3. In making loans, the state credit union law 1. That the post or organization is organized tual purposes and without profit to provide re- requirements, including their purposes, in the United States or any of its posses- serve funds for, and insurance of, shares or security, and rate of interest charged sions, deposits in: thereon, are complied with. 2. That at least 75% of the members are past 1. Domestic building and loan associations, 4. Its investments are limited to securities or present members of the U.S. Armed 2. Cooperative banks (without capital stock) which are legal investments for credit un- Forces and that at least 97.5% of all mem- organized and operated for mutual purpo- ions under the state credit union law. bers of the organization are past or ses and without profit, 5. Its dividends on shares, if any, are distrib- present members of the U.S. Armed Forces, cadets (including only students in 3. Mutual savings banks (not having capital uted as prescribed by the state credit un- college or university ROTC programs or at stock represented by shares), or ion law. armed services academies) or spouses, 4. Mutual savings banks described in section I, the undersigned, a duly authorized officer of widows, widowers, ancestors, or lineal de- 591(b). the Credit Union, Inc., de- scendants of any of those listed here, and

Page 56 Chapter 4 Other Section 501(c) Organizations Page 57 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

3. That no part of net earnings inure to the sion similar to charitable organizations. c. To pay the administrative and other benefit of any private shareholder or (See Articles of Organization in chapter 3 incidental expenses of that trust (in- individual. of this publication.) cluding legal, accounting, actuarial, and trustee expenses) in connection 2. The corpus or income can't be diverted or In addition to these requirements, a veter- with the operation of the trust and pro- used other than for: ans' organization also must be operated exclu- cessing of black lung claims against sively for one or more of the following purposes. a. The funding of a veterans' organiza- such person arising under federal or 1. To promote the social welfare of the com- tion, described in this section, state statutes, and munity (that is, to promote in some way b. Religious, charitable, scientific, liter- d. To pay accident and health benefits or the common good and general welfare of ary, or educational purposes or for the insurance premiums and other admin- the people of the community). prevention of cruelty to children or an- istrative expenses for retired coal min- 2. To assist disabled and needy war veter- imals, or ers and their spouses. The amount of assets available for such use is gener- ans and members of the U.S. Armed c. An insurance set aside. Forces and their dependents and the wid- ally limited to 110% of the present ows and orphans of deceased veterans. 3. The trust income isn't unreasonably accu- value of the liability for black lung mulated and, if the trust or foundation isn't benefits. 3. To provide entertainment, care, and assis- an insurance set aside, a substantial por- 2. No part of its assets can be used for, or di- tance to hospitalized veterans or members tion of the income is in fact distributed to verted to, any purposes other than: of the U.S. Armed Forces. the parent organization or for the purposes 4. To carry on programs to perpetuate the described in item 2(b). a. The purposes described in 1, memory of deceased veterans and mem- 4. It is organized exclusively for one or more b. Payments into the Black Lung Disabil- bers of the Armed Forces and to comfort of the purposes listed earlier in this section ity Trust Fund or into the general fund their survivors. that are specifically applicable to the pa- of the U.S. Treasury (other than in sat- 5. To conduct programs for religious, charita- rent organization. isfaction of any tax or other civil or ble, scientific, literary, or educational pur- criminal liability of the person who es- poses. Tax treatment of donations. Donations to tablished or contributed to the trust), war veterans' organizations are deductible as c. Investment in public debt securities of 6. To sponsor or participate in activities of a charitable contributions on the donor's federal the U.S., obligations of a state or local patriotic nature. income tax return. At least 90% of the organiza- government that aren't in default as to tion's membership must consist of war veter- 7. To provide insurance benefits for its mem- principal or interest, or time or de- ans. The term war veterans means persons, bers or dependents of its members or mand deposits in a bank or an insured whether or not present members of the U.S. both. credit union located in the United Armed Forces, who have served in the U.S. States. (These investments are re- 8. To provide social and recreational activi- Armed Forces during a period of war (including stricted to the extent that the trustee ties for its members. the Korean and Vietnam conflicts, the Persian determines that a portion of the as- Gulf war, and later declared wars). Auxiliary unit. An auxiliary unit or society of a sets isn't currently needed for the pur- veterans' organization can apply for recognition poses described in 1.) of exemption provided that the veterans' organization (parent organization) meets the require- 501(c)(21) - Black Lung An annual information return is required of ex- ments explained earlier in this section. The aux- Benefit Trusts empt trusts described in section 501(c)(21). iliary unit or society must also meet all the Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Cer- following additional requirements. If your organization wishes to obtain recognition tain Related Persons, must be used for this pur- of exemption as a black lung benefit trust, it 1. It is affiliated with, and organized in ac- pose. A trust that normally has gross receipts in must file its application by letter and include a cordance with, the bylaws and regulations each tax year of no more than $50,000 is ex- copy of its trust instrument. The general proce- formulated by the parent organization. cepted from this filing requirement. However, it dures to follow for obtaining recognition are dis- must submit an annual electronic notice, Form 2. At least 75% of its members are either cussed in chapter 1 of this publication. This 990-N (e-Postcard). past or present members of the U.S. section describes the additional (or specific) in- Armed Forces, spouses of those mem- formation to be provided upon application. Excise taxes. See Chapter 5 for informa- bers, or related to those members within tion on the excise tax that may be imposed on two degrees of kinship (grandparent, Requirements. A black lung benefit trust that the organization. brother, sister, and grandchild represent is established in writing, created or organized in the most distant allowable relationship). the United States, and contributed to by any Tax treatment of donations. Contributions by 3. All of its members either are members of person (except an insurance company) will a taxpayer (generally, the coal mine operator) to the parent organization, spouses of a qualify for tax-exempt status if it meets both of a black lung benefit trust are deductible for fed- member of the parent organization, or re- the following requirements. The trust must be ir- eral income tax purposes under section 192. lated to a member of such organization revocable and there can be no right or possibil- The deduction is limited, and any excess contri- within two degrees of kinship. ity or reversion of the corpus or income of the butions are subject to an excise tax of 5%. Form trust to the coal mine operator or other creator, 6069, Return of Excise Tax on Excess Contri- 4. No part of its net earnings inure to the ben- except that the creator may recover excess butions to Black Lung Benefit Trust Under Sec- efit of any private shareholder or contributions. tion 4953 and Computation of Section 192 De- individual. 1. Its only purpose is: duction, is used to compute the allowable deduction and any excise tax liability. The form Trusts or foundations. Trusts or foundations a. To satisfy in whole or in part the liabil- doesn't have to be filed if there is no excise tax for a veterans' organization also can apply for ity of that person (generally, the coal liability. For more information about these con- recognition of exemption provided that the pa- mine operator contributing to the trust) tributions, see Form 6069 and its instructions. rent organization meets the requirements ex- for, or with respect to, claims for com- plained earlier. The trust or foundation must pensation arising under federal or also meet all the following qualifications. state statutes for disability or death 1. The trust or foundation is in existence undue to pneumoconiosis, der local law and, if it is organized for char- b. To pay the premiums for insurance itable purposes, has a dissolution provi- that covers only that liability,

Chapter 4 Other Section 501(c) Organizations Page 57 Page 58 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Waiver of payment of income. Generally, The articles of incorporation or trust instru- there is no payment of rent when the occupant ment must include provisions showing that the 501(c)(2) - Title-Holding of property held by your title-holding corporation corporation or trust is organized to meet the re- Corporations for Single is the exempt organization for which your cor- quirements of the statute, including compliance poration holds the title. In this situation, the stat- with the limitations on membership and classes Parent Corporations utory requirement that income be paid over to of stock or beneficial interest, and compliance the exempt organization is satisfied if your cor- with the income distribution requirements. The If your organization wants to obtain recognition poration turns over whatever income is availa- organizing document must permit the organiza- of exemption from federal income tax as a cor- ble. tion's shareholders or beneficiaries to dismiss poration organized to hold title to property, col- the organization's investment advisor, if any, lect income from that property, and turn over Application for recognition of exemption. In upon a vote of the shareholders or beneficiaries the entire amount less expenses to a single pa- addition to the information required by Form holding a majority interest in the organization. rent organization that is exempt from income 1024, the title-holding corporation must furnish The organizing document must permit the tax, it must file its application on Form 1024. evidence that the organization for which title is shareholders or beneficiaries to terminate their The information to submit upon application is held has obtained recognition of exempt status. interests by at least one of the following meth- described in this section. For a discussion of If that organization has not been specifically no- ods. the procedures for obtaining recognition of ex- tified in writing by the IRS that it is exempt, the title-holding corporation must submit the neces- 1. By selling or exchanging their stock or emption, see chapter 1, Application Proce- beneficial interest to any organization de- dures. sary application and supporting documents to enable the IRS to determine whether the organ- scribed in section 501(c)(25)(C), provided You must show that your organization is a ization for which title is held qualifies for exemp- that the sale or exchange doesn't cause corporation. If you are in doubt as to whether tion. A copy of a ruling or determination letter is- the number of shareholders or beneficia- your organization qualifies as a corporation for sued to the organization for which title is held ries to exceed 35. this purpose, contact your IRS office. will be proof that it qualifies for exemption. How- 2. By having their stock or beneficial interest ever, until the organization for which title is held redeemed by the section 501(c)(25) or- A title-holding corporation will qualify for ex- obtains recognition of exempt status or proof is ganization upon 90 days notice. emption only if there is effective ownership and submitted to show that it qualifies, the title-hold- control over it by the distributee exempt organi- ing corporation can't obtain recognition of ex- If state law prevents a corporation from includ- zation. For example, the distributee organiza- emption. ing in its articles of incorporation the above pro- tion may control the title-holding corporation by visions, such provisions must instead be inclu- owning its voting stock or possessing the power Tax treatment of donations. Donations to an ded in the bylaws of the corporation. to select nominees to hold its voting stock. exempt title-holding corporation generally aren't A 501(c)(25) organization can be organized deductible as charitable contributions on the as a nonstock corporation if its articles of incor- Corporate charter. The corporate charter donor's federal income tax return. poration or bylaws provide members with the must confine the purposes and powers of your same rights as described above. organization to holding title to property, collecting income from the property, and turning the 501(c)(25) - Title-Holding Subsidiaries. A wholly owned subsidiary won't income over to an exempt organization. If the be treated as a separate corporation, and all as- charter authorizes your organization to engage Corporations or Trusts sets, liabilities, and items of income, deduction, in activities that go beyond these limits, its ex- and credit will be treated as belonging to the emption may not be recognized even if its ac- for Multiple Parent section 501(c)(25) organization. Subsidiaries tual operations are so limited. If your organiza- Corporations shouldn't apply separately for recognition of ex- tion's original charter doesn't limit its powers, emption. you can amend the charter to conform to the re- If your organization wants to obtain recognition quired limits and submit evidence with your ap- Tax treatment of donations. Donations to an of exemption from federal income tax as an or- plication that the charter has been amended. exempt title-holding corporation generally aren't ganization organized for the exclusive purpose deductible as charitable contributions on the of acquiring, holding title to, and collecting in- Payment of income. You must show that your donor's federal income tax return. come from real property, and turning over the corporation is required to turn over the entire in- entire amount less expenses to member organi- come from the property, less expenses, to one zations exempt from income tax, it should file its or more exempt organizations. Unrelated Business Income application on Form 1024. For a discussion of Actual payment of the income is required. A the procedures for obtaining recognition of ex- In general, the receipt of unrelated business in- mere obligation to use the income for the exemption, see chapter 1, Application Proce- empt organization's benefit, or the fact that such come by a section 501(c)(25) organization will dures. organization has control over the income subject the organization to loss of exempt sta- doesn't satisfy this requirement. tus since the organization can't be exempt from Who can control the organization. Organi- taxation if it engages in any business other than Expenses. Expenses may reduce the zations recognized as exempt under this sec- that of holding title to real property and collect- amount of income required to be turned over to tion can have up to 35 shareholders or benefi- ing the income from the property. However, ex- the tax-exempt organization for which your or- ciaries, in contrast to title-holding organizations empt status generally won't be affected by the ganization holds property. The term expenses recognized as exempt under section 501(c)(2), receipt of debt-financed income that is treated (for this purpose) includes not only ordinary and which can have only one controlling parent or- as unrelated business taxable income solely necessary expenses paid or incurred, but also ganization. because of section 514. reasonable additions to depreciation reserves and other reserves that would be proper for a Organizational requirements. A 501(c)(25) Under section 514(c)(9), certain sharehold- business corporation holding title to and main- organization must be either a corporation or a ers or beneficiaries aren't subject to unrelated taining property. trust. Only one class of stock is permitted in the debt-financed income tax under section 514 on In addition, the title-holding corporation can case of a corporation. In the case of a trust, only their investments through the organization. retain part of its income each year to apply to one class of beneficial interest is allowed. These shareholders are generally schools, col- debt on property to which it holds title. This Organizations eligible to acquire or hold in- leges, universities, or supporting organizations transaction is treated as if the income had been terests in this type of title-holding organization of such educational institutions. Organizations turned over to the exempt organization and the are qualified pension, profit-sharing, or stock other than these will take into account as gross latter had used the income to make a contribu- bonus plans, governmental plans, governments income from an unrelated trade or business tion to the capital of the title-holding corporation and their agencies and instrumentalities, and their pro rata share of income that is treated as that in turn applied the contribution to the debt. charitable organizations. unrelated debt-financed income because

Page 58 Chapter 4 Other Section 501(c) Organizations Page 59 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

section 514(c)(9) doesn't apply. These organi- 2. The state requires that the membership health insurance issuers (QNHIIs) that have re- zations will also take their pro rata share of the consist of all persons who issue insurance ceived a loan or grant under the Centers for allowable deductions from unrelated taxable in- covering workers' compensation losses in Medicare and Medicaid Services (CMS) come. the state and all persons and government CO-OP program for periods that they meet both entities who self-insure against those los- the requirements of section 1322 of the Afforda- Real property. Real property can include per- ses. ble Care Act and of any loan agreement with sonal property leased in connection with real CMS. The CO-OP program provides loans and 3. It operates as a nonprofit organization by property, but only if the rent from the personal repayable grants to foster the creation of mem- returning surplus income to its members property isn't more than 15% of the total rent for ber governed QNHIIs that will operate with a or workers' compensation policyholders both the real property and the personal prop- strong consumer focus and offer qualified on a periodic basis and by reducing initial erty. health insurance plans. Notice 2011-23, premiums in anticipation of investment in- Real property acquired after June 10, 1987, 2011-13 I.R.B. 588, discussed requirements for come. can't include any interest as a tenant in com- tax exemption for QNHIIs described in Internal Revenue Code section 501(c)(29). The Notice mon (or similar interest) or any indirect interest. 501(c)(27)(B) -- Organizations formed after provides guidance on the annual filing require- December 31, 1997. Any organization (includ- ment for organizations that intend to apply for ing a mutual insurance company) can qualify for recognition of section 501(c)(29) status. Rev. 501(c)(26) - exemption if it meets all of the following require- Proc. 2015-17, 2015-7 I.R.B. 599, sets out the ments. State-Sponsored procedures for issuing determination letters on 1. It is created by state law and is organized the exempt status of QNHIIs and provides guid- High-Risk Health and operated under state law exclusively ance on the effective date of exempt status. Coverage Organizations to: Rev. Proc. 2015-17, supplemented by Rev. Proc.2021-5. a. Provide workmen's compensation in- A state-sponsored organization established to surance which is required by state law provide medical care to high-risk individuals or state law must provide significant should apply by letter for recognition of exemp- disincentives if employers fail to pur- General Requirements tion from federal income tax under section chase such insurance, and 501(c)(26). for Exemption under b. Provide related coverage which is in- To qualify for exemption, the organization cidental to workmen's compensation 501(c)(29) and Annual must be a membership organization estab- insurance. Filing Requirement lished by a state exclusively to provide cover- 2. It provides workmen's compensation in- age for medical care on a nonprofit basis to surance to any employer in the state (for In general, section 501(c)(29) applies to certain high-risk individuals who are state residents. It employees in the state or temporarily as- organizations receiving loans or repayable can provide coverage either by issuing insur- signed out-of-state) which seeks such in- grants under the CO-OP program. An organiza- ance itself or by entering into an arrangement surance and meets other reasonable re- tion will qualify for exemption under section with a health maintenance organization (HMO). quirements relating to the insurance. 501(c)(29) only if: The state must determine the composition of • The organization has received a loan or a 3. The state makes a financial commitment membership in the organization. No part of the repayable grant under the CO-OP program to such organization either by extending net earnings of the organization can inure to the and is in compliance with all requirements its full faith and credit to the initial debt of benefit of any private shareholder or individual. of the CO-OP program and any agreement the organization or by providing the initial with CMS; High-risk individuals. These are individuals, operating capital of the organization. • The organization has applied for recogni- their spouses and qualifying children, who, be- 4. The assets of the organization revert to the tion of exemption; cause of a pre-existing medical condition: state upon dissolution or the organization • No part of the organization’s net earnings inures to the benefit of any private share- 1. Can't get medical care coverage for that isn't permitted to dissolve under state law. holder or individual, except that the organi- condition through insurance or an HMO, or 5. The majority of the board of directors or zation is required by section 1322(c)(4) of 2. Can get coverage for that condition only at oversight body of such organization are the Affordable Care Act to use its profits to a rate that is substantially higher than the appointed by the chief executive officer or lower premiums, improve benefits or im- rate for the same coverage from the other executive branch official of the state, prove the quality of health care delivered to state-sponsored organization. by the state legislature, or by both. its members; • No substantial part of the organization’s activities involves attempts to influence 501(c)(27) - Qualified 501(c)(29) - CO-OP legislation; and • The organization doesn't participate or in- State-Sponsored Health Insurance Issuers tervene in political campaigns. See Rev. Proc. 2015-17 for complete instructions for Workers' Compensation This includes a qualified nonprofit health insur- filing exemption applications. ance issuer which has received a loan or grant Organizations under the CO-OP Program under this section of the Code. 501(c)(27)(A) -- Pre-June 1, 1996, Organiza- Additional Guidance for tions. A state-sponsored workers' compensa- Prospective 501(c)(29) tion reinsurance organization should apply by Guidance for Section letter for recognition of exemption from federal Organizations income tax under section 501(c)(27). 501(c)(29) Qualified To qualify for exemption, any membership An organization claiming exempt status under organization must meet all the following require- Nonprofit Health section 501(c)(29) that intends to file an appli- ments. Insurance Issuers cation for recognition of exemption should begin filing Form 990, Return of Organization Ex- 1. It was established by a state before June empt from Income Tax, and indicate on its 1, 1996, exclusively to reimburse its mem- Section 501(c)(29), added to the Code by sec- return that it has not yet received a determina- bers for losses under workers' tion 1322(h)(1) of the Affordable Care Act, pro- tion letter. In addition to the general information compensation acts. vides for the exemption of qualified nonprofit

Chapter 4 Other Section 501(c) Organizations Page 59 Page 60 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

required on Form 990, these organizations 1. Entities described in section 501(c), in- Entity Level Tax must report certain information regarding re- cluding but not limited to the following quired reserves. common types of entities: Section 4965(a)(1) imposes an entity level ex- a. Instrumentalities of the United cise tax on any tax-exempt entity described in States described in section 501(c)(1); 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to b. Churches, hospitals, museums, a subsequently listed transaction (defined ear- schools, scientific research organiza- lier). The excise tax imposed on a tax-exempt tions, and other charities described in entity applies to tax years in which the entity be- 5. section 501(c)(3); comes a party to the prohibited tax shelter c. Civic leagues, social welfare organi- transaction and any subsequent tax years. The zations, and local associations of em- amount of the excise tax depends on whether ployees described in section 501(c) the tax-exempt entity knew or had reason to Excise Taxes (4); know that the transaction was a prohibited tax shelter transaction at the time it became a party d. Labor, agricultural, or horticultural to the transaction. organizations described in section Introduction 501(c)(5); To figure and report the excise tax imposed on a tax-exempt entity for being a party to a pro- An excise tax may be imposed on certain e. Business leagues, chambers of hibited tax shelter transaction, file Form 4720. tax-exempt organizations. commerce, trade associations, and other organizations described in sec- For more information about this excise tax, Topics tion 501(c)(6); including information about how it is figured, see the Instructions for Form 4720. This chapter discusses: f. Voluntary employees' beneficiary associations (VEBAs) described in • Prohibited tax shelter transactions section 501(c)(9); Manager Level Tax • Excess benefit transactions • Excess business holdings g. Credit unions described in section Section 4965(a)(2) imposes an excise tax on • Taxable distributions of sponsoring 501(c)(14); any tax-exempt entity manager who approves organizations h. Insurance companies described in or otherwise causes the entity to be a party to a • Taxes on prohibited benefits distributed section 501(c)(15); and prohibited tax shelter transaction and knows (or from donor advised funds has reason to know) that the transaction is a • Excise taxes on private foundations i. Veterans' organizations described prohibited tax shelter transaction. The excise • Excise taxes on 501(c)(21) black lung in section 501(c)(19). tax, in the amount of $20,000, is assessed for benefit trusts 2. Religious or apostolic associations or cor- each approval or other act causing the organi- • Excise Tax on Failure to Meet the porations described in section 501(d). zation to be a party to the prohibited tax shelter Community Health Needs Assessment transaction. To report this tax, file Form 4720. Requirements of Hospitals 3. Entities described in section 170(c), in- • Excise tax on excess tax-exempt cluding states, possessions of the United organization executive compensation States, the District of Columbia, political Excess Benefit • Excise tax on net investment income of subdivisions of states and political subdivi- private colleges and universities sions of possessions of the United States Transactions (but not including the United States). Excise tax on excess benefit transactions. 4. Indian tribal governments within the mean- Useful Items A disqualified person who benefits from an ex- ing of section 7701(a)(40). You may want to see: cess benefit transaction, such as compensa- Entity manager. An entity manager is any per- tion, fringe benefits, or contract payments from Forms (and Instructions) son with authority or responsibility similar to that certain section 501(c)(3), 501(c)(4), or 501(c)

4720 4720 Return of Certain Excise Taxes exercised by an officer, director, or trustee, and, (29) organizations, must correct the transaction Under Chapters 41 and 42 of the for any act, the person that has authority or re- and may have to pay an excise tax under sec- Internal Revenue Code sponsibility with respect to the prohibited trans- tion 4958. A manager of the organization may also have to pay an excise tax under section See chapter 6 for more information about get- action. 4958. These taxes are reported on Form 4720. ting Form 4720. Prohibited tax shelter transaction. A pro- The excise taxes are imposed if an applica- hibited tax shelter transaction is any listed ble tax-exempt organization provides an excess Prohibited Tax Shelter transaction, within the meaning of section benefit to a disqualified person and that benefit 6707A(c)(2), and any prohibited reportable exceeds the value of the benefit received in ex- Transactions transactions. A prohibited reportable transac- change. tion is a confidential transaction within the There are three taxes under section 4958. Section 4965 imposes an excise tax on: meaning of Regulations section 1.6011-4(b)(3), Disqualified persons are liable for the first two • Certain tax-exempt entities that are party and a transaction with contractual protection taxes and certain organization managers are li- to prohibited tax shelter transactions, and within the meaning of Regulations section able for the third tax. • Any entity manager who approves or oth- 1.6011-4(b)(4). See the Instructions for Form Taxes imposed on excess benefit transac- erwise causes the entity to be a party to a 8886-T for more information on listed transactions don't apply to a transaction under a written prohibited tax shelter transaction and tions and prohibited reportable transactions. contract that was binding on September 13, knows or has reason to know that the 1995, and at all times thereafter before the transaction is a prohibited tax shelter trans- Subsequently listed transaction. Any trans- transaction occurred. action. action to which the tax-exempt entity is a party and is later determined to be a listed transaction Additionally, section 6033 provides new disclo- after the entity has become a party to it, is a Tax on Disqualified Persons sure requirements on a tax-exempt entity that is subsequently listed transaction. a party to a prohibited tax shelter transaction. An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transac- Tax-exempt entities. Tax-exempt entities that tion between an applicable tax-exempt organi- are subject to section 4965 include: zation and a disqualified person. The

Page 60 Chapter 5 Excise Taxes Page 61 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

disqualified person who benefited from the transaction would be an excess benefit The excess benefit in this transaction is the transaction is liable for the tax. See definition of transaction; amount of the grant, loan, compensation, or Disqualified person, later at Disqualified person. • Is aware that such a transaction under other similar payment. For additional informa- these circumstances may violate the provi- tion, see the Instructions for Form 4720. Additional tax on the disqualified person. If sions of federal tax law governing excess the 25% tax is imposed and the excess benefit benefit transactions; and Supporting organization transactions oc- transaction isn't corrected within the taxable pe- • Negligently fails to make reasonable at- curring after July 25, 2006. For any support- riod, an additional excise tax equal to 200% of tempts to ascertain whether the transac- ing organization, defined in section 509(a)(3), the excess benefit is imposed on any disquali- tion is an excess benefit transaction, or the an excess benefit transaction includes grants, fied person involved. manager is in fact aware that it is such a loans, compensation, or other similar payment If a disqualified person makes a payment of transaction. provided by the supporting organization to a: Substantial contributor, less than the full correction amount, the 200% Knowing doesn't mean having reason to know. • Family member of a substantial contribu- tax is imposed only on the unpaid portion of the The organization manager ordinarily won't be • tor, correction amount. If more than one disqualified considered knowing if, after full disclosure of 35% controlled entity of a substantial con- person received an excess benefit from an ex- the factual situation to an appropriate professio- • tributor, or cess benefit transaction, all such disqualified nal, the organization manager relied on the pro- 35% controlled entity of a family member persons are jointly and severally liable for the fessional's reasoned written opinion on matters • of a substantial contributor. taxes. within the professional's expertise or if the man- To avoid the 200% tax, a disqualified person ager relied on the fact that the requirements for Additionally, an excess benefit transaction must correct the excess benefit transaction dur- the rebuttable presumption of reasonableness includes any loans provided by the supporting ing the taxable period. The 200% tax is abated have been satisfied. Participation by an organi- organization to a disqualified person (other than (refunded if collected) if the excess benefit zation manager is willful if it is voluntary, con- an organization described in section 509(a)(1), transaction is corrected within a 90-day correc- scious, and intentional. An organization manag- (2), or (4)). tion period beginning on the date a statutory no- er's participation is due to reasonable cause if The excess benefit for substantial contribu- tice of deficiency is issued. the manager has exercised responsibility on be- tors and parties related to those contributors in- Taxable period. The taxable period means half of the organization with ordinary business cludes the amount of the grant, loan, compen- the period beginning with the date on which the care and prudence. sation, or other similar payment. For additional excess benefit transaction occurs and ending information, see the Instructions for Form 4720. on the earlier of: Excess Benefit Transaction Excess benefit transaction rules generally • The date a notice of deficiency was mailed don't apply to transactions between a supporting organization and its supported organization to the disqualified person for the initial tax An excess benefit transaction is a transaction in on the excess benefit transaction, or described in section 501(c)(4), (5), or (6) in fur- which an economic benefit is provided by an therance of charitable purposes. • The date on which the initial tax on the ex- applicable tax-exempt organization, directly or cess benefit transaction for the disqualified indirectly, to or for the use of any disqualified person is assessed. person, and the value of the economic benefit Date of Occurrence provided by the organization exceeds the value Tax on Organization of the consideration (including the performance An excess benefit transaction occurs on the Managers of services) received for providing such benefit. date the disqualified person receives the eco- The excess benefit transaction rules apply to all nomic benefit from the organization for federal transactions with disqualified persons, regard- income tax purposes. However, when a single If tax is imposed on a disqualified person for less of whether the amount of the benefit provi- contractual arrangement provides for a series of any excess benefit transaction, an excise tax ded is determined in whole or in part by the rev- compensation or other payments to or for the equal to 10% of the excess benefit is imposed enues of one or more activities of the use of a disqualified person during the disquali- on an organization manager who knowingly organization. fied person's tax year, any excess benefit trans- participated in an excess benefit transaction, action with respect to these payments occurs unless such participation wasn't willful and was To determine whether an excess benefit on the last day of the taxpayer's tax year. due to reasonable cause. This tax can't exceed transaction has occurred, all consideration and $20,000 ($10,000 for transactions entered in a benefits exchanged between a disqualified per- In the case of benefits provided to a quali- tax year beginning before August 18, 2006), for son and the applicable tax-exempt organiza- fied pension, profit-sharing, or stock bonus each transaction. There is also joint and several tion, and all entities it controls, are taken into plan, the transaction occurs on the date the liability for this tax. A person can be liable for account. For purposes of determining the value benefit is vested. In the case of the transfer of both the tax paid by the disqualified person and of economic benefits, the value of property, in- property subject to a substantial risk of forfei- the organization manager tax for a particular excluding the right to use property, is the fair mar- ture, or in the case of rights to future compensa- cess benefit transaction. ket value. Fair market value is the price at which tion or property, the transaction occurs on the property, or the right to use property, would date the property, or the rights to future com- Organization Manager. An organization man- change hands between a willing buyer and a pensation or property, isn't subject to a substan- ager is any officer, director, or trustee of an ap- willing seller, neither being under any compul- tial risk of forfeiture. Where the disqualified per- plicable tax-exempt organization, or any individ- sion to buy, sell, or transfer property or the right son elects to include an amount in gross ual having powers or responsibilities similar to to use property, and both having reasonable income in the tax year of transfer under section officers, directors, or trustees of the organiza- knowledge of relevant facts. 83(b), the excess benefit transaction occurs on tion, regardless of title. An organization man- the date the disqualified person receives the ager isn't considered to have participated in an Donor advised fund transactions occurring economic benefit for federal income tax purpo- excess benefit transaction where the manager after August 17, 2006. For a donor advised ses. has opposed the transaction in a manner con- fund, an excess benefit transaction includes a sistent with the fulfillment of the manager's re- grant, loan, compensation, or other similar pay- Correcting the excess benefit. An excess sponsibilities to the organization. For example, ment from the fund to a: benefit transaction is corrected by undoing the a director who votes against giving an excess • Donor or donor advisor, excess benefit to the extent possible, and by benefit would ordinarily not be subject to the • Family member of a donor, or donor advi- taking any additional measures necessary to 10% tax. sor, place the organization in a financial position not worse than what it would have been if the dis- A person participates in a transaction know- • 35% controlled entity of a donor, or donor advisor, or qualified person were dealing under the highest ingly if the person: fiduciary standards. • Has actual knowledge of sufficient facts so • 35% controlled entity of a family member that, based solely upon those facts, such of a donor, or donor advisor.

Chapter 5 Excise Taxes Page 61 Page 62 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

A disqualified person corrects an excess wasn't based on private inurement or one or In determining the holdings of a business benefit by making a payment in cash or cash more excess benefit transactions. enterprise, any stock or other interest owned di- equivalents, excluding payment by a promis- rectly or indirectly shall apply. sory note, equal to the correction amount to the Disqualified Person applicable tax-exempt organization. The correc- Persons having substantial influence. tion amount equals the excess benefit plus the A disqualified person is: Among those who are in a position to exercise interest on the excess benefit. The interest rate • Any person (at any time during the 5-year substantial influence over the affairs of the or- can be no lower than the applicable federal period ending on the date of the transac- ganization are, for example, voting members of rate, compounded annually, for the month the tion) in a position to exercise substantial in- the governing body, and persons holding the transaction occurred. fluence over the affairs of the organization, power of: A disqualified person can, with the agree- • A family member of an individual described • Presidents, chief executives, or chief oper- ment of the applicable tax-exempt organization, in (1), and ating officers. make a payment by returning the specific prop- • A 35% controlled entity. • Treasurers and chief financial officers. erty previously transferred in the excess trans- • Persons with a material financial interest in action. In this case, the disqualified person is For donor advised funds, sponsoring or- a provider-sponsored organization. treated as making a payment equal to the ganizations, and certain supporting organi- Persons not considered to have sub- lesser of: zations occurring after August 17, 2006. stantial influence. Persons who aren't consid- The fair market value of the property on the • The following persons will be considered dis- ered to be in a position to exercise substantial date the property is returned to the organi- qualified persons along with certain family influence over the affairs of an organization in- zation, or members and 35% controlled entities associ- clude: • The fair market value of the property on the ated with them. • An employee who receives benefits that date the excess benefit transaction occur- • Donors of donor advised funds, total less than the highly compensated red. • Investment advisors of sponsoring organi- amount in section 414(q)(1)(B)(i) and who If the payment resulting from the return of zations, and doesn't hold the executive or voting pow- property is less than the correction amount, the • Disqualified persons of a section 509(a)(3) ers mentioned earlier in the discussion on disqualified person must make an additional supporting organization that supports the Disqualified Person, isn't a family member cash payment to the organization equal to the applicable tax-exempt organization. of a disqualified person, and isn't a sub- difference. For certain supporting organization stantial contributor, If the payment resulting from the return of transactions occurring after July 25, 2006. • Tax-exempt organizations described in the property exceeds the correction amount de- Substantial contributors to supporting organiza- section 501(c)(3), and scribed above, the organization can make a tions will also be considered disqualified per- • Section 501(c)(4) organizations with re- cash payment to the disqualified person equal sons with respect to the supporting organiza- spect to transactions engaged in with other to the difference. tions, along with their family members and 35% section 501(c)(4) organizations. Exception. For a correction of an excess controlled entities. Facts and circumstances. The determi- benefit transaction (discussed earlier), no Investment advisor. Investment advisor nation of whether a person has substantial influ- amount repaid in a manner prescribed by the means for any sponsoring organization, any ence over the affairs of an organization is based Secretary can be held in a donor advised fund. person compensated by such organization (but on all the facts and circumstances. Facts and not an employee of such organization) for man- circumstances that tend to show a person has Applicable Tax-Exempt aging the investment of, or providing investment substantial influence over the affairs of an or- Organization advice for, assets maintained in donor advised ganization include, but aren't limited to, the fol- funds owned by such sponsoring organization. lowing. An applicable tax-exempt organization is a sec- • The person founded the organization. Substantial contributor. In general, a sub- tion 501(c)(3), 501(c)(4), or 501(c)(29) organi- • The person is a substantial contributor to stantial contributor means any person who con- zation that is tax-exempt under section 501(a), the organization under the section 507(d) tributed or bequeathed an aggregate of more or was such an organization at any time during (2)(A) definition, only taking into account than $5,000 to the organization, if that amount a 5-year period ending on the day of the excess contributions to the organization for the is more than 2% of the total contributions and benefit transaction. past 5 years. bequests received by the end of the organiza- • The person's compensation is primarily An applicable tax-exempt organization tion's tax year in which the contribution or be- based on revenues derived from activities doesn't include: quest is received. A substantial contributor in- of the organization that the person concludes the grantor of a trust. trols. 1. A private foundation as defined in section • The person has or shares authority to con- 509(a), Family members. Family members of a dis- trol or determine a substantial portion of qualified person include a disqualified person's 2. A governmental entity that is: the organization's capital expenditures, op- spouse, brothers or sisters (whether by whole erating budget, or compensation for em- a. Exempt from (or not subject to) taxa- or half-blood), spouses of brothers or sisters ployees. tion without regard to section 501(a), (whether by whole or half-blood), ancestors, • The person manages a discrete segment or children (including a legally adopted child), or activity of the organization that repre- grandchildren, great grandchildren, and spou- b. Not required to file an annual return, sents a substantial portion of the activities, ses of children, grandchildren, and great grand- or assets, income, or expenses of the organi- children (whether by whole or half-blood). zation, as compared to the organization as 3. A foreign organization, recognized by the a whole. IRS or by treaty, that receives substantially 35% controlled entity. A 35% controlled en- • The person owns a controlling interest all of its support (other than gross invest- tity is: (measured by either vote or value) in a cor- ment income) from sources outside the 1. A corporation in which disqualified per- poration, partnership, or trust that is a dis- United States. sons own more than 35% of the total com- qualified person. bined voting power, • The person is a nonstock organization An organization isn't treated as a section controlled directly or indirectly by one or 501(c)(3), 501(c)(4), or 501(c)(29) organization 2. A partnership in which such persons own more disqualified persons. for any period covered by a final determination more than 35% of the profits interest, or that the organization wasn't tax-exempt under Facts and circumstances tending to show 3. A trust or estate in which such persons section 501(a), but only if the determination that a person doesn't have substantial influence own more than 35% of the beneficial interest.

Page 62 Chapter 5 Excise Taxes Page 63 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

over the affairs of an organization include, but consideration for the performance of services e. Documentation of the basis of the de- aren't limited to, the following. unless the organization providing the benefit termination before the later of the next • The person has taken a bona fide vow of clearly indicates its intent to treat the benefit as meeting of the authorized body or 60 poverty as an employee or agent of a reli- compensation when the benefit is paid. days after the final actions of the au- gious organization or on its behalf. An applicable tax-exempt organization (or thorized body are taken, and approval • The person is an independent contractor entity that it controls) is treated as clearly indi- of records as reasonable, accurate, whose sole relationship to the organization cating its intent to provide an economic benefit and complete within a reasonable is providing professional advice (without as compensation for services only if the organi- time thereafter. having decision-making authority) with re- zation provides written substantiation that is spect to transactions from which the inde- contemporaneous with the transfer of the eco- Disregarded benefits. The following eco- pendent contractor won't economically nomic benefits under consideration. Ways to nomic benefits are disregarded for section 4958 benefit either directly or indirectly aside provide contemporaneous written substantia- purposes. from customary fees received for the pro- tion of its intent to provide an economic benefit • Nontaxable fringe benefits that are exclu- fessional advice rendered. as compensation include: ded from income under section 132. • Any preferential treatment the person re- • The organization produces a signed writ- • Benefits provided to a volunteer for the or- ceives based on the size of the person's ten employment contract, ganization if the benefit is provided to the donation is also offered to others making • The organization reports the benefit as general public in exchange for a member- comparable widely solicited donations. compensation on an original Form W-2, ship fee or contribution of $75 or less. • The direct supervisor of the person isn't a Form 1099, or Form 990, or on an amen- • Benefits provided to a member of an or- disqualified person. ded form filed before starting an IRS ex- ganization due to the payment of a mem- • The person doesn't participate in any man- amination, or bership fee or to a donor as a result of a agement decisions affecting the organiza- • The disqualified person reports the benefit deductible contribution, if a significant tion as a whole or a discrete segment of as income on the person's original Form number of disqualified persons make simi- the organization that represents a substan- 1040 or 1040-SR, or on an amended form lar payments or contributions and are of- tial portion of the activities, assets, income, filed before starting an IRS examination. fered a similar economic benefit. or expenses of the organization, as com- • Benefits provided to a person solely as a pared to the organization as a whole. Exception. If the economic benefit is exclu- member of a charitable class that the appli- ded from the disqualified person's gross income cable tax-exempt organization intends to In the case of multiple organizations affili- for income tax purposes, the applicable tax-ex- benefit as part of the accomplishment of its ated by common control or governing docu- empt organization isn't required to indicate its exempt purpose. ments, the determination of whether a person intent to provide an economic benefit as com- • A transfer of an economic benefit to or for does or doesn't have substantial influence is pensation for services. the use of a governmental unit, as defined made separately for each applicable tax-ex- in section 170(c)(1), if exclusively for public empt organization. A person may be a disquali- Rebuttable presumption that a transac- purposes. fied person with respect to transactions with tion isn't an excess benefit transaction. more than one organization. Payments under a compensation arrangement Special exception for initial contracts. are presumed to be reasonable and the transfer Section 4958 doesn't apply to any fixed pay- Reasonable compensation. Reasonable of property (or right to use property) is pre- ment made to a person under an initial contract. compensation is the value that would ordinarily sumed to be at fair market value, if the following A fixed payment is an amount of cash or be paid for like services by like enterprises un- three conditions are met. other property specified in the contract, or de- der like circumstances. The section 162 stand- termined by a fixed formula that is specified in 1. The transaction is approved in advance by ard will apply in determining the reasonable- the contract, which is to be paid or transferred an authorized body of the organization (or ness of compensation. The fact that a bonus or in exchange for the provision of specified serv- an entity it controls) which is composed of revenue-sharing arrangement is subject to a ices or property. individuals who don't have a conflict of in- cap is a relevant factor in determining reasona- A fixed formula can, generally, incorporate terest concerning the transaction. bleness of compensation. an amount that depends upon future specified To determine the reasonableness of com- 2. Before making its determination, the au- events or contingencies, as long as no one has pensation, all items of compensation provided thorized body obtained and relied upon discretion when calculating the amount of a by an applicable tax-exempt organization in ex- appropriate data as to comparability. payment or deciding whether to make a pay- change for performance of services are taken (There is a special safe harbor for small ment (such as a bonus). into account in determining the value of com- organizations. If the organization has An initial contract is a binding written con- pensation (except for economic benefits that gross receipts of less than $1 million, ap- tract between an applicable tax-exempt organi- are disregarded under the discussion Disregar- propriate comparability data includes data zation and a person who wasn't a disqualified ded benefits, later). Items of compensation in- on compensation paid by three compara- person immediately before entering into the clude: ble organizations in the same or similar contract. • All forms of cash and noncash compensa- communities for similar services.) A binding written contract, providing it can tion, including salary, fees, bonuses, sev- be terminated or canceled by the applicable 3. The authorized body adequately docu- erance payments, and deferred noncash tax-exempt organization without the other par- ments the basis for its determination con- compensation, ty's consent (except as a result of substantial currently with making that determination. • The payment of liability insurance premi- nonperformance) and without substantial pen- The documentation should include: ums for, or the payment or reimbursement alty, is treated as a new contract, as of the earli- by the organization of penalties, taxes, or a. The terms of the approved transaction est date any termination or cancellation would certain expenses under section 4958, un- and the date approved, be effective. Also, if the parties make a material less excludable from income as a de mini- change to a contract, which includes an exten- b. The members of the authorized body mis fringe benefit under section 132(a)(4), sion or renewal of the contract (except for an who were present during debate on • All other compensatory benefits, whether extension or renewal resulting from the exercise the transaction that was approved or not included in gross income for income of an option by the disqualified person), or a and those who voted on it, tax purposes, more than incidental change to the amount pay- • Taxable and nontaxable fringe benefits, c. The comparability data obtained and able under the contract, it is treated as a new except fringe benefits described in section relied upon by the authorized body contract as of the effective date of the material 132, and and how the data was obtained, change. • Foregone interest on loans. d. Any actions by a member of the au- More information. For more information, Intent to treat benefits as compensation. thorized body having conflict of inter- see the Instructions to Forms 990 and 4720. An economic benefit isn't treated as est, and

Chapter 5 Excise Taxes Page 63 Page 64 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

are not (i) directors or officers of the busi- Taxable distribution. A taxable distribution is ness enterprise, or (ii) family members of a any distribution from a donor advised fund to Excess Business substantial contributor to the private foun- any natural person or to any other person if: dation; and Holdings 1. The distribution is for any purpose other 3. There is no loan outstanding from the than one specified in section 170(c)(2)(B), General rule. Private foundations are gener- business enterprise to a substantial con- or ally not permitted to hold more than a 20% inter- tributor to the private foundation or to any 2. The sponsoring organization maintaining est in an unrelated business enterprise. They family member of such a contributor. the donor advised fund doesn't exercise may be subject to an excise tax on the amount expenditure responsibility with respect to of any excess business holdings. For purposes This provision does not apply to any donor ad- the distribution in accordance with section of section 4943, for tax years beginning after 4945(h). August 17, 2006, donor advised funds and cer- vised fund treated as a private foundation by tain supporting organizations are considered section 4943(e), a supporting organization trea- However, a taxable distribution doesn't in- private foundations. ted as a private foundation by section 4943(f), a clude a distribution from a donor advised fund trust described in section 4947(a)(1), or a trust to: Exception under section 4943(g). Section described in section 4947(a)(2). • Any organization described in section 4943(g) added by the Bipartisan Budget Act of 170(b)(1)(A) (other than a disqualified sup- 2018, Pub. L. No. 115-123, 132 Stat. 64 (2018), Section 4943(g) shall apply to tax years begin- porting organization), provides an exception for certain limited hold- ning after December 31, 2017. • The sponsoring organization of the donor ings to independently operated businesses. In advised fund, or Donor advised fund. In general, a donor ad- general, the excess business holdings provi- • Any other donor advised fund. sions of section 4943(a) shall not apply with revised fund is a fund or account separately iden- The tax on taxable distributions applies to spect to the holdings of a private foundation in tified by reference to contributions of a donor or distributions occurring in tax years beginning af- any business enterprise which meets all the re- donors that is owned and controlled by a spon- ter August 17, 2006. quirements of section 4943(g)(2), (3), and (4). soring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. Sponsoring organization. A sponsoring or- The requirements of section 4943(g)(2) are met ganization is a section 170(c) organization that if: Supporting organizations. Only certain sup- is neither a government organization (as refer- 1. 100% of the voting stock in the business porting organizations are subject to the excess red to in section 170(c)(1) and (2)(A)) nor a pri- enterprise is held by the private foundation business holdings tax under section 4943. vate foundation. at all times during the tax year, and These include (1) Type III supporting organizations that aren't functionally integrated and (2) Donor advised fund. A donor advised fund is 2. All of the private foundation’s ownership Type II supporting organizations that accept a fund or account: interests were acquired by means other any gift or contribution from a person who by than purchase, such as a gift or bequest. 1. Which is separately identified by reference himself or in connection with a related party to contributions of a donor or donors, controls the supported organization that the The requirements of section 4943(g)(3) are met Type II supporting organization supports. 2. Which is owned and controlled by a spon- if the business enterprise, no later than 120 soring organization, and days after the close of the tax year, distributes Taxes. A private foundation that has excess 3. For which the donor (or any person ap- an amount equal to its net operating income for holdings in a business enterprise may become pointed or designated by the donor) has or such tax year to the private foundation. For pur- liable for an excise tax based on the amount of expects to have advisory privileges con- poses of section 4943(g) , the net operating in- holdings. The initial tax is 10% (5% for tax years cerning the distribution or investment of come of any business enterprise for any tax beginning before August 18, 2006) of the value the funds held in the donor advised funds year is an amount equal to the gross income of of the excess holdings and is imposed on the or accounts because of the donor's status the business enterprise for the tax year, re- last day of each tax year that ends during the as a donor. duced by the sum of: taxable period. The excess holdings are determined on the day during the tax year when they 1. The deductions allowed by chapter 1 of were the largest. the Code for the tax year that are directly A foundation that fails to correct the excess connected with the production of such in- business holdings becomes liable for an addi- come, tional tax of 200% of the remaining excess busi- Exception. A donor advised fund doesn't 2. The tax imposed by chapter 1 of the Code ness holdings as of the earlier of tax assess- include: on the business enterprise for the tax year, ment or mailing of a notice of deficiency. and For more information on the tax on excess 1. A fund or account that makes distributions business holdings, see the Instructions for Form only to a single identified organization or 3. An amount for a reasonable reserve for 4720. governmental entity, or working capital and other business needs of the business enterprise. 2. Any fund or account for a person described in 3 above that gives advice about Taxable Distributions of which individuals receive grants for travel, The requirements of section 4943(g)(4) are met study, or similar purposes, if the following if, at all times during the tax year: Sponsoring three requirements are met: 1. No substantial contributor (as defined in Organizations a. The person's advisory privileges are section 4958(c)(3)(C)) to the private foun- performed exclusively by such person dation or family member (as determined An excise tax under section 4966 is imposed on in their capacity as a committee mem- under section 4958(f)(4)) of such a con- a sponsoring organization for each taxable dis- ber of which all the committee mem- tributor is a director, officer, trustee, man- tribution it makes from a donor advised fund. An bers are appointed by the sponsoring ager, employee, or contractor of the busi- excise tax is also imposed on any fund man- organization, ness enterprise (or an individual having ager of the sponsoring organization who agreed powers or responsibilities similar to any of to the making of a distribution, knowing that it is b. No combination of persons with advi- the foregoing); a taxable distribution. sory privileges, described in 3 above, or persons related to those in 3 above 2. At least a majority of the board of directors directly or indirectly control the of the private foundation are persons who committee, and

Page 64 Chapter 5 Excise Taxes Page 65 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

c. All grants from the fund or account are the party who received such benefit (which For more information on the excise taxes im- awarded on an objective and nondis- might be a donor, donor advisor, or related posed on private foundations, see the Instruc- criminatory basis according to a pro- party). The advisor and the party who received tions for Form 4720 and the Instructions for cedure approved in advance by the the benefit are jointly and severally liable for the Form 990-PF. board of directors of the sponsoring tax. organization. The procedure must be designed to ensure that all grants Tax on fund managers. If a tax is imposed on Excise Taxes on Black meet the requirements of section a prohibited benefit received by a donor, donor 4945(g)(1), (2), or (3). advisor, or related person, a tax of 10% of the Lung Benefit Trusts amount of the prohibited benefit is imposed on Disqualified supporting organization. A dis- any fund manager who agreed to the distribu- A black lung benefit trust that makes any ex- qualified supporting organization includes (1) a tion knowing that it would confer a prohibited penditures, payments, or investments other Type III supporting organization that isn't func- benefit. Any fund manager who took part in the than those described in chapter 4 under 501(c) tionally integrated and (2) any supporting or- distribution and is liable for the tax must pay the (21) - Black Lung Benefit Trusts must pay a tax ganization where the donor or donor advisor tax. The maximum amount of tax on all fund equal to 10% of the amount of such expendi- (and any related parties) directly or indirectly managers for any one taxable distribution is tures. If there are any acts of self-dealing be- controls a supported organization of the sup- $10,000. If more than one fund manager is lia- tween the trust and a disqualified person, a tax porting organization. ble for tax on a taxable distribution, all such equal to 10% of the amount involved is imposed managers are jointly and severally liable for the on the disqualified person. Both of these excise Tax on sponsoring organization. A tax of tax. taxes are reported on Schedule A (Form 20% of the amount of each taxable distribution 990-BL). See the Form 990-BL instructions for is imposed on the sponsoring organization. Exception. If a person engaged in an excess more information on these taxes and what has benefit transaction and received a prohibited to be filed, even if the trust is excepted from fil- Tax on fund manager. If a tax is imposed on benefit for the same transaction, the person is ing. a taxable distribution of the sponsoring organi- taxed under section 4958, and no tax is im- zation, a tax of 5% of the distribution will be imposed under section 4967 for a prohibited ben- posed on any fund manager who agreed to the efit. Excise Tax on Failure to distribution knowing that it was a taxable distri- For more information on taxes on prohibited bution. Any fund manager who took part in the benefits distributed from donor advised funds, Meet the Community distribution and is liable for the tax must pay the see the Instructions for Form 4720. tax. The maximum amount of tax on all fund Health Needs managers for any one taxable distribution is Assessment $10,000. If more than one fund manager is lia- Excise Taxes on Private ble for tax on a taxable distribution, all such Requirements managers are jointly and severally liable for the Foundations tax. For tax years beginning after March 23, 2012, For more information on the tax on taxable There is an excise tax on the net investment in- new section 4959 imposes an excise tax on distributions of sponsoring organizations, see come of most domestic private foundations. hospital organizations which fail to meet certain the Instructions for Form 4720. Capital gains from appreciation are included in section 501(r) requirements for each of their the tax base on private foundation net invest- hospital facilities. These entities must meet sec- ment income. This tax must be reported on tion 501(r)(3) requirements at all times during Taxes on Prohibited Form 990-PF and must be paid annually at the their tax year. Section 501(r)(3) requirements time for filing that return or in quarterly estima- pertain to a hospital organization preparing a Benefits Resulting from ted tax payments if the total tax for the year community health needs assessment (CHNA). (section 4940 tax minus credits) is $500 or See Schedule H, Hospitals (Form 990), for de- Donor Advised Fund more. Form 990-W is used to calculate the esti- tails. Distributions mated tax. In addition, there are several other rules that Prohibited benefit. If any donor, donor advi- apply to excise taxes on private foundations. Excise Tax on Executive sor, or related party advises the sponsoring or- These include: ganization about making a distribution which re- Compensation sults in a donor, donor advisor, or related party 1. Restrictions on self-dealing between pri- receiving (either directly or indirectly) a more vate foundations and their substantial con- New section 4960 imposes an excise tax on an than incidental benefit, then such benefit is a tributors and other disqualified persons, organization that pays to any covered employee prohibited benefit. The tax on prohibited bene- more than $1 million in remuneration or pays an 2. Requirements that the foundation annually excess parachute payment during the year fits applies to distributions occurring in tax years distribute income for charitable purposes, beginning after August 17, 2006. starting in 2018. See section 4960 and Form 3. Limits on their holdings in any business 4720, Return of Certain Excise Taxes Under Donor advisor. A donor advisor is any person enterprise (see Excess Business Hold- Chapters 41 and 42 of the Internal Revenue appointed or designated by a donor to advise a ings, earlier), Code, final regulations TD 9938 (Regulations sections 53.4960-0 through 53.4960-6), and sponsoring organization on the distribution or 4. Provisions that investments mustn't jeop- investment of amounts held in the donor's fund Notice 2019-09, 2019-04 I.R.B. 403, for more ardize the carrying out of exempt purpo- information. or account. ses, and Related party. A related party includes any 5. Provisions to assure that expenditures fur- family member or 35% controlled entity. See ther the organization's exempt purposes. the definition of those terms under Disqualified Violations of these provisions give rise to Person, earlier. taxes and penalties against the private founda- Tax on donor, donor advisor, or related per- tion and, in some cases, its managers, its sub- son. A tax of 125% of the benefit resulting from stantial contributors, and certain related per- the distribution is imposed on both the party sons. who advised as to the distribution (which might be a donor, donor advisor, or related party) and

Chapter 5 Excise Taxes Page 65 Page 66 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

statements from banks and investment firms – A self-employment tax feature. (Forms 1099), you have several options to – Automatic calculation of taxable social Excise Tax on Net choose from to prepare and file your tax return. security benefits. Investment Income of You can prepare the tax return yourself, see if • The First Time Homebuyer Credit Account you qualify for free tax preparation, or hire a tax Look-up (IRS.gov/HomeBuyer) tool pro- Certain Colleges and professional to prepare your return. vides information on your repayments and account balance. Universities Free options for tax preparation. Go to • The Sales Tax Deduction Calculator IRS.gov to see your options for preparing and (IRS.gov/SalesTax) figures the amount you New section 4968 imposes an excise tax on the filing your return online or in your local commun- can claim if you itemize deductions on net investment income of certain private col- ity, if you qualify, which include the following. Schedule A (Form 1040). leges and universities. A private college or uni- • Free File. This program lets you prepare versity will be subject to the excise tax on net in- and file your federal individual income tax Getting answers to your tax ques- vestment income under section 4968 if four return for free using brand-name tax-prep- tions. On IRS.gov, you can get tests are met. aration-and-filing software or Free File filla- up-to-date information on current events and changes in tax law. 1. The organization must be an eligible edu- ble forms. However, state tax preparation cational institution as defined in section may not be available through Free File. Go • IRS.gov/Help: A variety of tools that will 25A(f)(2). Section 25A(f)(2) defines “eligi- to IRS.gov/FreeFile to see if you qualify for help you get answers to some of the most ble educational institution” as an institution free online federal tax preparation, e-filing, common tax questions. that is described in section 481 of the and direct deposit or payment options. • IRS.gov/ITA: The Interactive Tax Assistant, Higher Education Act of 1965 (20 U.S.C. • VITA. The Volunteer Income Tax Assis- a tool that will ask you questions on a num- section 1088), as in effect on August 5, tance (VITA) program offers free tax help ber of tax law topics and provide answers. 1997, and is eligible to participate in a pro- to people with low-to-moderate incomes, You can print the entire interview and the gram under Title IV of such Act (20 U.S.C. persons with disabilities, and limited-Eng- final response for your records. lish-speaking taxpayers who need help sections 1070 et seq.). • IRS.gov/Forms: Find forms, instructions, preparing their own tax returns. Go to and publications. You will find details on 2. The organization must have had at least IRS.gov/VITA, download the free IRS2Go 2020 tax changes and hundreds of interac- 500 tuition-paying students, based upon a app, or call 800-906-9887 for information tive links to help you find answers to your daily average student count, during the on free tax return preparation. questions. preceding tax year. • TCE. The Tax Counseling for the Elderly • You may also be able to access tax law in- 3. More than 50% of those students must (TCE) program offers free tax help for all formation in your electronic filing software. have been located in the United States. taxpayers, particularly those who are 60 years of age and older. TCE volunteers 4. The aggregate fair market value, at the specialize in answering questions about Need someone to prepare your tax return? end of the preceding tax year, of the as- pensions and retirement-related issues There are various types of tax return preparers, sets not used directly in carrying out the unique to seniors. Go to IRS.gov/TCE, including tax preparers, enrolled agents, certi- organization’s exempt purpose, held by download the free IRS2Go app, or call fied public accountants (CPAs), attorneys, and the organization and related organizations, 888-227-7669 for information on free tax many others who don’t have professional cre- must be at least $500,000 per student. return preparation. dentials. If you choose to have someone pre- MilTax. Members of the U.S. Armed See the Instructions for Form 990, Part V, • pare your tax return, choose that preparer Forces and qualified veterans may use Mil- Line 16 for more information about organiza- wisely. A paid tax preparer is: Tax, a free tax service offered by the De- tions subject to the excise tax. See Instructions • Primarily responsible for the overall sub- partment of Defense through Military One- for Form 4720, Schedule O, and final regula- stantive accuracy of your return, Source. tions TD 9917 (Regulations sections 53.4968-1 • Required to sign the return, and Also, the IRS offers Free Fillable through 53.4968-4) for more information about • Required to include their preparer tax iden- Forms, which can be completed online and calculating the excise tax. tification number (PTIN). then filed electronically regardless of in- Although the tax preparer always signs the re- come. turn, you're ultimately responsible for providing Using online tools to help prepare your re- all the information required for the preparer to turn. Go to IRS.gov/Tools for the following. accurately prepare your return. Anyone paid to • The Earned Income Tax Credit Assistant prepare tax returns for others should have a (IRS.gov/EITCAssistant) determines if thorough understanding of tax matters. For 6. you’re eligible for the earned income credit more information on how to choose a tax preparer, go to (EIC). Tips for Choosing a Tax Preparer • The Online EIN Application (IRS.gov/EIN) on IRS.gov. helps you get an employer identification Coronavirus. Go to IRS.gov/Coronavirrus for How to Get Tax number (EIN). links to information on the impact of the corona- • The Tax Withholding Estimator (IRS.gov/ virus, as well as tax relief available for individu- W4app) makes it easier for everyone to Help als and families, small and large businesses, pay the correct amount of tax during the and tax-exempt organizations. year. The tool is a convenient, online way If you have questions about a tax issue, need to check and tailor your withholding. It’s help preparing your tax return, or want to down- Tax reform. Tax reform legislation affects indi- more user-friendly for taxpayers, including load free publications, forms, or instructions, go viduals, businesses, and tax-exempt and gov- retirees and self-employed individuals. The to IRS.gov and find resources that can help you ernment entities. Go to IRS.gov/TaxReform for features include the following. right away. information and updates on how this legislation Easy to understand language. – affects your taxes. Preparing and filing your tax return. After – The ability to switch between screens, receiving all your wage and earnings state- correct previous entries, and skip Employers can register to use Business ments (Form W-2, W-2G, 1099-R, 1099-MISC, screens that don’t apply. Services Online. The Social Security Adminis- 1099-NEC, etc.); unemployment compensation – Tips and links to help you determine if tration (SSA) offers online service at SSA.gov/ statements (by mail or in a digital format) or you qualify for tax credits and deduc- employer for fast, free, and secure online W-2 other government payment statements (Form tions. filing options to CPAs, accountants, enrolled 1099-G); and interest, dividend, and retirement – A progress tracker. agents, and individuals who process Form W-2,

Page 66 Chapter 6 How to Get Tax Help Page 67 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Wage and Tax Statement, and Form W-2c, prefer, you can order your transcript by calling • Cash: You may be able to pay your taxes Corrected Wage and Tax Statement. 800-908-9946. with cash at a participating retail store. • Same-Day Wire: You may be able to do IRS social media. Go to IRS.gov/SocialMedia Reporting and resolving your tax-related same-day wire from your financial institu- to see the various social media tools the IRS identity theft issues. tion. Contact your financial institution for uses to share the latest information on tax • Tax-related identity theft happens when availability, cost, and cut-off times. changes, scam alerts, initiatives, products, and someone steals your personal information services. At the IRS, privacy and security are to commit tax fraud. Your taxes can be af- What if I can’t pay now? Go to IRS.gov/ paramount. We use these tools to share public fected if your SSN is used to file a fraudu- Payments for more information about your op- information with you. Don’t post your social se- lent return or to claim a refund or credit. tions. curity number or other confidential information • The IRS doesn’t initiate contact with tax- • Apply for an online payment agreement on social media sites. Always protect your iden- payers by email, text messages, telephone (IRS.gov/OPA) to meet your tax obligation tity when using any social networking site. calls, or social media channels to request in monthly installments if you can’t pay personal or financial information. This in- your taxes in full today. Once you complete The following IRS YouTube channels provide the online process, you will receive imme- short, informative videos on various tax-related cludes requests for personal identification numbers (PINs), passwords, or similar in- diate notification of whether your agree- topics in English, Spanish, and ASL. ment has been approved. • Youtube.com/irsvideos. formation for credit cards, banks, or other financial accounts. • Use the Offer in Compromise Pre-Qualifier • Youtube.com/irsvideosmultilingua. to see if you can settle your tax debt for • Youtube.com/irsvideosASL. • Go to IRS.gov/IdentityTheft, the IRS Iden- tity Theft Central webpage, for information less than the full amount you owe. For on identity theft and data security protec- more information on the Offer in Compro- Watching IRS videos. The IRS Video portal mise program, go to IRS.gov/OIC. (IRSVideos.gov) contains video and audio pre- tion for taxpayers, tax professionals, and businesses. If your SSN has been lost or sentations for individuals, small businesses, Filing an amended return. You can now file stolen or you suspect you’re a victim of and tax professionals. Form 1040-X electronically with tax filing soft- tax-related identity theft, you can learn ware to amend 2019 Forms 1040 and 1040-SR. what steps you should take. Online tax information in other languages. To do so, you must have e-filed your original • Get an Identity Protection PIN (IP PIN). IP You can find information on IRS.gov/ 2019 return. Amended returns for all prior years PINs are six-digit numbers assigned to eli- MyLanguage if English isn’t your native lan- must be mailed. See Tips for taxpayers who gible taxpayers to help prevent the misuse guage. need to file an amended tax return and go to of their SSNs on fraudulent federal income IRS.gov/Form1040X for information and up- Free interpreter service. Multilingual assis- tax returns. When you have an IP PIN, it dates. tance, provided by the IRS, is available at Tax- prevents someone else from filing a tax return with your SSN. To learn more, go to payer Assistance Centers (TACs) and other Checking the status of an amended return. IRS.gov/IPPIN. IRS offices. Over-the-phone interpreter service Go to IRS.gov/WMAR to track the status of is accessible in more than 350 languages. Form 1040-X amended returns. Please note Checking on the status of your refund. that it can take up to 3 weeks from the date you Getting tax forms and publications. Go to • Go to IRS.gov/Refunds. mailed your amended return for it to show up in IRS.gov/Forms to view, download, or print all of • The IRS can’t issue refunds before our system, and processing it can take up to 16 the forms, instructions, and publications you mid-February 2021 for returns that claimed weeks. may need. You can also download and view the EIC or the additional child tax credit (ACTC). This applies to the entire refund, popular tax publications and instructions (in- Understanding an IRS notice or letter. Go to not just the portion associated with these cluding the Instructions for Forms 1040) on mo- IRS.gov/Notices to find additional information credits. bile devices as an eBook at IRS.gov/eBooks. about responding to an IRS notice or letter. Or you can go to IRS.gov/OrderForms to place • Download the official IRS2Go app to your an order. mobile device to check your refund status. Contacting your local IRS office. Keep in • Call the automated refund hotline at mind, many questions can be answered on Access your online account (individual tax- 800-829-1954. IRS.gov without visiting an IRS Taxpayer Assis- payers only). Go to IRS.gov/Account to se- tance Center (TAC). Go to IRS.gov/LetUsHelp Making a tax payment. The IRS uses the lat- curely access information about your federal tax for the topics people ask about most. If you still est encryption technology to ensure your elec- account. need help, IRS TACs provide tax help when a tronic payments are safe and secure. You can • View the amount you owe, pay online, or tax issue can’t be handled online or by phone. make electronic payments online, by phone, set up an online payment agreement. All TACs now provide service by appointment, and from a mobile device using the IRS2Go • Access your tax records online. so you’ll know in advance that you can get the app. Paying electronically is quick, easy, and • Review your payment history. service you need without long wait times. Be- faster than mailing in a check or money order. • Go to IRS.gov/SecureAccess to review the fore you visit, go to IRS.gov/TACLocator to find Go to IRS.gov/Payments to make a payment required identity authentication process. the nearest TAC and to check hours, available using any of the following options. services, and appointment options. Or, on the Using direct deposit. The fastest way to re- IRS Direct Pay: Pay your individual tax bill • IRS2Go app, under the Stay Connected tab, ceive a tax refund is to file electronically and or estimated tax payment directly from choose the Contact Us option and click on “Lo- choose direct deposit, which securely and elec- your checking or savings account at no cal Offices.” tronically transfers your refund directly into your cost to you. financial account. Direct deposit also avoids the • Debit or Credit Card: Choose an approved possibility that your check could be lost, stolen, payment processor to pay online, by or returned undeliverable to the IRS. Eight in 10 phone, and by mobile device. taxpayers use direct deposit to receive their re- • Electronic Funds Withdrawal: Offered only The Taxpayer Advocate funds. The IRS issues more than 90% of re- when filing your federal taxes using tax re- Service (TAS) Is Here To funds in less than 21 days. turn preparation software or through a tax Help You professional. Getting a transcript or copy of a return. The • Electronic Federal Tax Payment System: What Is TAS? quickest way to get a copy of your tax transcript Best option for businesses. Enrollment is is to go to IRS.gov/Transcripts. Click on either required. TAS is an independent organization within the “Get Transcript Online” or “Get Transcript by • Check or Money Order: Mail your payment IRS that helps taxpayers and protects taxpayer Mail” to order a copy of your transcript. If you to the address listed on the notice or in- rights. Their job is to ensure that every taxpayer structions. is treated fairly and that you know and

Chapter 6 How to Get Tax Help Page 67 Page 68 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

understand your rights under the Taxpayer Bill • You face (or your business is facing) an guidance, TAS programs, and ways to let TAS of Rights. immediate threat of adverse action; or know about systemic problems you’ve seen in • You’ve tried repeatedly to contact the IRS your practice. How Can You Learn About Your but no one has responded, or the IRS Taxpayer Rights? hasn’t responded by the date promised. Low Income Taxpayer Clinics (LITCs) The Taxpayer Bill of Rights describes 10 basic How Can You Reach TAS? rights that all taxpayers have when dealing with LITCs are independent from the IRS. LITCs TAS has offices in every state, the District of the IRS. Go to TaxpayerAdvocate.IRS.gov to represent individuals whose income is below a Columbia, and Puerto Rico. Your local advo- help you understand what these rights mean to certain level and need to resolve tax problems cate’s number is in your local directory and at you and how they apply. These are your rights. with the IRS, such as audits, appeals, and tax TaxpayerAdvocate.IRS.gov/Contact-Us. You Know them. Use them. collection disputes. In addition, clinics can pro- can also call them at 877-777-4778. vide information about taxpayer rights and re- What Can TAS Do For You? sponsibilities in different languages for individu- How Else Does TAS Help als who speak English as a second language. TAS can help you resolve problems that you Taxpayers? Services are offered for free or a small fee for can’t resolve with the IRS. And their service is eligible taxpayers. To find a clinic near you, visit free. If you qualify for their assistance, you will TAS works to resolve large-scale problems that TaxpayerAdvocate.IRS.gov/about/LITC or see be assigned to one advocate who will work with affect many taxpayers. If you know of one of IRS Pub. 4134, Low Income Taxpayer Clinic you throughout the process and will do every- these broad issues, please report it to them at List. thing possible to resolve your issue. TAS can IRS.gov/SAMS. help you if: • Your problem is causing financial difficulty TAS for Tax Professionals for you, your family, or your business; TAS can provide a variety of information for tax professionals, including tax law updates and

Page 68 Chapter 6 How to Get Tax Help Page 69 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Organization Reference Chart

Section of Application Annual return Contributions 1986 Code Description of organization General nature of activities Form1 required to be allowable filed

501(c)(1) Corporations Organized under Act Instrumentalities of the No Form None Yes, if made for of Congress (including Federal Credit United States exclusively public Unions) purposes 501(c)(2) Title Holding Corporation For Holding title to property of an 1024 9902 or 990-EZ9 No3 Exempt Organization exempt organization and distributing net income to it 501(c)(3) Religious, Educational, Charitable, Activities of nature implied by description 1023, 1023-EZ 9902 or 990-EZ9, Yes, generally Scientific, Literary, Testing for Public of class of organization or 990-PF Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations 501(c)(4) Civic Leagues, Social Welfare Promotion of community welfare; Must provide 9902 or 990-EZ9 No, generally 3, 4 Organizations; and Local charitable, educational, or recreational notice on Form Associations of Employees 8976; may also submit Form1024-A 501(c)(5) Labor, Agricultural, and Horticultural Educational or instructive, the 1024 9902 or 990-EZ1 No3 Organizations purpose being to improve conditions of work, and to improve products and/or efficiency 501(c)(6) Business Leagues, Chambers of Improvement of business 1024 9902 or 990-EZ9 No3 Commerce, Real Estate Boards, conditions of one or more lines of business etc. 501(c)(7) Social and Recreational Clubs Pleasure, recreation, social activities 1024 9902 or 990-EZ9 No3 501(c)(8) Fraternal Beneficiary Societies Providing for payment of life, sickness, 1024 9902 or 990-EZ9 Yes, if for certain and Associations accident or other benefits Sec. 501(c)(3) to members within a lodge system purposes 501(c)(9) Voluntary Employees Beneficiary Employee association providing for 1024 9902 or 990-EZ9 No3 Associations payment of life, sickness, accident, or other benefits to members 501(c)(10) Domestic Fraternal Societies Earnings devoted to charitable, fraternal, 1024 9902 or 990-EZ9 Yes, if for certain and Associations and Sec. 501(c)(3) other specified purposes within a domestic purposes lodge system. No benefits to members 501(c)(11) Teachers' Retirement Fund Associations Teachers' association for payment of Letter7 9902 or 990-EZ9 No3 retirement benefits 501(c)(12) Benevolent Life Insurance Associations, Activities of a mutual or cooperative 1024 9902 or 990-EZ9 No3 Mutual Ditch or nature Irrigation Companies, Mutual or Cooperative Telephone Companies, and Like Organizations 501(c)(13) Cemetery Companies Burials and incidental activities 1024 9902 or 990-EZ9 Yes, generally 501(c)(14) State-Chartered Credit Unions, Loans to members Letter7 9902 or 990-EZ9 No3 Mutual Reserve Funds 501(c)(15) Mutual Insurance Companies or Providing insurance to members 1024 9902 or 990-EZ9 No3 Associations substantially at cost 501(c)(16) Cooperative Organizations to Financing crop operations in Form 1120-C, 9902 or 990-EZ9 No3 Finance Crop Operations conjunction with activities of a marketing Letter7 or purchasing association 501(c)(17) Supplemental Unemployment Provides for payment of 1024 9902 or 990-EZ9 No3 Benefit Trusts supplemental unemployment compensation benefits 501(c)(18) Employee Funded Pension Trust Payment of benefits under a Letter7 9902 or 990-EZ9 No3 (created before June 25, 1959) pension plan funded by employees 501(c)(19) Post or Organization of Past or Activities implied by nature of organization 1024 9902 or 990-EZ9 No, generally8 Present Members of the Armed Forces 501(c)(21) Black Lung Benefit Trusts Funded by coal mine operators to satisfy Letter7 990-BL No5 their liability for disability or death due to black lung diseases Publication 557 (February 2021) Page 69 Page 70 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Section of Application Annual return Contributions 1986 Code Description of organization General nature of activities Form1 required to be allowable filed 501(c)(22) Withdrawal Liability Payment Fund To provide funds to meet the Letter7 9902 or 990-EZ9 No6 liability of employers withdrawing from a multi-employer pension fund 501(c)(23) Veterans' Organization (created To provide insurance and other Letter7 9902 or 990-EZ9 No, generally8 before 1880) benefits to veterans 501(c)(25) Title Holding Corporations or Trusts with Holding title and paying over 1024 9902 or 990-EZ9 No Multiple Parent Corporations income from real property to 35 or fewer parents or beneficiaries 501(c)(26) State-Sponsored Organization Providing Provides health care coverage to high-risk Letter7 9902 or 990-EZ9 No Health Coverage for High-Risk individuals Individuals 501(c)(27) State-Sponsored Workers' Reimburses members for losses Letter7 9902 or 990-EZ9 No Compensation Reinsurance Organization under workers' compensation acts 501(c)(28) National Railroad Retirement Investment Manages and invests the assets of the No Form 99012 No12 Trust Railroad Retirement Account 501(c)(29) CO-OP health insurance issuers A qualified health insurance issuer which Letter and 9902 No14 has received a loan or grant under the Form 871815 CO-OP program 501(d) Religious and Apostolic Associations Regular business activities; No Form 106510 No3 Communal religious community 501(e) Cooperative Hospital Service Performs cooperative services for hospitals 1023 9902 or 990-EZ9 Yes Organizations 501(f) Cooperative Service Organizations Performs collective investment 1023 9902 or 990-EZ9 Yes of Operating Educational Organizations services for educational organizations 501(k) Child Care Organizations Provides care for children 1023 9902 or 990-EZ9 Yes 501(n) Charitable Risk Pools Pools certain insurance risks of sec. 501(c) 1023 9902 or 990-EZ9 Yes (3) organizations 501(q) Credit Counseling Organization Credit counseling services 1023 99013 No 521(a) Farmers' Cooperative Associations Cooperative marketing and 1028 1120-C No purchasing for agricultural procedures 527 Political organizations A party, committee, fund, 8871 1120-POL11 No association, etc., that directly or indirectly 9902 or 990-EZ8 accepts contributions or makes expenditures for political campaigns 1 Most 501(c) organizations, other than those described in sections 501(c)(3) (exceptions apply), (9), and (17), may, but are not required to, submit an application for recognition of tax exempt status from the IRS. These organizations may self-declare their tax exempt status by operating within the requirements of the applicable code section and filing the required annual returns or notices. 2 For exceptions to the filing requirement, see chapter 2 and the form instructions. Note: For annual tax periods beginning after 2006, most tax-exempt organizations, other than churches, are required to file an annual Form 990, 990-EZ, or 990-PF with the IRS or to submit an annual electronic notice, Form 990-N (e-Postcard), to the IRS. Tax-exempt organizations failing to file an annual return or submit an annual notice as required for 3 consecutive years will automatically lose their tax-exempt status. See form instructions as to which 990 series, and other series, forms, after the Taxpayer First Act, are required to be filed electronically. 3 An organization exempt under a subsection of section 501 other than 501(c)(3) can establish a charitable fund, contributions to which are deductible. Such a fund must itself meet the requirements of section 501(c)(3) and the related notice requirements of section 508(a). 4 Contributions to volunteer fire companies and similar organizations are deductible, but only if made for exclusively public purposes. 5 Deductible as a business expense to the extent allowed by section 192. 6 Deductible as a business expense to the extent allowed by section 194A. 7 Application is by letter to the address shown on Form 8718. A copy of the organizing document should be attached and the letter should be signed by an officer. 8 Contributions to these organizations are deductible only if 90% or more of the organization's members are war veterans. 9 For limits on the use of Form 990-EZ, see chapter 2 and the general instructions for Form 990-EZ (or Form 990). 10 Although the organization files a partnership return, all distributions are deemed dividends. The members aren't entitled to pass through treatment of the organization's income or expenses. 11 Form 1120-POL is required only if the organization has taxable income as defined in section 527(c). 12 Only required to annually file so much of the Form 990 that relates to the names and addresses of the officers, directors, trustees, and key employees, and their titles, compensation, and hours devoted to their positions (Part VII of Form 990), and to complete Item I in the Heading of Form 990 to confirm its tax-exempt status under section 501(c)(28). 13 See section 501(q) if the organization provides credit counseling services and seeks recognition of exemption under section 501(c)(4). Use Form 1024-A if applying for recognition under section 501(c)(4). 14 See section 501(c)(29) for details. 15 See Rev. Proc. 2015-17, sec. 4.01, 2015-7 I.R.B. 599, for details.

Page 70 Publication 557 (February 2021) Page 71 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Appendix. Sample Articles of Organization

The following are examples of Articles of Incorporation (Draft A) and a declaration of trust (Draft B) that contain the required information as to purposes and powers of an organization and disposition of its assets upon dissolution. You should bear in mind that requirements for these instruments may vary under applicable state law.

See Private Foundations and Public Charities, earlier for the special provisions required in a private foundation's governing instrument in order for it to qualify for exemption.

DRAFT A

Articles of Incorporation of the undersigned, a majority of whom are citizens of the United States, desiring to form a Non-Profit Corporation under the Non-Profit Corporation Law of , do hereby certify:

First: The name of the Corporation shall be .

Second: The place in this state where the principal office of the Corporation is to be located is the City of , County.

Third: Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

Fourth: The names and addresses of the persons who are the initial trustees of the corporation are as follows: Name , Address

Fifth: No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article Third hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

If reference to federal law in articles of incorporation imposes a limitation that is invalid in your state, you may wish to substitute the following for the last sentence of the preceding paragraph: “Notwithstanding any other provision of these articles, this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that aren't in furtherance of the purposes of this corporation.”

Sixth: Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.

In witness whereof, we have hereunto subscribed our names this day of , 20 .

Publication 557 (February 2021) Page 71 Page 72 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Appendix. Sample Articles of Organization, continued

Draft B The Charitable Trust. Declaration of Trust made as of the day of , 20 , by , of , and , of , who hereby declare and agree that they have received this day from , as Donor, the sum of Ten Dollars ($10) and that they will hold and manage the same, and any additions to it, in trust, as follows:

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

Second: The trustees may receive and accept property, whether real, personal, or mixed, by way of gift, bequest, or devise, from any person, firm, trust, or corporation, to be held, administered, and disposed of in accordance with and pursuant to the provisions of this Declaration of Trust; but no gift, bequest, or devise of any such property shall be received and accepted if it is conditioned or limited in such manner as to require the disposition of the income or its principal to any person or organization other than a “charitable organization” or for other than “charitable purposes” within the meaning of such terms as defined in Article Third of this Declaration of Trust, or as shall, in the opinion of the trustees, jeopardize the federal income tax exemption of this trust pursuant to section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

Third: a) The principal and income of all property received and accepted by the trustees to be administered under this Declaration of Trust shall be held in trust by them, and the trustees may make payments or distributions from income or principal, or both, to or for the use of such charitable organizations, within the meaning of that term as defined in paragraph C, in such amounts and for such charitable purposes of the trust as the trustees shall from time to time select and determine; and the trustees may make payments or distributions from income or principal, or both, directly for such charitable purposes, within the meaning of that term as defined in paragraph D, in such amounts as the trustees shall from time to time select and determine without making use of any other charitable organization. The trustees may also make payments or distributions of all or any part of the income or principal to states, territories, or possessions of the United States, any political subdivision of any of the foregoing, or to the United States or the District of Columbia but only for charitable purposes within the meaning of that term as defined in paragraph D. Income or principal derived from contributions by corporations shall be distributed by the trustees for use solely within the United States or its possessions. No part of the net earnings of this trust shall inure or be payable to or for the benefit of any private shareholder or individual, and no substantial part of the activities of this trust shall be the carrying on of propaganda, or otherwise attempting to influence legislation. No part of the activities of this trust shall be the participation in, or intervention in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office.

b) The trust shall continue forever unless the trustees terminate it and distribute all of the principal and income, which action may be taken by the trustees in their discretion at any time. On such termination, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. The donor authorizes and empowers the trustees to form and organize a nonprofit corporation limited to the uses and purposes provided for in this Declaration of Trust, such corporation to be organized under the laws of any state or under the laws of the United States as may be determined by the trustees; such corporation when organized to have power to administer and control the affairs and property and to carry out the uses, objects, and purposes of this trust. Upon the creation and organization of such corporation, the trustees are authorized and empowered to convey, transfer, and deliver to such corporation all the property and assets to which this trust may be or become entitled. The charter, bylaws, and other provisions for the organization and management of such corporation and its affairs and property shall be such as the trustees shall determine, consistent with the provisions of this paragraph.

Page 72 Publication 557 (February 2021) Page 73 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

c) In this Declaration of Trust and in any amendments to it, references to “charitable organizations” or “charitable organization” mean corporations, trusts, funds, foundations, or community chests created or organized in the United States or in any of its possessions, whether under the laws of the United States, any state or territory, the District of Columbia, or any possession of the United States, organized and operated exclusively for charitable purposes, no part of the net earnings of which inures or is payable to or for the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which don't participate in or intervene in (including the publishing or distributing of statements) any political campaign on behalf of or in opposition to any candidate for public office. It is intended that the organization described in this paragraph C shall be entitled to exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code. d) In this Declaration of Trust and in any amendments to it, the term “charitable purposes” shall be limited to and shall include only religious, charitable, scientific, literary, or educational purposes within the meaning of those terms as used in section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, but only such purposes as also constitute public charitable purposes under the law of trusts of the State of .

Fourth: This Declaration of Trust may be amended at any time or times by written instrument or instruments signed and sealed by the trustees, and acknowledged by any of the trustees, provided that no amendment shall authorize the trustees to conduct the affairs of this trust in any manner or for any purpose contrary to the provisions of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code. An amendment of the provisions of this Article Fourth (or any amendment to it) shall be valid only if and to the extent that such amendment further restricts the trustees' amending power. All instruments amending this Declaration of Trust shall be noted upon or kept attached to the executed original of this Declaration of Trust held by the trustees.

Fifth: Any trustee under this Declaration of Trust may, by written instrument, signed and acknowledged, resign his office. The number of trustees shall be at all times not less than two, and whenever for any reason the number is reduced to one, there shall be, and at any other time there may be, appointed one or more additional trustees. Appointments shall be made by the trustee or trustees for the time in office by written instruments signed and acknowledged. Any succeeding or additional trustee shall, upon his or her acceptance of the office by written instrument signed and acknowledged, have the same powers, rights, and duties, and the same title to the trust estate jointly with the surviving or remaining trustee or trustees as if originally appointed. None of the trustees shall be required to furnish any bond or surety. None of them shall be responsible or liable for the acts or omissions of any other of the trustees or of any predecessor or of a custodian, agent, depositary, or counsel selected with reasonable care. The one or more trustees, whether original or successor, for the time being in office, shall have full authority to act even though one or more vacancies may exist. A trustee may, by appropriate written instrument, delegate all or any part of his or her powers to another or others of the trustees for such periods and subject to such conditions as such delegating trustee may determine. The trustees serving under this Declaration of Trust are authorized to pay to themselves amounts for reasonable expenses incurred and reasonable compensation for services rendered in the administration of this trust, but in no event shall any trustee who has made a contribution to this trust ever receive any compensation thereafter.

Sixth: In extension and not in limitation of the common law and statutory powers of trustees and other powers granted in this Declaration of Trust, the trustees shall have the following discretionary powers.

a) To invest and reinvest the principal and income of the trust in such property, real, personal, or mixed, and in such manner as they shall deem proper, and from time to time to change investments as they shall deem advisable; to invest in or retain any stocks, shares, bonds, notes, obligations, or personal or real property (including without limitation any interests in or obligations of any corporation, association, business trust, investment trust, common trust fund, or investment company) although some or all of the property so acquired or retained is of a kind or size which but for this express authority wouldn't be considered proper and although all of the trust funds are invested in the securities of one company. No principal or income, however, shall be loaned, directly or indirectly, to any trustee or to anyone else, corporate or otherwise, who has at any time made a contribution to this trust, nor to anyone except on the basis of an adequate interest charge and with adequate security.

b) To sell, lease, or exchange any personal, mixed, or real property, at public auction or by private contract, for such consideration and on such terms as to credit or otherwise, and to make such contracts and enter into such undertakings relating to the trust property, as they consider advisable, whether or not such leases or contracts may extend beyond the duration of the trust.

Publication 557 (February 2021) Page 73 Page 74 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

c) To borrow money for such periods, at such rates of interest, and upon such terms as the trustees consider advisable, and as security for such loans to mortgage or pledge any real or personal property with or without power of sale; to acquire or hold any real or personal property, subject to any mortgage or pledge on or of property acquired or held by this trust.

d) To execute and deliver deeds, assignments, transfers, mortgages, pledges, leases, covenants, contracts, promissory notes, releases, and other instruments, sealed or unsealed, incident to any transaction in which they engage.

e) To vote, to give proxies, to participate in the reorganization, merger, or consolidation of any concern, or in the sale, lease, disposition, or distribution of its assets; to join with other security holders in acting through a committee, depositary, voting trustees, or otherwise, and in this connection to delegate authority to such committee, depositary, or trustees and to deposit securities with them or transfer securities to them; to pay assessments levied on securities or to exercise subscription rights in respect of securities.

f) To employ a bank or trust company as custodian of any funds or securities and to delegate to it such powers as they deem appropriate; to hold trust property without indication of fiduciary capacity but only in the name of a registered nominee, provided the trust property is at all times identified as such on the books of the trust; to keep any or all of the trust property or funds in any place or places in the United States of America; to employ clerks, accountants, investment counsel, investment agents, and any special services, and to pay the reasonable compensation and expenses of all such services in addition to the compensation of the trustees.

Seventh: The trustees' powers are exercisable solely in the fiduciary capacity consistent with and in furtherance of the charitable purposes of this trust as specified in Article Third and not otherwise.

Eighth: In this Declaration of Trust and in any amendment to it, references to “trustees” mean the one or more trustees, whether original or successor, for the time being in office.

Ninth: Any person may rely on a copy, certified by a notary public, of the executed original of this Declaration of Trust held by the trustees, and of any of the notations on it and writings attached to it, as fully as he might rely on the original documents themselves. Any such person may rely fully on any statements of fact certified by anyone who appears from such original documents or from such certified copy to be a trustee under this Declaration of Trust. No one dealing with the trustees need inquire concerning the validity of anything the trustees purport to do. No one dealing with the trustees need see to the application of anything paid or transferred to or upon the order of the trustees of the trust.

Tenth: This Declaration of Trust is to be governed in all respects by the laws of the State of . • Trustee • Trustee

Page 74 Publication 557 (February 2021) Page 75 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

1024 4, 18, 47, 49–53, 55, 56, Listed transaction 60 A D 58 Literary organizations 30 Acknowledgment of Determination letter 6 1040 14 Loans, organizations contributions 17 Disclosures, required 16 1065 11 providing 29 Adverse determination 6 Dues used for lobbying 21 1120–POL 14 Lobbying expenditures 46 Affordable Care Act: Nondeductible 1128 21 Local benevolent life insurance Hospitals 32 contributions 20 2848 4, 7 associations 54 Agricultural organization 49 Quid pro quo contributions 16 4720 47 Local employees' Airport 48 Services available from 5578 27 association 52 Alumni association 26 government 20 5768 46 Lodge system 51 Amateur athletic Dispositions of donated 6069 57 organizations 30 property 16 8274 13 Animals, prevention of cruelty Disqualified persons 42 8282 16 M to 30 Domestic fraternal society 51 8283 16 Medical research Appeal procedures 7 Donor advised funds: 8300 18 organization 32 Application procedures 4, 5 Excess benefit transaction 61 8718 4 Medicare and Medicaid Bylaws 5 Dues used for political or 8821 7 payments 35 Conformed copy 5 legislative activities 21, 50 8871 14, 18 Membership fee 35, 40 Description of activities 5 8872 14, 18 Modification of exemption 6 Employer identification 990 9, 11, 18, 46 Mutual financial number 5 E 990-BL 11, 57 organization 56 Financial Unless you are filing Educational organizations 25, 990-EZ 11 Mutual or cooperative Form 1023-EZ, y 5 31 990-PF 12, 31, 65 association 55 Organizing If you are submitting Employees' association 51 990-T 13 a Form 1023 or Form 1024, Employment taxes 13 SS-4 5, 8 y 5 Endowment fund 32 W–2 13 N Aquatic resources 49 Estimated tax 13 Fraternal beneficiary society 51 Notice: Articles of organization 25 Excess benefit transaction 61 Fraternal societies 20, 51 Notice 2014–4 45 Assistance (See Tax help) Disqualified person 60, 62 Funeral benefit insurance 55 Athletic organization 26, 30 Controlled entity, 35% 62 Attorney's fees 29 Family members 62 O Attribution, special rules 44 Substantial influence 62 G One-third support test 32 Disregarded benefits 63 Gifts and contributions, public Organizational changes 21 Donor advised funds 61, 62 charity 40 Organization assets 25 B Excise tax 60 Governmental unit 32 Dedication 25 Black lung benefit trust 57 Initial contracts 63 Grant: Distribution 25 Board of trade 49 Reasonable compensation 63 Distinguished from gross Organization Reference Bureau defined 40 Rebuttable presumption 63 receipts 40 Chart 69 Burial benefit insurance 55 Excise tax: Exclusion for unusual Business income, unrelated 13 Black lung benefit trust 57 grant 35, 39 Business league 49 Lobbying expenditures 47 From public charity 35, 41 P Political expenditures 47 Grantor and contributor, Penalties 13 Private foundations 31, 65 reliance on ruling 45 Failure to allow public C Exempt function 14 Gross receipts from inspection 20 Cemetery company 55 Exemption for terrorist nonmembership sources 51 Failure to disclose 17, 20, 21 Chamber of commerce 49 organization 5 Group exemption letter 8 Failure to file 13 Change in legal structure 21 Exempt purposes 22 Perpetual care organization 55 Charitable contributions 17, 22 Extensions of time 23 Political activity 21, 23, 48 Charitable organization 22, 28 H Political organization: Charitable risk pools 28 Health coverage Income tax return 14 Child care organization 22 F organization 59 Taxable income 14 Children, prevention of cruelty Facts and circumstances High-risk health coverage Power of attorney 4 to 30 test 33 organization 59 Preferred stock 55 Church 29 Fair market value, estimate Homeowners' association 48 Prevention of cruelty to children Integrated auxiliaries 29 of 16 Horticultural organization 49 or animals 30 Civic leagues 47 Filing requirements 11 Hospital 28, 31 Private delivery service 23 Clinic 29 Annual information returns 11 Private foundations 30 College bookstore, Donee information return 16 Private operating foundation 45 restaurant 26 Due date 14 I Private school 26 Community association 48 Employment tax 13 Inactive organization 21 Prohibited tax shelter Community trust 37 Excise tax 31, 65 Industrial development 48 transactions: Contributions, charitable 17, 22 Political organization 14 Instrumentalities 22 Entity managers 60 CO-OP Health Insurance Private foundations 12 Insurance, organizations Entity managers excise tax 60 Issuers 59 Unrelated business income 13 providing 28 Listed transaction 60 Court appeals 8 Form 990-N 11 Prohibited reportable Credit union 56 Forms 4 transactions 60 1023 4, 7, 8, 18, 23, 24, 26, L Subsequently listed 30, 46, 48 Labor organization 20, 49 transaction 60 1023-EZ 4, 23 Law, public interest 29 Tax-exempt entities 60 Legislative activity 46, 50 Publications (See Tax help)

Publication 557 (February 2021) Page 75 Page 76 of 76 Fileid: … ons/P557/202102/A/XML/Cycle03/source 12:15 - 1-Mar-2021

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Public charity: Requests other than Social clubs 20, 50 Testing for public safety 45 Gifts and contributions 40 applications 5 Social welfare organization 20, Title-holding corporation 58 Grant from 41 Responsiveness test 43 47 Section 509(a)(1) 31 Revocation of exemption 6 Specified organizations 42 Section 509(a)(2) 38 Ruling letter 6 Sports organization, U Section 509(a)(3) 41 amateur 30 Unemployment benefit trust 53 Section 509(a)(4) 45 State-sponsored 59 Unrelated business income 13 Support test 32, 38 S High-risk health coverage Unusual grants 35, 39 Public inspection: Scholarship: organization 59 User fee 4, 5 Annual return 18 Private school 27 Workers' compensation Exemption applications 18 Scholarships 28 reinsurance Forms 8871 and 8872 18 School, private 26 organization 59 V Public-interest law firm 29 Scientific organizations 29 Stock or commodity Veterans' organization 56 Publicly supported Section 501(c)(3) organizations: exchange 50 Voluntary employees' organization 32 Section 501(c)(3) Supplemental unemployment beneficiary association 52 Attraction of public support 33 Organizations: benefit trust 53 Volunteer fire company 48 Ten-percent-of-support 33 Amateur athletic 30 Support 34, 35 Charitable 28 Supporting organization 61 Educational 25 Support test 32 W R Literary 30 Facts and circumstances 33 War veterans' organization 56 Racial composition 26 Prevention of cruelty 30 One-third 32 Withdrawal of application 6 Racially nondiscriminatory Private foundations 30 Public charity 38 Withholding information from policy 26 Public charities 31 public 6 Real estate board 49 Qualifications 22 Workers' compensation Recognition of exemption, Religious 29 T reinsurance organization 59 application 23 Scientific 29 Tax help 66 Religious organizations 29 Single entity 37 Technical advice 7

Page 76 Publication 557 (February 2021)