Future developments. . The IRS has created a page on IRS.gov for information about Publication 557, at IRS.gov/pub557. Information about any future developments affecting Publication 557 (such as legislation enacted after we release it) will be posted on that page.
Electronic Form 1024. As of January 3, 2022, Form 1024, Application for Recognition of Exemption Under Section 501(a) or Section 521, is available for electronic filing on Pay.gov. As part of the revision, applications for recognition of exemption under Sections 501(c)(11), (14), (16), (18), (21), (22), (23), (26), (27), (28), (29,) and 501(d) can no longer be submitted as letter applications. Instead, these requests must be made on the electronic Form 1024. The IRS will provide a 90-day grace period during which it will continue to accept paper versions of Form 1024 (Rev. 01-2018) and letter applications; however, after April 4 the Form 1024 must be submitted electronically. See Rev. Proc. 2022-8. Also, organizations requesting determinations under Section 521 are now able to use the electronic Form 1024 instead of Form 1028, Application for Recognition of Exemption Under Section 521.
Update on mandatory e-filing. The Taxpayer First Act, enacted July 1, 2019, requires tax-exempt organizations to electronically file information returns and related forms. The new law affects tax-exempt organizations in tax years beginning after July 1, 2019.
Section 501(c)(21) trusts. Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons, will be a historical form beginning with tax year 2021. Section 501(c)(21) trusts can no longer file Form 990-BL and will file Form 990 (or submit Form 990-N, if eligible) to meet their annual filing obligations under section 6033. Some section 501(c)(21) trusts may also be required to file Form 6069, Return of Certain Excise Taxes on Mine Operators, Black Lung Trusts, and Other Persons Under Sections 4951, 4952, and 4953.
Electronic Form 1024-A. Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4), must be submitted electronically on Pay.gov.
Reporting of donor information (Form 990, 990-EZ, and 990-PF). Final regulations provide that the requirement to report contributor names and addresses on annual returns generally applies only to returns filed by Section 501(c)(3) organizations and Section 527 political organizations. All tax-exempt organizations must continue to maintain the names and addresses of their substantial contributors in their books and records
IRS not accepting requests for group exemption numbers. The IRS will not accept any requests for group exemption letters starting on June 17, 2020, until publication of the final revenue procedure or other guidance in the Internal Revenue Bulletin. See Notice 2020-36.
Automatic revocation. Regarding automatic revocation for the failure to file a return or notice for 3 consecutive years, as required by section 6033, the Taxpayer First Act of 2019, P.L. 116-25, added a requirement that the IRS notify the organization after the organization has failed to file for 2 consecutive years. See Automatic Revocation, later, for more information, including applicability dates.
Electronic Form 1023. Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, is available only as an electronic form filed on Pay.gov. Form 1023-EZ, Streamlined Application, is already on Pay.gov.
Tax on investment income of private foundations. The Taxpayer Certainty and Disaster Tax Relief Act of 2019, reduced the 2% excise tax on investment income of private foundations to 1.39%. At the same time, the legislation repealed the 1% special rate that applied if the private foundation met certain distribution requirements. The change is effective for taxable years beginning after December 20, 2019.
Increase in UBTI for disallowed fringe repealed. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 retroactively repealed Internal Revenue Code (IRC) Section 512(a)(7), which increased unrelated business taxable income by amounts paid or incurred for qualified transportation fringes. Congress had previously enacted this provision for amounts paid or incurred after December 31, 2017.
Excise tax on executive compensation. Section 4960, added by Public Law 115-97, effective for tax years beginning after December 17, 2017, imposes an excise tax on an organization that pays to any covered employee more than $1 million in remuneration or pays an excess parachute payment during the year starting in 2018. See Excise Tax on Executive Compensation, chapter 5. See also section 4960 and Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, for more information.
Excise tax on net investment income of certain colleges and universities. Section 4968 imposes an excise tax on the net investment income of certain private colleges and universities. See Excise Tax on Net Investment Income of Certain Colleges and Universities, chapter 5. See also section 4968 and Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, for more information.
Separate UBTI calculation for each trade or business. Organizations with more than 1 unrelated trade or business must compute unrelated business taxable income (UBTI), including for purposes of determining any net operating loss deduction, separately with respect to each such trade or business. See Unrelated Business Income Tax Return, chapter 2. See also Schedule A (Form 990-T). The UBTI with respect to any such trade or business shall not be less than zero when computing total UBTI.
Exception from the excise tax on excess business holdings. Section 4943(g) created an exception from the excise tax on excess business holdings for certain independently operated enterprises whose voting stock is wholly owned by a private foundation. For more details, see Excess Business Holdings, chapter 5
Organizational Changes. For tax years beginning on or after January 1, 2018, the IRS will no longer require a new exemption application from a domestic section 501(c) organization that undergoes certain changes of form or place of organization, as described in Rev. Proc. 2018-15, 2018-9 I.R.B. 379.
Group Exemptions. Beginning January 2019, the IRS will no longer send the List of Parent and Subsidiary Accounts to the central organizations. See Group Exemption Letter, later.
Form 8976. Each new section 501(c)(4) organization must notify the IRS of its intent to operate as a section 501(c)(4) organization regardless of whether it will seek recognition of its exempt status under section 501(c)(4). Use Form 8976, Notice of Intent to Operate Under Section 501(c)(4), to provide this notification. Form 8976 may only be completed and submitted electronically at: Electronically Submit Your Form 8976, Notice of Intent to Operate Under Section 501(c)(4).
Forms, Instructions and Publications. All IRS forms, instructions and publications mentioned in this publication can be accessed on IRS.gov from the Forms and Instructions page.
This publication discusses the rules and procedures for organizations that seek recognition of exemption from federal income tax under section 501(a) of the Internal Revenue Code (the Code). It explains the procedures you must follow to obtain an appropriate determination letter recognizing your organization's exemption, as well as certain other information that applies generally to all exempt organizations. To qualify for exemption under the Code, your organization must be organized for one or more of the purposes specifically designated in the Code. Organizations that are exempt under section 501(a) include those organizations described in section 501(c). Section 501(c) organizations are covered in this publication.
Chapter 1, Application, Approval, and Appeal Procedures, provides general information about the procedures for obtaining recognition of tax-exempt status.
Chapter 2, Filing Requirements and Required Disclosures, contains information about annual filing requirements and other matters that may affect your organization's tax-exempt status.
Chapter 3, Section 501(c)(3) Organizations, contains detailed information on various matters affecting section 501(c)(3) organizations, including a section on the determination of private foundation status.
Chapter 4, Other Section 501(c) Organizations, includes separate sections for specific types of organizations described in section 501(c).
Chapter 5, Excise Taxes, provides information on when excise taxes may be imposed.
Chapter 6, How to Get Tax Help, provides tips and resources on where to find answers to tax questions or other assistance.
Organizations not discussed in this publication.
Certain organizations that may qualify for exemption aren't discussed in detail in this publication, although they are included in the Organization Reference Chart and the application procedures discussed in Chapter 1. These organizations (and the Code sections that apply to them) are as follows:
Section 501(c)(24) organizations (section 4049 ERISA trusts) are neither discussed in the text nor listed in the Organization Reference Chart.
Similarly, farmers' cooperative associations that qualify for exemption under section 521, qualified state tuition programs described in section 529, qualified ABLE programs described in section 529A, and pension, profit-sharing, and stock bonus plans described in section 401(a) aren't discussed in this publication. Visit IRS.gov for more information on these types of organizations. For telephone assistance, call 1–877–829–5500.
Check the Table of Contents at the beginning of this publication to determine whether your organization is described in this publication. If it is, read the chapter (or section) that applies to your type of organization for the specific information you must give when applying for recognition of exemption.
Comments and suggestions.
We welcome your comments about this publication and your suggestions for future editions.
You can send us comments through IRS.gov/FormComments. Or, you can write to Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.
Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.
If your organization is one of the organizations described in this publication and is seeking recognition of tax-exempt status from the IRS, you should follow the procedures described in this chapter and the instructions that accompany the appropriate application forms.
For information on section 501(c)(3) organizations, go to Section 501(c)(3) Organizations, chapter 3. If your organization is seeking exemption under one of the other paragraphs of section 501(c), see chapter 4.This chapter discusses:
Oral requests for recognition of exemption won't be considered by the IRS. Your application for recognition of tax-exempt status must be in writing using the appropriate forms as discussed below.
If your organization is seeking recognition of exemption from federal income tax, it must use a specific application prescribed by the IRS in Rev. Proc. 2022-5, I.R.B 256, as amended by Rev. Proc. 2022-8. If your organization is a central organization with exempt status, see Group Exemption Letter, later. All applications must be signed by an authorized individual.
Applications for exempt status on a Form 1023 must be electronically submitted through Pay.gov. See Rev. Proc. 2022-5.
Form 8940, Request for Miscellaneous Determination.
You can request miscellaneous determinations under sections 507, 509(a), 4940, 4942, 4945, and 6033 using Form 8940. Nonexempt charitable trusts also file Form 8940 for an initial determination of section 509(a)(3) status or change to their type. See Form 8940 and instructions for more information.
These requests, similar to applications for recognition of exemption previously discussed, must be accompanied by the appropriate user fee. The schedule for user fees, including those for requests other than applications, can be found in Rev. Proc. 2022-1.
EO Determinations can request technical advice from the Office of Chief Counsel (EEE) on any question that can't be resolved on the basis of law, regulations, or a clearly applicable revenue ruling or other published precedent. See section 3, Rev. Proc. 2022-5.
The law requires payment of a user fee for determination letter requests. Go to Rev. Proc. 2022-5,Appendix A, to find the required payment. Payment must accompany each request.
If you are submitting an application other than Form 1023-EZ, your application should include a copy of the organizing or enabling document that is signed by a principal officer or is accompanied by a written declaration signed by an authorized individual certifying that the document is a complete and accurate copy of the original or meets the requirements of a conformed copy in Rev. Proc. 2011-9, sec. 3.08(5). If you are submitting a Form 1023-EZ, you don’t need to include a copy of your organizing documents with the application. However, you may be asked to provide it during the application review process.
If your organizing or enabling document are articles of incorporation, include evidence that it was filed and approved by a state official. (For example, a stamped “Filed” copy dated by the Secretary of State is prima facie evidence that it was filed and approved by a state official.) A copy of the articles of incorporation can also be submitted with a written declaration signed by an authorized individual indicating the copy is complete and was filed and approved by the state, including the date filed.
If you are formed as a limited liability company and have adopted an operating agreement, submit the operating agreement along with your state-approved articles of organization.
If your organization's name has been officially changed by an amendment to your organizing instruments, you should also attach a conformed copy of that amendment to your application.
Description of activities.
Your application must include a full description of the proposed activities of your organization, including each of the fundraising activities of a section 501(c)(3) organization and a narrative description of anticipated receipts and contemplated expenditures. When describing the activities in which your organization expects to engage, you must include the standards, criteria, procedures, or other means that your organization adopted or planned for carrying out those activities.
To determine the information you need to provide, you should study the part of this publication that applies to your organization. The appropriate chapter will describe the purposes and activities that your organization must pursue, engage in, and include in your application in order to achieve exempt status.
Often, your organization's articles of organization (or other organizing instruments) contain descriptions of your organization's purposes and activities.
Your application should describe completely and in detail your past, present, and planned activities.
If you are filing Form 1023-EZ, also review the Instructions for Form 1023-EZ for more information about what to include in your description.
To help in processing your application, be sure to attach all schedules, statements, and other documents required by the application form. If you don’t attach them, you may have to resubmit your application or you may otherwise encounter a delay in processing your application.
If an application isn't complete and doesn't contain all the required attachments found under Required Inclusions, the IRS will return it to you for completion. The IRS will no longer request the missing information if the application is incomplete. However, the IRS may, but is not required to, request additional information to validate information presented or to clarify an inconsistency on a Form 1023-EZ. See Rev. Proc. 2022-5, 2022–1 I.R.B. 256.
If the IRS returns the application or requests additional information from you, that application will be considered filed on the date the substantially completed application is postmarked, or if no postmark, received at the IRS.
For applications that are returned to the applicant because they aren't complete, the user fee will be returned or refunded.
Additional information may be requested if necessary to clarify the nature of your organization.
Requests for withholding of information from the public.
The law requires many exempt organizations and private foundations to make their application forms and annual information returns available for public inspection. The law also requires the IRS to make available for public inspection, in accordance with section 6104 and the related regulations, your approved application for recognition of exemption (including any papers submitted in support of the application) and the determination letter (discussed later, under Determination Letters).
Any information submitted in the application or in support of it that relates to any trade secret, patent, process, style of work, or apparatus, upon request, can be withheld from public inspection if the IRS determines that the disclosure of such information would adversely affect the organization. Your request must:
An organization must describe fully the activities in which it expects to engage. This includes standards, procedures, or other means adopted or planned by the organization for carrying out its activities, expected sources of funds, and the nature of its contemplated expenses.
A determination letter recognizing exemption is usually effective as of the date of formation of an organization if, the organization submitted the application for recognition of exemption within 27 months from the end of the month in which it was organized and during the period before the date of the determination letter, its purposes and activities are consistent with the requirements for exempt status under the applicable section of 501(c). Upon obtaining recognition of exemption, the organization can file a claim for a refund of income taxes paid for the period for which its exempt status is recognized.
An organization that does not submit its application for exemption within that 27-month period but otherwise meets the requirements for tax-exempt status will be recognized as exempt from the postmark date of application or the submission date of its Form 1023, Form 1024, Form 1023-EZ, or Form 1024-A, if applicable. See Rev. Proc. 2022-5, as amended by Rev. Proc. 2022-8.
If an organization is required to alter its activities or substantially amend its charter to qualify, the determination letter recognizing exemption will be effective as of the date specified in the letter. If a nonsubstantive amendment is made, such as correction of a clerical error in the enabling instrument or the addition of a dissolution clause, exemption will ordinarily be recognized as of the date of formation if the activities of the organization before the determination are consistent with the exemption requirements.
A determination letter recognizing exemption can't be relied on if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization. Also, a determination letter can't be relied on if it is based on any omission or inaccurate material information submitted by the organization. See section 11 of Rev. Proc. 2022-5.
For more information about the effective date of exemption, see Rev. Proc. 2022-5, section 6.
A determination letter recognizing exemption may be revoked by:
If your organization applies for recognition of tax-exempt status and Rulings and Agreements determines your organization doesn't qualify for exemption, your organization will be advised of its rights to protest the determination by requesting Independent Office of Appeals consideration. Your organization must submit a statement of its views fully explaining its reasoning. The statement must be submitted within 30 days from the date of the proposed adverse determination letter and must state whether your organization wishes Independent Office of Appeals consideration.
A principal officer or trustee can represent an organization at any level of appeal within the IRS. Also, an attorney, certified public accountant, or individual enrolled to practice before the IRS can represent the organization.
If the organization's representative attends a conference without a principal officer or trustee, the representative must file a proper power of attorney or a tax information authorization before receiving or inspecting confidential information. Form 2848 or Form 8821, Tax Information Authorization, as appropriate (or any other properly written power of attorney or authorization), can be used for this purpose. These forms are available on IRS.gov from the Forms and Instructions page. For more information, see Publication 947, Practice Before the IRS and Power of Attorney,which is also available on IRS.gov from the Forms and Instructions page.
Before forwarding a case to the Independent Office of Appeals, Rulings and Agreements will consider the applicant’s statement protesting and appealing (hereinafter appealing) the proposed adverse determination. If the organization does not submit the information that provides a basis for Rulings and Agreements to reconsider its adverse determination, it will forward the appeal and case file to the Independent Office of Appeals. For more information about the role of the Independent Office of Appeals, see Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status. The appeal should include the following information.
The statement of facts in item 4 must be declared true under penalties of perjury. This may be done by adding to the protest the following signed declaration:If the organization's representative submits the appeal, a substitute declaration must be included, stating:
Be sure the appeal contains all of the information requested. Incomplete appeals will be returned for completion.
The Independent Office of Appeals, after any requested conference and upon consideration of the organization's appeal as well as information presented in any conference held, will generally notify the organization of its decision and issue an appropriate determination letter. An adverse decision can be appealed to the courts (discussed later). If new information is submitted during Independent Office of Appeals consideration, the matter may be returned to Rulings and Agreements for further consideration. See section 9 of Rev. Proc. 2022-5 for more information.
The Independent Office of Appeals must request technical advice on any exempt organization issue concerning qualification for exemption or foundation status for which there is no published precedent or for which there is reason to believe that nonuniformity exists. If an organization believes that its case involves such an issue, it should ask the Independent Office of Appeals to request technical advice.
Any determination letter issued on the basis of technical advice can't be appealed to the Independent Office of Appeals Office for those issues that were the subject of the technical advice.
In the case of an application under section 501(c) or 501(d) and exempt from tax under 501(a), all of the following actions, called administrative remedies, must be completed by your organization before an unfavorable determination letter from the IRS can be appealed to the courts.
The actions just described won't be considered completed until the IRS has had a reasonable time to act upon the appeal or protest, as the case may be.
An organization won't be considered to have exhausted its administrative remedies before the earlier of:
The 270-day period will be considered by the IRS to begin on the date a completed application, or group exemption request is sent or submitted to the IRS. See Application Procedures, earlier, for information needed to complete the application form.
If the application doesn't contain all of the required items, it won't be further processed and may be returned to the applicant for completion. The 270-day period, in this event, won't be considered as starting until the date the application is remailed to the IRS with the requested information, or, if a postmark isn't evident, on the date the IRS receives a completed application.
If the IRS issues an unfavorable determination letter to your organization and you have exhausted all the administrative remedies just discussed, your organization can seek judicial remedies.
For example, if your organization has paid the tax resulting from the adverse determination and met all other statutory prerequisites, it can file suit for a refund in a U.S. District Court or the U.S. Court of Federal Claims. Or, if your organization elected not to pay the tax deficiency resulting from the adverse determination and met all other statutory prerequisites, it can file suit for a redetermination of the tax deficiencies in the United States Tax Court. For more information on these types of suits, get Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund.
In certain situations, your organization can file suit for a declaratory judgment in the U.S. District Court for the District of Columbia, the U.S. Court of Federal Claims, or the U.S. Tax Court. This remedy is available if your organization received an adverse notice of final determination, or if the IRS failed to make a timely determination on your initial or continuing qualification or classification as an exempt organization. However, your exempt status claim must be as:
A group exemption letter is a determination letter issued to a central organization recognizing on a group basis the exemption under section 501(c) of subordinate organizations on whose behalf the central organization has applied for recognition of exemption.
A central organization is an organization that has one or more subordinates under its general supervision or control. A subordinate organization is a chapter, local, post, or unit of a central organization.
A subordinate organization may or may not be incorporated, but it must have an organizing document and it must have its own taxpayer identification number (EIN). A subordinate that is organized and operated in a foreign country can't be included in a group exemption letter. A subordinate described in section 501(c)(3) can't be included in a group exemption letter if it is a private foundation described in section 509(a).
If your organization is a subordinate controlled by a central organization (for example, a church, a veterans' organization, or a fraternal organization), you should check with the central organization to see if it has been issued a group exemption letter that covers your organization. If it has, you don’t have to file a separate application unless your organization no longer wants to be included in the group exemption letter.
If the group exemption letter doesn't cover your organization, ask your central organization about being included in the next annual group ruling update that it submits to the IRS.
See Publication 4573, Group Exemptions, for additional general information about group exemption. Go to the Charities & Nonprofits page on IRS.gov for Group Exemption Resources for the most current information and updates.
The content about the Central Organization Application Procedure is included here for informational purposes. However, as stated in Notice 2020-36, IRB 2020-21, 840 and Rev. Proc. 2022-5, IRB 2022-1, 256, the IRS is not accepting any requests for group exemption letters until publication of the final revenue procedure described in the Notice or other guidance in the Internal Revenue Bulletin.
If your organization is a central organization with affiliated subordinates under its control, it can apply for a group exemption letter for its subordinates, provided it has obtained recognition of its own exemption. A central organization obtains recognition of its own exemption by submitting Form 1023 or 1023-EZ, 1024 or 1024-A as described in their instructions with the appropriate user fee. You request the group exemption letter for the central organization’s subordinates by letter rather than a specific application form. The issuance of the group exemption letter relieves each of the covered subordinates from filing its own application.
A central organization that has previously obtained recognition of its own exemption must indicate its employer identification number and the date of the letter recognizing its exemption, but need not forward documents already submitted. However, if it has not already done so, the central organization must submit a copy of any amendment to its governing instruments or internal regulations as well as any information about changes in its character, purposes, or method of operation.
Continued effectiveness of a group exemption letter is based on the following conditions.
To maintain a group exemption letter, the central organization must submit annually, at least 90 days before the close of its annual accounting period, all of the following information.
The organization should send this information to:. Internal Revenue Service Center
Ogden, UT 84201–0027.
Submitting the required information annually doesn't relieve the central organization or any of its subordinates of the duty to submit any other information that may be required by an EO area manager to determine whether the conditions for continued exemption are being met. .
As of 2019, the IRS will no longer send the List of Parent and Subsidiary Accounts to the central organizations..
A group exemption letter no longer has effect, for either a particular subordinate or the group as a whole, when:
In addition, the IRS will cease to recognize the subordinates under a group exemption as tax-exempt if the central organization is automatically revoked for failure to file required returns or notices for three consecutive years. See Automatic Revocation, later. Subordinates under a group exemption are also subject to automatic revocation for failure to file required returns (or appear on a group return if the subordinate does not file its own) or notices for three consecutive years. A subordinate organization that is automatically revoked must apply to the IRS for reinstatement of its exempt status. Thereafter, it may retain independent exempt status or it may seek to resume its status as a subordinate of the central organization. See Group Exemption Resources .
Most exempt organizations (including private foundations) must file various returns and reports at some time during (or following the close of) their accounting period.This chapter discusses:
Form (and Instructions)
See chapter 6 for information about getting these publications and forms.
Every organization exempt from federal income tax under section 501(a) must file an Annual Exempt Organization Return except:
Each section 509(a)(3) supporting organization is required to file Form 990 or 990-EZ with the IRS regardless of the organization's gross receipts, unless it qualifies as one of the following:
If the organization is described in item (3) above, then it must submit Form 990-N (e-Postcard) unless it voluntarily files Form 990 or 990-EZ.
On its annual information return, at Part I, Schedule A (Form 990) a supporting organization must:
Small tax-exempt organizations with annual gross receipts normally $50,000 or less that are not otherwise required to file an annual information return and are not otherwise exempted entirely from a filing requirement must submit Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, with the IRS each year, if they choose not to file a Form 990 or 990-EZ. Form 990-N requires the following information:
Form 990-N is due by the 15th day of the fifth month after the close of the tax year. For tax years beginning after December 31, 2006, any organization that fails to meet its annual reporting requirement for 3 consecutive years will automatically lose its tax-exempt status. To regain its exempt status an organization will have to reapply for recognition as a tax-exempt organization.
Exempt organizations, other than private foundations, must file their annual information returns on Form 990 or 990-EZ, unless excepted from filing or allowed to submit Form 990-N, described earlier.
Generally, political organizations with gross receipts of $25,000 ($100,000 for a qualified state or local political organization (QSLPO)) or more for the tax year are required to file Form 990 or 990-EZ unless specifically excepted from filing the annual return. The following political organizations aren't required to file Form 990 or Form 990-EZ.
All private foundations exempt under section 501(c)(3) must file Form 990-PF. These organizations are discussed in chapter 3.
For tax years beginning on or before July 1, 2019, your organization may be required to file Form 990, Form 990-EZ, or Form 990-PF, and related forms, schedules, and attachments electronically. For tax years beginning after July 1, 2019, under the Taxpayer First Act, organizations are required to file certain returns electronically, including Form 990, 990-EZ, 990-PF, 8872, and 990-T. The e-filing requirement is generally effective for tax years beginning after July 1, 2019. The Taxpayer First Act allows transitional relief for certain small organizations or other organizations for which the IRS determines that application of the e-filing requirement would constitute an undue hardship in the absence of additional transitional time.
If an organization is required to file a return electronically but doesn't, it isn't considered to have filed its return. See Regulations section 301.6033-4 for more information.
Forms 990, 990-EZ, or 990-PF must be filed by the 15th day of the fifth month after the end of your organization's accounting period. Thus, for a calendar year taxpayer, Forms 990, 990-EZ, or 990-PF are due May 15 of the following year. If any due date falls on a Saturday, Sunday, or legal holiday, the return will be due the next business day.
If the organization fails to file a Form 990, 990-EZ, or 990-PF, or fails to submit a Form 990-N, as required, for 3 consecutive years, it will automatically lose its tax-exempt status by operation of law effective as of the due date for the third missed return or notice. The list of organizations whose tax-exempt status has been automatically revoked is available on IRS.gov. This list (Auto-Revocation List) may be viewed and searched on Tax-Exempt Organization Search. The Auto-Revocation List includes each organization's name, Employer Identification Number (EIN) and last known address. It also includes the effective date of the automatic revocation and the date it was posted to the list. For auto-revoked organizations that applied for and received reinstatement, the list gives the date of reinstatement. The IRS updates the list monthly to include additional organizations that lose their tax-exempt status.
If your organization’s tax-exempt status is automatically revoked, you may be required to file one of the following federal income tax returns and pay any applicable income taxes:
In addition, a section 501(c)(3) organization that loses its tax-exempt status can't receive tax-deductible contributions and won't be identified in the IRS Business Master File extract as eligible to received tax-deductible contributions, or be included in Tax-Exempt Organization Search (Pub. 78 database).
An organization whose exemption was automatically revoked must apply for tax exemption in order to regain its tax exemption (even if it wasn't originally required to apply). In some situations, an organization may be able to obtain exemption retroactive to its date of revocation. Similarly, if the central organization with a Group Exemption Number is automatically revoked, all its covered subsidiaries may need to apply for exemption as independent organizations.
For more information about automatic revocation, go to IRS.gov and select Charities & Non-Profits and then select Reinstated? Learn more with Reinstate Tax-Exempt Status.
Even though your organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that isn't substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption.
If your organization has gross income of $1,000 or more from a regularly conducted unrelated trade or business, you must file Form 990-T in addition to your required annual information return or notice. The form instructions and irs.gov should be consulted for electronic filing guidance. For tax years beginning after December 31, 2017, an organization with more than 1 unrelated trade or business must compute its UBTI (unrelated business taxable income), including for purposes of determining any net operating loss deduction, separately with respect to each such trade or business. Organizations complete a separate Schedule A (Form 990-T) to calculate UBTI for each of its trades or businesses.
See Publication 598, Tax on Unrelated Business Income of Exempt Organizations more information on UBTI.
Every employer, including an organization exempt from federal income tax that pays wages to employees is responsible for withholding, depositing, paying, and reporting federal income tax, social security and Medicare (FICA) taxes, and federal unemployment tax (FUTA), unless that employer is specifically excepted by law from those requirements, or if the taxes clearly don't apply.
For more information, obtain a copy of Publication 15, which summarizes the responsibilities of an employer, Publication 15-A, Publication 15-B, and Form 941.
Generally, a political organization is treated as an organization exempt from tax. Certain political organizations, however, must file an annual income tax return, Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations, for any year they have political organization taxable income in excess of the $100 specific deduction allowed under section 527.
A political organization that has $25,000 ($100,000 for a qualified state or local political organization) or more in gross receipts for the tax year must file Form 990 or Form 990-EZ (and Schedule B of the form), unless excepted. See Forms 990 and 990-EZ earlier..
Certain political organizations are required to notify the IRS that they are section 527 organizations. These organizations must use Form 8871. Some of these section 527 organizations must use Form 8872 to file periodic reports with the IRS disclosing their contributions and expenditures. For a discussion on these forms, see Reporting Requirements for a Political Organization, later..
Section 501(c)(3) organizations are precluded from, and may suffer loss of exemption for, engaging in any political campaign on behalf of, or in opposition to, any candidate for public office. .
For more information about filing Form 1120-POL, refer to the instructions accompanying the form.
Certain political organizations are required to notify the IRS that the organization is to be treated as a section 527 political organization. The organization is also required to periodically report certain contributions received and expenditures made by the organization. To notify the IRS of section 527 treatment, an organization must file Form 8871. To report contributions and expenditures, certain tax-exempt political organizations must file Form 8872.
A political organization must electronically file Form 8871 to notify the IRS that it is to be treated as a section 527 organization. However, an organization isn't required to file Form 8871 if:
An organization must provide on Form 8871:
Every tax-exempt section 527 political organization that accepts a contribution or makes an expenditure, for an exempt function during the calendar year, must file Form 8872 except:
Information required on Form 8872.
If an organization pays an individual $500 or more for the calendar year, the organization is required to disclose the individual's name, address, occupation, employer, amount of the expense, the date the expense was paid, and the purpose of the expense on Form 8872.
If an organization receives contributions of $200 or more from one contributor for the calendar year, the organization must disclose the donor's name, address, occupation, employer, and the date the contributions were made.
For additional information that is required, see Form 8872.
A penalty will be imposed if the organization is required to file Form 8872 and it:
The penalty is 21% for tax years beginning after December 31, 2017 (35% for tax years beginning before December 31 2017) of the total amount of contributions and expenditures to which a failure relates.
In some situations, a donor must obtain certain information from a donee organization to obtain a deduction for a charitable contribution. In other situations, the donee organization is required to provide information to the donor.
A charitable organization must give a donor a disclosure statement for a quid pro quo contribution over $75. (See Disclosure statement. later.) This is a payment a donor makes to a charity partly as a contribution and partly for goods or services. See Quid pro quo contribution below for an example.
Failure to make the required disclosure may result in a penalty to the organization. A donor can't deduct a charitable contribution of $250 or more unless the donor has a written acknowledgment from the charitable organization.
In certain circumstances, an organization may be able to meet both of these requirements with the same written document.
A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization. The donor must get the acknowledgment by the earlier of:
If an exempt organization receives a contribution of a qualified vehicle with a claimed value of more than $500, the donee organization is required to provide a contemporaneous written acknowledgment to the donor. The donee organization can use a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, for the contemporaneous written acknowledgment. See section 3.03 of Notice 2005-44, 2005-25 I.R.B. 1287 for guidance on the information that must be included in a contemporaneous written acknowledgment and the deadline for furnishing the acknowledgment to the donor.
Any donee organization that provides a contemporaneous written acknowledgment to a donor is required to report to the IRS the information contained in the acknowledgment. The report is due by February 28 (March 31 if filing electronically) of the year following the year in which the donee organization provides the acknowledgment to the donor. The organization must file the report on Copy A of Form 1098-C.
An organization that files Form 1098-C on paper should send it with Form 1096, Annual Summary and Transmittal of U.S. Information Returns. See the Instructions for Form 1096 for the correct filing location.
An organization that is required to file 250 or more Forms 1098-C during the calendar year must file the forms electronically or magnetically. Specifications for filing Form 1098-C electronically or magnetically can be found in Publication 1220, Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically at Pub. 1220.
For a contribution of a qualified vehicle with a claimed value of $500 or less, don't file Form 1098-C. However, you can use it as the contemporaneous written acknowledgment under section 170(f)(8) by providing the donor with Copy C only. See the Instructions for Form 1098-C..
Generally, the organization should complete Form 1098-C as the written acknowledgment to the donor and the IRS. The contents of the acknowledgment depend upon whether the organization:
For more information on the acknowledgment, see Notice 2005-44.
Material improvements or significant intervening use.
To constitute significant intervening use, the organization must actually use the vehicle to substantially further the organization's regularly conducted activities, and the use must be significant, not incidental. Factors in determining whether a use is a significant intervening use depend on the nature, extent, frequency, and duration. For this purpose, use includes providing transportation on a regular basis for a significant period of time or significant use directly related to training in vehicle repair. Use doesn't include the use of a vehicle to provide training in business skills, such as marketing or sales. Examples of significant use include:
Material improvements include major repairs and additions that improve the condition of the vehicle in a manner that significantly increases the value. To be a material improvement, the improvement can't be funded by an additional payment to the organization from the donor of the vehicle. Material improvements don't include cleaning, minor repairs, routine maintenance, painting, removal of dents or scratches, cleaning or repair of upholstery, and installation of theft deterrent devices.
If your charitable organization receives contributions of used motor vehicles, boats, and airplanes valued over $500 it may be subject to a penalty if it knowingly:
An acknowledgment containing a certification will be presumed to be false or fraudulent if the qualified vehicle is sold to a buyer other than a needy individual without a significant intervening use or material improvement within 6 months of the date of the contribution.
If a charity sells a donated vehicle at auction, the IRS won't accept as substantiation an acknowledgment from the charity stating that the vehicle is to be transferred to a needy individual for significantly below fair market value. Vehicles sold at auction aren't sold at prices significantly below fair market value, and the IRS won't treat vehicles sold at auction as qualifying for this exception.
The penalty for a false or fraudulent acknowledgment where the donee certifies that the vehicle won't be transferred for money, other property, or services before completion of material improvements or significant intervening use or the donee certifies that the vehicle is to be transferred to a needy individual for significantly below fair market value in furtherance of the donee's charitable purpose is the larger of $5,000 or the claimed value of the vehicle multiplied by 39.6%.
The penalty for an acknowledgment relating to a qualified vehicle being sold in an arm's length transaction to an unrelated party is the larger of the gross proceeds from the sale or the sales price stated in the acknowledgment multiplied by 39.6%.
A taxpayer who contributes qualified intellectual property to a charity may be entitled to a charitable deduction, in addition to any initial deduction allowed in the year of contribution. The additional deduction is based on a specified percentage of the qualified donee income with respect to the qualified intellectual property. To qualify for the additional charitable deduction, the donor must provide notice to the donee at the time of the contribution that the donor intends to treat the contribution as qualified intellectual property contribution for purposes of sections 170(m) and 6050L.
Every donee organization described in section 170(c) (except a private foundation as defined in section 509(a) that isn't described in section 170(b)(1)(F)) that receives or accrues net income from a charitable gift of qualified intellectual property must file Form 8899.
An exempt organization that receives, in the course of its activities, more than $10,000 cash in one transaction (or two or more related transactions) that isn't a charitable contribution must report the transaction to the IRS on Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
The general rule under section 6103 is that returns and return information of all taxpayers are confidential except as authorized under the Code. Section 6104 provides exceptions to the general rule of confidentiality for disclosure of certain information about exempt organizations.
In addition, included in this section is a discussion on the public inspection requirements for political organizations filing Forms 8871 and 8872.
An exempt organization must make available for public inspection, upon request and without charge, a copy of its original and amended annual information returns. Each information return must be made available from the date it is required to be filed (determined with regard to any extensions), or is actually filed, whichever is later. An original return doesn't have to be made available if more than 3 years have passed from the date the return was required to be filed (including any extensions) or was filed, whichever is later. An amended return doesn't have to be made available if more than 3 years have passed from the date it was filed.
An annual information return includes an exact copy of the return (Forms 990, 990-EZ, 990-BL, 990-PF, 990-T, or 1065), and amended return if any, and all schedules, attachments, and supporting documents filed with the IRS.
An annual information return doesn't include:
In the case of a tax-exempt organization other than a private foundation, an annual information return doesn't include the names and addresses of contributors to the organization.
Form 990-T. All section 501(c)(3) organizations that file Form 990-T must make the return public, regardless of whether the organization is otherwise subject to the disclosure requirements of section 6104. For example, although churches aren't required to file Form 1023 or Form 990 with the IRS, they must file the Form 990-T with the IRS to report unrelated business taxable income. Thus, churches must disclose Form 990-T to the public..
State colleges and universities that have been recognized by the IRS as exempt under section 501(a) as organizations described in section 501(c)(3) must disclose Form 990-T to the public. However, state colleges and universities that are subject to tax under section 511(a) solely by virtue of section 511(a)(2)(B) and that haven't been recognized by the IRS as exempt under section 501(a) as organizations described in section 501(c)(3) aren't required to make their Forms 990-T public.
An exempt organization must also make available for public inspection without charge its application for tax-exempt status. An application for tax exemption includes the application form (such as Forms 1023 or 1024), all documents and statements the IRS requires the organization to file with the form, any statement or other supporting document submitted by an organization in support of its application, and any letter or other document issued by the IRS concerning the application.
The application for exemption doesn't include:
If there is no prescribed application form, see Regulations section 301.6104(d)-1(b)(3)(ii) for a list of the documents that must be made available.
Time, place, and manner restrictions.
The annual returns and exemption application must be made available for inspection, without charge, at the organization's principal, regional, and district offices during regular business hours. The organization can have an employee present during inspection, but must allow the individual to take notes freely and to photocopy at no charge if the individual provides the photocopying equipment. Generally, regional and district offices are those that have paid employees who together are normally paid for at least 120 hours a week.
If the organization doesn't maintain a permanent office, it must make its application for tax exemption and its annual information returns available for inspection at a reasonable location of its choice. It must permit public inspection within a reasonable amount of time after receiving a request for inspection (normally not more than 2 weeks) and at a reasonable time of day. At its option, it can mail, within 2 weeks of receiving the request, a copy of its application for tax exemption and annual information returns to the requester in lieu of allowing an inspection. The organization can charge the requester for copying and actual postage costs only if the requester consents to the charge.
An organization that has a permanent office, but has no office hours or very limited hours during certain times of the year, must make its documents available during those periods when office hours are limited or not available as though it were an organization without a permanent office.
An exempt organization also must provide a copy of all, or any specific part or schedule, of its three most recent annual information returns and/or exemption application to anyone who requests a copy either in person or in writing at its principal, regional, or district office during regular business hours. If the individual made the request in person, the copy must be provided on the same business day the request is made unless there are unusual circumstances. Unusual circumstances are defined in Regulations section 301.6104(d)-1(d)(1)(ii).
The organization must honor a written request for a copy of documents or specific parts or schedules of documents that are required to be disclosed. However, this rule only applies if the request:
The organization must mail the copy within 30 days from the date it receives the request. The organization can request payment in advance and must then provide the copies within 30 days from the date it receives payment.
Local and subordinate organizations.
A local or subordinate organization is an exempt organization that didn't file its own application for tax exemption because it is covered by a group exemption letter. Generally, a local or subordinate organization of an exempt organization must, upon request, make available for public inspection, or provide copies of:
The local or subordinate organization must permit public inspection or comply with a request for copies made in person, within a reasonable amount of time (normally not more than 2 weeks) after receiving a request made in person for public inspection or copies and at a reasonable time of day. In lieu of allowing an inspection, the local or subordinate organization can mail a copy of the applicable documents to the person requesting inspection within the same time period. In that case, the organization can charge the requester for copying and actual postage costs only if the requester consents to the charge. If the local or subordinate organization receives a written request for a copy of its application for exemption, it must fulfill the request in the time and manner specified earlier.
The requester has the option of requesting from the central or parent organization, at its principal office, inspection or copies of the application for group exemption and the material submitted by the central or parent organization to include a local or subordinate organization in the group ruling. If the central or parent organization submits to the IRS a list or directory of local or subordinate organizations covered by the group exemption letter, it must make the list or directory available for public inspection, but it is required to provide copies only of those pages of the list or directory that refer to particular local or subordinate organizations specified by the requester. The central or parent organization must fulfill such requests in the time and manner specified earlier.
A local or subordinate organization that doesn't file its own annual information return (because it is affiliated with a central or parent organization that files a group return) must, on request, make available for public inspection, or provide copies of, the group returns filed by the central or parent organization. However, if the group return includes separate schedules for each local or subordinate organization included in the group return, the local or subordinate organization receiving the request can omit any schedules relating only to other organizations included in the group return. The local or subordinate organization must permit public inspection, or comply with a request for copies made in person, within a reasonable amount of time (normally not more than 2 weeks) after receiving a request made in person for public inspection or copies and at a reasonable time of day.
In lieu of allowing an inspection, the local or subordinate organization can mail a copy of the applicable documents to the person requesting inspection within the same time period. In this case, the organization can charge the requester for copying and actual postage costs only if the requester consents to the charge. If the local or subordinate organization receives a written request for a copy of its annual information return, it must fulfill the request by providing a copy of the group return in the time and manner specified earlier. The requester has the option of requesting from the central or parent organization, at its principal office, inspection or copies of group returns filed by the central or parent organization. The central or parent organization must fulfill such requests in the time and manner specified earlier.
If an organization fails to comply, it may be liable for a penalty. See Penalties, later.
Making applications and annual information returns widely available.
An exempt organization doesn't have to comply with requests for copies of its annual information returns or exemption application if it makes them widely available. However, making these documents widely available doesn't relieve the organization from making its documents available for public inspection.
The organization can make its application and annual information returns widely available by posting the application and annual information returns on the Internet. For the rules to follow so that the Internet posting will be considered widely available, see Regulations section 301.6104(d)-2(b).
If the organization has made its application for tax exemption and/or annual information returns widely available, it must inform any individual requesting a copy where the documents are available, including the website address on the Internet, if applicable. If the request is made in person, the notice must be provided immediately. If the request is made in writing, the notice must be provided within 7 days.
Forms 8871 and 8872 (discussed earlier under Reporting Requirements for a Political Organization) are open to public inspection.
Electronically filed Forms 8871 and 8872 are available online 48 hours after the form has been filed. Forms 8872 that are filed by mail are available online after being imaged by the IRS. These forms are considered widely available if you provide the online address to the requester. In addition, your organization must make a copy of these materials available for public inspection during regular business hours at the organization’s principal office and at each of its regional or district offices having at least three paid employees.
The penalty for failure to allow public inspection of annual returns is $20 for each day the failure continues. The maximum penalty on all persons for failures involving any one return is $10,000.
The penalty for failure to allow public inspection of exemption applications is $20 for each day the failure continues.
The penalty for willful failure to allow public inspection of a return or exemption application is $5,000 for each return or application. The penalty also applies to a willful failure to provide copies.
The penalty for failure to allow public inspection of a political organization's section 527 notice (Form 8871) is $20 for each day the failure continues.
The penalty for failure to allow public inspection of a section 527 organization's contributions and expenditures report (Form 8872) is $20 for each day the failure continues. The maximum penalty on all persons for failures involving any one report is $10,000.
Certain exempt organizations must disclose to the IRS or the public certain information about their activities. Generally, an organization discloses this information by entering it on the appropriate lines of its annual return. In addition, there are disclosure requirements for:
Solicitations for contributions or other payments by certain exempt organizations (including lobbying groups and political action committees) must include a statement that payments to those organizations aren't deductible as charitable contributions for federal income tax purposes. The statement must be included in the fundraising solicitation and be conspicuous and easily recognizable.
Certain organizations that offer to sell to individuals (or solicit money for) information or routine services that could be readily obtained free (or for a nominal fee) from the Federal Government must include a statement that the information or service can be so obtained. The statement must be made in a conspicuous and easily recognized format when the organization makes an offer or solicitation to sell the information or service. Organizations affected are those exempt under section 501(c) or 501(d) and political organizations defined in section 527(e).
Certain exempt organizations must notify anyone paying dues to the organization whether any part of the dues isn't deductible because it is related to lobbying or political activities.
An organization must provide the notice if it is exempt from tax under section 501(a) and is one of the following.
If the organization doesn't provide the required notice, it may have to pay a tax that is reported on Form 990-T. But the tax doesn't apply to any amount on which the section 527 tax has been paid on Form 1120-POL. See Political Organization Income Tax Return, earlier.
For more information about nondeductible dues, see Deduction not allowed for dues used for political or legislative activities. under Section 501(c)(6) organizations, later.
Every exempt organization (as defined in section 4965(c)) that is a party to a prohibited tax shelter transaction is required to disclose to the IRS the following information:
If you’ve changed your form or place of organization, review Rev. Proc. 2018-15, 2018-9 I.R.B. 379, to determine whether you’re required to file a new exemption application. If your organization becomes inactive for a period of time but doesn't cease being an entity under the laws of the state in which it was formed, you will have to continue to file an annual information return during the period of inactivity, unless a filing exception applies. If your organization has been liquidated, dissolved, terminated, or substantially contracted, you should file your annual return of information by the 15th day of the 5th month after the change and follow the applicable instructions to the form.
If your organization amends its articles of organization or its internal regulations (bylaws), then follow the instructions to Form 990, Form 990-EZ, or Form 990-PF for reporting these changes. Regardless of whether your organization files an annual information return, you may also report these changes to the EO Determinations office; however, such reporting doesn't relieve your organization from reporting the changes on its annual information return. For information about informing the IRS of a termination or merger, see Publication 4779, Facts about Terminating or Merging Your Exempt Organization.
An organization should report new significant program services or significant changes in how it conducts program services, and significant changes to its organizational documents, on its Form 990 rather than in a letter to EO Determinations. EO Determinations no longer issues letters confirming the tax-exempt status of organizations that report new services or significant changes, or changes to organizational documents.
The procedures that an organization must follow to change its accounting period differ for an independent organization and for a central organization that seeks a group change for its subordinate organizations.
If an organization isn't required to file an annual information return, but files a Form 990-T, it can change its annual accounting period by timely filing the Form 990-T. If neither an information return nor a Form 990-T is required to be filed, an organization must notify the IRS by letter that it has changed its fiscal period.
If an organization changed its annual accounting period at any time within the previous 10 years and within that time it had a filing requirement, the organization must file a Form 1128, Application to Adopt, Change, or Retain a Tax Year, with its timely filed annual information return or Form 990-T, as appropriate, whether or not the filing of the information return or Form 990-T would have otherwise been required for that year.
Organizations that wish to modify or obtain a National Taxonomy of Exempt Entities (NTEE) Code should send a written request to the Correspondence Unit with the relevant facts, including the Code currently assigned, if any, and the requested Code, as well as who selected the currently assigned Code initially, if known. The Correspondence Unit will refer to EO Determinations, if necessary, and will notify the organization if a form or user fee is required to make the requested change. The written request must be sent or faxed to:Internal Revenue Service Attn: Correspondence Unit P.O. Box 2508, Room 6403 Cincinnati, Ohio 45201
Fax: (855) 204-6184
Express and Overnight Delivery: Internal Revenue Service Attn: Correspondence Unit 500 Main Street, Room 6403
Cincinnati, Ohio 45202
An organization may qualify for exemption from federal income tax under section 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes.
To qualify, the organization must be organized as a corporation (including a limited liability company), unincorporated association, or trust. Sole proprietorships, partnerships, individuals, or loosely associated groups of individuals won't qualify.This chapter discusses:
Forms (and Instructions)
Form 1023 and Form 1023-EZ must be filed electronically on Pay.gov.
See chapter 6 for information about getting publications and forms.
Contributions to domestic organizations described in this chapter, except organizations testing for public safety, are deductible as charitable contributions on the donor's federal income tax return.
If the donor receives something of value in return for the contribution, a common occurrence with fundraising efforts, part or all of the contribution may not be deductible. This may apply to fundraising activities such as charity balls, bazaars, banquets, auctions, concerts, athletic events, and solicitations for membership or contributions when merchandise or benefits are given in return for payment of a specified minimum contribution.
If the donor receives or expects to receive goods or services in return for a contribution to your organization, the donor can't deduct any part of the contribution unless the donor intends to, and does, make a payment greater than the fair market value of the goods or services. If a deduction is allowed, the donor can deduct only the part of the contribution, if any, that is more than the fair market value of the goods or services received. You should determine in advance the fair market value of any goods or services to be given to contributors and tell them, when you publicize the fundraising event or solicit their contributions, how much is deductible and how much is for the goods or services. See Disclosure of Quid Pro Quo Contributions in chapter 2.
Separate fund—contributions that are deductible.
An organization that is exempt from federal income tax other than as an organization described in section 501(c)(3) can, if it desires, establish a fund, separate and apart from its other funds, exclusively for religious, charitable, scientific, literary, or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals.
If the fund is organized and operated exclusively for these purposes, it may qualify for exemption as an organization described in section 501(c)(3), and contributions made to it will be deductible as provided by section 170. A fund with these characteristics must be organized in such a manner as to prohibit the use of its funds upon dissolution, or otherwise, for the general purposes of the organization creating it.
This discussion describes certain information to be provided upon application for recognition of exemption by all organizations created for any of the purposes described earlier in this chapter. See the organization headings that follow for specific information your organization may need to provide.
The interests of the Government are ordinarily prejudiced if the tax year in which the application should have been filed (or any tax year that would have been affected had the filing been timely) are closed by the statute of limitations before relief is granted. . Therefore, the request for relief will not be granted if the period of limitations on assessment under § 6501(a) for any taxable year for which the organization claims tax-exempt status has expired prior to the date of application. See Rev. Proc 2022-5. The IRS can condition a grant of relief on the organization providing the IRS with a statement from an independent auditor certifying that the interests of the Government aren't prejudiced.
Some organizations aren't required to file Form 1023 or 1023-EZ. These include:
These organizations are exempt automatically if they meet the requirements of section 501(c)(3). However, such organizations will not appear on the Tax-Exempt Organization Search list of organizations eligible to receive tax-deductible contributions. These organizations also cannot obtain a written affirmation of their exempt status. To be included in the IRS database of exempt organizations and be eligible to receive a written determination or affirmation of exempt status, these organization must file Form 1023 or 1023-EZ.
Gross receipts test.
For purposes of the gross receipts test, an organization normally doesn't have more than $5,000 annually in gross receipts if:
An organization with gross receipts more than the amounts in the gross receipts test, unless otherwise exempt from filing Form 1023 or Form 1023-EZ, must apply for recognition of exemption within 90 days after the end of the period in which the amounts are exceeded. For example, an organization's gross receipts for its first tax year were less than $7,500, but at the end of its second tax year its gross receipts for the 2-year period were more than $12,000. The organization must apply for recognition of exemption within 90 days after the end of its second tax year.
If the organization had existed for at least 3 tax years and had met the gross receipts test for all prior tax years but fails to meet the requirement for the current tax year, its tax-exempt status for the prior years won't be lost even if it does not apply for recognition of exemption within 90 days after the close of the current tax year. However, the organization won't be treated as a section 501(c)(3) organization for the period beginning with the current tax year and ending with the filing of its application for recognition of exemption .
An organization is organized and operated exclusively for charitable purposes and isn't a private foundation. It was incorporated on January 1, 2017, and files returns on a calendar-year basis. It didn't apply for recognition of exemption. The organization's gross receipts during the years 2017 through 2020 were as follows:
The organization's total gross receipts for 2017, 2018, and 2019 were $6,900. Therefore, it didn't have to apply for recognition of exemption and is exempt for those years. However, for 2018, 2019, and 2020 the total gross receipts were $15,900. Therefore, the organization must apply for recognition of exemption within 90 days after the end of its 2020 tax year. If it doesn't apply within this time period, it won't be exempt under section 501(c)(3) for the period beginning with tax year 2020 ending when the application for recognition of exemption is received by the IRS. The organization, however, won't lose its exempt status for the tax years ending before January 1, 2020.
The IRS will consider applying the Commissioner's discretionary authority to extend the time for filing an application for recognition of exemption. See the procedures for this extension discussed earlier.
Your organization must be a legal entity (corporation, trust or association) separate from its organizers and must have written articles of organization. Depending upon the type of entity, its articles organization may be a corporate charter (filed articles of incorporation), trust instrument, articles of association, or any other written instrument by which the organization was created. If applying for recognition of exemption using Form 1023, a conformed copy of the articles of organization must be uploaded with the application for recognition of exemption. See Form 1023 Part II. An organization applying for exemption using Form 1023-EZ does not submit a copy of the articles of organization with its application; however, the organization could be asked to provide a copy at any time as part of a compliance check or examination.
The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and mustn't expressly empower it to engage, other than as an insubstantial part of its activities, in activities that don't further one or more of those purposes. These conditions for exemption are referred to as the organizational test.
Section 501(c)(3) is the provision of law that grants exemption to the organizations described in this chapter. Therefore, the organizational test may be met if the purposes stated in the articles of organization are limited in some way by reference to section 501(c)(3).
The requirement that your organization's purposes and powers must be limited by the articles of organization isn't satisfied if the limit is contained only in the bylaws or other rules or regulations. Moreover, the organizational test isn't satisfied by statements of your organization's officers that you intend to operate only for exempt purposes. Also, the test isn't satisfied by the fact that your actual operations are for exempt purposes.
In interpreting an organization's articles, the law of the state where the organization was created is controlling. If an organization contends that the terms of its articles have a different meaning under state law than their generally accepted meaning, such meaning must be established by a clear and convincing reference to relevant court decisions, opinions of the state attorney general, or other appropriate state authorities.
The following are examples illustrating the organizational test.
Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). These articles appropriately limit the organization's purposes. The organization meets the organizational test.
An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. The organization won't be properly limited as to its purposes since all research isn't scientific. The organization doesn't meet the organizational test.
An organization's articles state that its purpose is to receive contributions and pay them over to organizations that are described in section 501(c)(3) and exempt from taxation under section 501(a). The organization meets the organizational test.
If a stated purpose in the articles is the conduct of a school of adult education and its manner of operation is described in detail, such a purpose will be satisfactorily limited.
If the articles state the organization is formed for charitable purposes, without any further description, such language ordinarily will be sufficient since the term charitable has a generally accepted legal meaning. On the other hand, if the purposes are stated to be charitable, philanthropic, and benevolent, the organizational requirement won't be met since the terms philanthropic and benevolent have no generally accepted legal meaning and, therefore, the stated purposes may, under the laws of the state, permit activities that are broader than those intended by the exemption law.
If the articles state an organization is formed to promote American ideals, or to foster the best interests of the people, or to further the common welfare and well-being of the community, without any limitation or provision restricting such purposes to accomplishment only in a charitable manner, the purposes won't be sufficiently limited. Such purposes are vague and may be accomplished other than in an exempt manner.
A stated purpose to operate a hospital doesn't meet the organizational test since it isn't necessarily charitable. A hospital may or may not be exempt depending on the manner in which it is operated.
An organization that is expressly empowered by its articles to carry on social activities won't be sufficiently limited as to its power, even if its articles state that it is organized and will be operated exclusively for charitable purposes.
Assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the Federal Government or to a state or local government for a public purpose. If the assets could be distributed to members or private individuals or for any other purpose, the organizational test isn't met.
If your organization wants to obtain recognition of exemption as an educational organization, you must submit complete information as to how your organization carries on or plans to carry on its educational activities, such as by conducting a school, by panels, discussions, lectures, forums, radio and television programs, or through various cultural media such as museums, symphony orchestras, or art exhibits. In each instance, you must explain by whom and where these activities are or will be conducted and the amount of admission fees, if any. You must submit a copy of the pertinent contracts, agreements, publications, programs, etc.
If you are organized to conduct a school, you must submit full information regarding your tuition charges, number of faculty members, number of full-time and part-time students enrolled, courses of study and degrees conferred, together with a copy of your school catalog. See Form 1023 Schedule B and Private Schools, discussed later.
Every private school filing an application for recognition of tax-exempt status must supply the IRS (on Schedule B, Form 1023) with the following information.
How to determine racial composition.
The racial composition of the student body, faculty, and administrative staff can be an estimate based on the best information readily available to the school, without requiring student applicants, students, faculty, or administrative staff to submit to the school information that the school otherwise doesn't require. Nevertheless, a statement of the method by which the racial composition was determined must be supplied. The identity of individual students or members of the faculty and administrative staff shouldn't be included with this information.
A school that is a state or municipal instrumentality (see Instrumentalities, near the beginning of this chapter), whether or not it qualifies for exemption under section 501(c)(3), isn't considered to be a private school for purposes of the following discussion.
To qualify as an organization exempt from federal income tax, a private school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and that it doesn't discriminate against applicants and students on the basis of race, color, or national or ethnic origin. Also, the school must circulate information that clearly states the school's admission policies. A racially nondiscriminatory policy toward students means that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school doesn't discriminate on the basis of race in administering its educational policies, admission policies, scholarship and loan programs, and athletic and other school-administered programs.
The IRS considers discrimination on the basis of race to include discrimination on the basis of color or national or ethnic origin.
The existence of a racially discriminatory policy with respect to the employment of faculty and administrative staff is indicative of a racially discriminatory policy as to students. Conversely, the absence of racial discrimination in the employment of faculty and administrative staff is indicative of a racially nondiscriminatory policy as to students.
A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance isn't discrimination on the basis of race when the purpose and effect of this policy is to promote establishing and maintaining the school's nondiscriminatory policy.
A school that selects students on the basis of membership in a religious denomination or unit isn't discriminating if membership in the denomination or unit is open to all on a racially nondiscriminatory basis.
If this method is used, the notice must meet the following printing requirements.
The following is an acceptable example of the notice:
The publicity requirements won't apply in the following situations.
The school can demonstrate that it follows a racially nondiscriminatory policy either by showing that it currently enrolls students of racial minority groups in meaningful numbers or, except for local community schools, when minority students aren't enrolled in meaningful numbers, that its promotional activities and recruiting efforts in each geographic area were reasonably designed to inform students of all racial segments in the general communities within the area of the availability of the school. The question as to whether a school demonstrates such a policy satisfactorily will be determined on the basis of the facts and circumstances of each case.
The IRS recognizes that the failure by a school drawing its students from local communities to enroll racial minority group students may not necessarily indicate the absence of a racially nondiscriminatory policy when there are relatively few or no such students in these communities. Actual enrollment is, however, a meaningful indication of a racially nondiscriminatory policy in a community in which a public school or schools became subject to a desegregation order of a federal court or are otherwise expressly obligated to implement a desegregation plan under the terms of any written contract or other commitment to which any federal agency was a party.
The IRS encourages schools to satisfy the publicity requirement by using either of the methods described earlier, even though a school considers itself to be within one of the Exceptions. The IRS believes that these publicity requirements are the most effective methods to make known a school's racially nondiscriminatory policy. In this regard, it is each school's responsibility to determine whether either of the exceptions applies. Such responsibility will prepare the school, if it is audited by the IRS, to demonstrate that the failure to publish its racially nondiscriminatory policy in accordance with either one of the publicity requirements was justified by one of the exceptions. Also, a school must be prepared to demonstrate that it has publicly disavowed or repudiated any statements purported to have been made on its behalf (after November 6, 1975) that are contrary to its publicity of a racially nondiscriminatory policy as to students, to the extent that the school or its principal official was aware of these statements.
Recordkeeping requirements. With certain exceptions, given later, each exempt private school must maintain the following records for a minimum period of 3 years, beginning with the year after the year of compilation or acquisition. .
The racial composition of the student body, faculty, and administrative staff can be determined in the same manner as that described at the beginning of this section. However, a school can't discontinue maintaining a system of records that reflect the racial composition of its students, faculty, and administrative staff used on November 6, 1975, unless it substitutes a different system that compiles substantially the same information, without advance approval of the IRS.
The IRS doesn't require that a school release any personally identifiable records or personal information except in accordance with the requirements of the Family Educational Rights and Privacy Act of 1974. Similarly, the IRS doesn't require a school to keep records prohibited under state or federal law.
An organization described in sections 501(c)(3) or 501(c)(4) may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance.
However, this rule doesn't apply to state-sponsored organizations described in sections 501(c)(26) or 501(c)(27), which are discussed in chapter 4, or to charitable risk pools, discussed next.
A charitable risk pool is treated as organized and operated exclusively for charitable purposes if it satisfies all of the following requirements:
In addition to the information required for all organizations, as described earlier, you should include any other information described in this section.
If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. Some examples of this type of organization are those organized for:
Acceptance of attorneys' fees.
A nonprofit public-interest law firm can accept attorneys' fees in public-interest cases if the fees are paid directly by its clients and the fees aren't more than the actual costs incurred in the case. Upon undertaking a representation, the organization can't withdraw from the case because the litigant is unable to pay the fee.
Firms can accept fees awarded or approved by a court or an administrative agency and paid by an opposing party if the firms don't use the likelihood or probability of fee awards as a consideration in the selection of cases. All fee awards must be paid to the organization and not to its individual staff attorneys. Instead, a public-interest law firm can reasonably compensate its staff attorneys, but only on a straight salary basis. Private attorneys, whose services are retained by the firm to assist it in particular cases, can be compensated by the firm, but only on a fixed fee or salary basis.
The total amount of all attorneys' fees (court awarded and those received from clients) mustn't be more than 50% of the total cost of operations of the organization's legal functions, calculated over a 5-year period.
If, to carry out its program, an organization violates applicable canons of ethics, disrupts the judicial system, or engages in any illegal action, the organization will jeopardize its exemption.
To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines.
Although a church, its integrated auxiliaries, or a convention or association of churches isn't required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions, the organization may find it advantageous to obtain recognition of exemption. See Form 1023, Schedule A. In this event, you should submit information showing that your organization is a church, synagogue, association or convention of churches, religious order, or religious organization that is an integral part of a church, and that it is engaged in carrying out the function of a church.
In determining whether an admittedly religious organization is also a church, the IRS doesn't accept every assertion that the organization is a church. Because beliefs and practices vary widely, there is no single definition of the word church for tax purposes. The IRS considers the facts and circumstances of each organization applying for church status.
You must show that your organization's research will be carried on in the public interest. Scientific research will be considered to be in the public interest if the results of the research (including any patents, copyrights, processes, or formulas) are made available to the public on a nondiscriminatory basis; if the research is performed for the United States or a state, county, or municipal government; or if the research is carried on for one of the following purposes.
Scientific research, for exemption purposes, doesn't include activities of a type ordinarily incidental to commercial or industrial operations such as the ordinary inspection or testing of materials or products, or the designing or constructing of equipment, buildings, etc.
If you engage or plan to engage in research, submit all of the following.
If your organization is established to operate a book store or engage in publishing activities of any nature (printing, publication, or distribution of your own material or that printed or published by others and distributed by you), explain fully the nature of the operations, including whether sales are or will be made to the general public, the type of literature involved, and how these activities are related to your stated purposes.
There are two types of amateur athletic organizations that can qualify for tax-exempt status. The first type is an organization that fosters national or international amateur sports competition but only if none of its activities involve providing athletic facilities or equipment. The second type is a Qualified amateur sports organization (discussed below). The difference is that a qualified amateur sports organization can provide athletic facilities and equipment.
Donations to either type of amateur athletic organization are deductible as charitable contributions on the donor's federal income tax return. However, no deduction is allowed if there is a direct personal benefit to the donor or any other person other than the organization.
Examples of activities that may qualify this type of organization for exempt status are:
It is important that you determine if your organization is a private foundation. Most organizations exempt from income tax (as organizations described in section 501(c)(3)) are presumed to be private foundations unless they notify the IRS within a specified period of time that they meet the requirements of section 509(a) to be treated as other than a private foundation. This notice requirement applies to most section 501(c)(3) organizations regardless of when they were formed. See Form 1023, Part VII.
Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in sections 509(a)(1), 509(a)(2), 509(a)(3), or 509(a)(4)). In effect, the definition divides these organizations into two classes, namely private foundations and public charities. Public charities are discussed later.
Organizations that fall into the excluded categories are generally those that either have broad public support or actively function in a supporting relationship to those organizations. Organizations that test for public safety also are excluded.
When to file application.
If an organization has to file the application, it must do so within 27 months from the end of the month in which it was organized.
If your organization is newly applying for recognition of exemption as an organization described in this chapter (a section 501(c)(3) organization) and you wish to establish that your organization is a public charity rather than a private foundation, you must complete the applicable lines of Part VII of Form 1023 or Part IV of Form 1023-EZ. See Application for Recognition of Exemption, earlier in this chapter, for more information.
In determining the date on which a corporation is organized for purposes of applying for recognition of section 501(c)(3) status, the IRS looks to the date the corporation came into existence under the law of the state in which it is incorporated. For example, where state law provides that existence of a corporation begins on the date its articles are filed by a certain state official in the appropriate state office, the corporation is considered organized on that date. Later nonsubstantive amendments to the enabling instrument won't change the date of organization, for purposes of the filing requirement.
Any other provisions of this instrument notwithstanding, the trustees shall distribute its income for each tax year at a time and in a manner as not to become subject to the tax on undistributed income imposed by section 4942 of the Internal Revenue Code, or the corresponding section of any future federal tax code.
Any other provisions of this instrument notwithstanding, the trustees won't engage in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor retain any excess business holdings as defined in section 4943(c) of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor make any investments in a manner as to incur tax liability under section 4944 of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor make any taxable expenditures as defined in section 4945 (d) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
A private foundation is any organization described in Section 501(c)(3), unless it falls into one of the categories specifically excluded from the definition of that term in section 509(a), which lists four basic categories of exclusions. These categories are discussed under the Section 509(a)(1), 509(a)(2), 509(a)(3), and 509(a)(4) Organizations headings that follow this introduction. See Section 509(a)(1) Organizations, etc.
If your organization falls into one of these categories, it isn't a private foundation and you should state this in Part VII of Form 1023 or Part IV of Form 1023-EZ.
If your organization doesn't fall into one of these categories, it is a private foundation and is subject to the applicable rules and restrictions until it terminates its private foundation status. Some private foundations also qualify as private operating foundations; these are discussed near the end of this chapter.
Generally speaking, a large class of organizations excluded under section 509(a)(1) and all organizations excluded under section 509(a)(2) depend upon a support test. This test is used to assure a minimum percentage of broad-based public support in the organization's total support pattern. Thus, in the following discussions, when the one-third support test (see Qualifying as Publicly Supported, later) is referred to, it means the following fraction normally must equal at least one-third.
Including items of support in qualifying support (the numerator of the fraction) or excluding items of support from total support (the denominator of the fraction) may decide whether an organization is excluded from the definition of a private foundation, and thus from the liability for certain excise taxes. It is very important to classify items of support correctly. .
M is recognized as an organization described in section 501(c)(3). For the years 2017 through 2021 (the applicable period for the tax year 2021 under Regulations section 1.170A-9(f)(3)), M received support (as defined in paragraphs Regulations section 1.170A-9(f)(6) through (8)) of $600,000 from the following sources:For tax year 2021, M's public support is computed as follows: M's support from governmental units and from direct and indirect contributions from the general public for the 2019 tax year normally exceeds one-third of M's total support ($202,000/$600,000 = 33.67 percent) for the applicable period (2016 through 2020). M meets the one-third support test for 2020 and is therefore publicly supported for the tax years 2021 and 2022.
N is recognized as an organization described in section 501(c)(3). It was created to maintain public gardens containing botanical specimens and displaying statuary and other art objects. The facilities, works of art, and a large endowment were all contributed by a single contributor. The members of the governing body of the organization are unrelated to its creator. The gardens are open to the public without charge and attract many visitors each year. For the current tax year and the 4 tax years preceding the current tax year, 95% of the organization's total support was received from investment income from its original endowment. N also maintains a membership society that is supported by members of the general public who wish to contribute to the upkeep of the gardens by paying a small annual membership fee. Over the 5-year period in question, these fees from the general public constituted the remaining 5% of the organization's total support. Under these circumstances, N doesn't meet the one-third support test for its current tax year. Furthermore, since only 5% was received from the general public, N doesn't satisfy the 10 percent support limitation under Regulations section 1.170A-9(f)(3)(i), and therefore doesn't qualify as publicly supported under the facts and circumstances test. Because N has failed to satisfy the 10 percent support limitation, none of the other requirements or factors in Regulations section 1.170A-9(f)(3)(iii)(A) through (E) can be considered in determining whether N qualifies as a publicly supported organization. For its current tax year, N isn't an organization described in section 170(b)(1)(A)(vi).
O, an art museum, is recognized as an organization described in section 501(c)(3). In 1930, O was founded in S City by members of a single family to collect, preserve, interpret, and display to the public important works of art. O is governed by a Board of Trustees that originally consisted almost entirely of members of the founding family. However, since 1945, members of the founding family or persons standing in relationship to the members of that family described in section 4946(a)(1)(C) through (G) have annually constituted less than one-fifth of the Board of Trustees. The remaining board members are citizens of S City from a variety of professions and occupations who represent the interests and views of the people of S City in the activities carried on by the organization rather than the personal or private interests of the founding family. O solicits contributions from the general public, and for the current tax year and each of the 4 tax years immediately preceding the current tax year, O has received total contributions (in small sums of less than $100, none of which exceeds 2 percent of O's total support for such period) in excess of $10,000. These contributions from the general public represent 25 percent of the organization's total support for that 5-year period. For the same period, investment income from several large endowment funds has constituted 75 percent of O's total support. O expends substantially all of its annual income for its exempt purposes and thus depends on the funds it annually solicits from the public as well as its investment income in order to carry out its activities on a normal and continuing basis and to acquire new works of art. O has, for the entire period of its existence, been open to the public and more than 300,000 people (from S City and elsewhere) have visited the museum in the current tax year and the 4 years immediately preceding the current tax year.
Under these circumstances, O doesn't meet the one-third support test for its current year because it has received only 25 percent of its total support for the applicable 5-year period from the general public. However, under the facts set forth, O has met the 10 percent support limitation under Regulations section 1.170A-9(f)(3)(i), as well as the requirements of Regulations section 1.170A-9(f)(3)(ii). Under all of the facts set forth, O is considered as meeting the requirements of the facts and circumstances test on the basis of satisfying Regulations section 1.170A-9(f)(3)(iii)(A) through (D). O is therefore publicly supported for its current tax year and the immediately succeeding tax year.
In 1960, the P Philharmonic Orchestra was organized in T City by a local music society and a local women's club to present to the public a wide variety of musical programs intended to foster music appreciation in the community. P is recognized as an organization described in section 501(c)(3). The orchestra is composed of professional musicians who are paid by the association. Twelve performances, open to the public, are scheduled each year. A small admission charge is made for each of these performances. In addition, several performances are staged annually without charge.
During the current tax year and the 4 tax years immediately preceding the current tax year, P received separate contributions of $200,000 each from A and B (not members of a single family) and support of $120,000 from the T Community Chest, a public federated fundraising organization operating in T City. P depends on these funds to carry out its activities and will continue to depend on contributions of this type to be made in the future. P has also begun a fundraising campaign in an attempt to expand its activities for the coming years.
P is governed by a Board of Directors composed of five individuals. A faculty member of a local college, the president of a local music society, the head of a local banking institution, a prominent doctor, and a member of the governing body of the local Chamber of Commerce currently serve on the Board and represent the interests and views of the community in the activities carried on by P.
For P's current tax year, its sources of support are computed on the basis of the current tax year and the 4 immediately preceding tax years, as follows.P's support from the general public, directly and indirectly, doesn't meet the one-third support test ($140,800/$520,000 = 27% of total support). However, because P receives 27 percent of its total support from the general public, it meets the 10 percent support limitation under Regulations section 1.170A-9(f)(3)(i). P also meets the requirements of Regulations section 1.170A-9(f)(3)(ii). As a result of satisfying these requirements and factors, P is considered to meet the facts and circumstances test and therefore qualifies as a publicly supported organization for its current tax year and the immediately succeeding tax year.
Q is recognized as an organization described in section 501(c)(3) and it is a philanthropic organization. Q was founded in 1965 by C for the purpose of making annual contributions to worthy charities. C created Q as a charitable trust by transferring $500,000 worth of appreciated securities to Q.
Under the trust agreement, C and two other family members are the sole trustees of Q and are vested with the right to appoint successor trustees. In each of the current tax year and the 4 tax years immediately preceding the current tax year, Q received $12,000 in investment income from its original endowment. Each year Q solicits funds by operating a charity ball at C's residence. Guests are invited and asked to make contributions of $100 per couple. During the 5-year period involved, $15,000 was received from the proceeds of these events. C and his family have also made contributions to Q of $25,000 over the 5-year period at issue. Q makes disbursements each year of substantially all of its net income to the public charities chosen by the trustees.
Q's sources of support for the current tax year and the 4 tax years immediately preceding the current tax year are as follows:Q's support from the general public doesn't meet the one-third support test ($17,000/$100,000 = 17% of total support). Even though it does meet the ten-percent-of-support requirement, its method of solicitation makes it questionable whether Q satisfies Regulations section 1.170A-9(f)(3)(ii). Because of its method of operating, Q also has a greater burden of establishing its publicly supported nature. Based on these facts and on Q's failure to receive favorable consideration under the remaining factors of Regulations section 1.170A-9(f)(3)(iii), Q doesn't satisfy the facts and circumstances test and therefore doesn't qualify as a publicly supported organization.
Community trusts are often established to attract large contributions of a capital or endowment nature for the benefit of a particular community or area. Often these contributions come initially from a small number of donors. While the community trust generally has a governing body composed of representatives of the particular community or area, its contributions are often received and maintained in the form of separate trusts or funds that are subject to varying degrees of control by the governing body.
To qualify as a publicly supported organization, a community trust must meet the one-third support test, explained earlier under Qualifying as Publicly Supported. If it can't meet that test, it must be organized and operated so as to attract new and additional public or governmental support on a continuous basis sufficient to meet the facts and circumstances test, also explained earlier. Community trusts are generally able to satisfy the attraction of public support requirement (as contained in the facts and circumstances test) if they seek gifts and bequests from a wide range of potential donors in the community or area served, through banks or trust companies, through attorneys or other professional persons, or in other appropriate ways that call attention to the community trust as a potential recipient of gifts and bequests made for the benefit of the community or area served. A community trust, however, doesn't have to engage in periodic, community-wide, fundraising campaigns directed toward attracting a large number of small contributions in a manner similar to campaigns conducted by a community chest or a united fund.
Section 509(a)(2) excludes certain types of broadly based, publicly supported organizations from private foundation status. Generally, an organization described in section 509(a)(2) may also fit the description of a publicly supported organization under section 509(a)(1). There are, however, two basic differences.
To be excluded from private foundation treatment under section 509(a)(2), an organization must meet two support tests.
Both these tests are designed to ensure that an organization excluded from private foundation treatment is responsive to the general public, rather than to the private interests of a limited number of donors or other persons.
If there is any doubt that a grant or contribution can be excluded as an unusual grant, the grantee organization can request a determination by submitting Form 8940, Request for Miscellaneous Determination, supporting documents described in the Instructions to Form 8940 and the appropriate user fee. The IRS has the sole discretion of issuing a determination, but if a favorable determination is issued, it can be relied on by the grantor or contributor for purposes of a charitable contributions deduction and by the organization for purposes of the exclusion for unusual grants.
In addition to the characteristics listed above, the following factors may be considered by the IRS in determining if the grant or contribution is an unusual grant.
Y, an organization described in section 501(c)(3), was created by Marshall Pine, the holder of all the common stock in M corporation, Lisa, Marshall's wife, and Edward Forest, Marshall's business associate. The purpose of Y was to sponsor and equip athletic teams composed of underprivileged children in the community. Each of the three creators makes small cash contributions to Y. Marshall, Lisa, and Edward have been active participants in the affairs of Y since its creation. Y regularly raises small amounts of contributions through fundraising drives and selling admission to some of the sponsored sporting events. The operations of Y are carried out on a small scale, usually being restricted to the sponsorship of two to four baseball teams of underprivileged children.
In 2012, M Corporation recapitalizes and creates a first and second class of 6 percent nonvoting preferred stock, most of which is held by Marshall and Lisa. In 2013, Marshall contributes 49 percent of his common stock in M to Y. Marshall's contribution of M's common stock was substantial and constitutes 90 percent of Y's total support for 2013. A combination of the facts and circumstances of the determining factors preclude Marshall's contribution of M's common stock in 2013 from being excluded as an unusual grant under Temporary Regulations section 1.509(a)-3T(c)(3) for purposes of determining whether Y meets the one-third support test under section 509(a)(2).
M was organized in 2012 to promote the appreciation of ballet in a particular region of the United States. Its principal activities consist of erecting a theater for the performance of ballet and the organization and operation of a ballet company. M receives a determination letter that it is an organization described in section 501(c)(3) and that it is a public charity described in section 509(a)(2). The governing body of M consists of nine prominent unrelated citizens residing in the region who have either an expertise in ballet or a strong interest in encouraging appreciation of the art form.
In 2013, Z, a private foundation, proposes to make a grant of $500,000 in cash to M to provide sufficient capital for M to commence its activities. Although Albert Cedar, the creator of Z, is one of the nine members of M's governing body, was one of M's original founders, and continues to lend his prestige to M's activities and fundraising efforts, Albert doesn't, directly or indirectly, exercise any control over M. By the close of its first tax year, M also has received a significant amount of support from a number of smaller contributions and pledges from members of the general public. M charges admission to the ballet performances to the general public.
Although the support received in 2013 won't impact M's status as a public charity for its first 5 tax years, it will be relevant to the determination of whether M meets the one-third support test under section 509(a)(2) for the 2017 tax year, using the computation period 2013 through 2017. Within the appropriate timeframe, M may submit a request for a determination letter that the $500,000 contribution from Z qualifies as an unusual grant.
Under the above circumstances, even though Albert was a founder and member of the governing body of M, M may exclude Z's contribution of $500,000 in 2013 as an unusual grant under Regulations section 1.509(a)-3T(c)(3) for purposes of determining whether M meets the one-third support test under section 509(a)(2) for 2017.
Gifts, contributions, and grants distinguished from gross receipts.
In determining whether an organization normally receives more than one-third of its support from permitted sources, include all gifts, contributions, and grants received from permitted sources in the numerator of the support fraction in each tax year. However, gross receipts from admissions, sales of merchandise, performance of services, or furnishing facilities, in an activity that isn't an unrelated trade or business, are includible in the numerator of the support fraction in any tax year only to the extent that the amounts received from any person or from any bureau or similar agency of a governmental unit aren't more than the greater of $5,000 or 1% of support.
Gifts and contributions.
Any payment of money or transfer of property without adequate consideration is considered a gift or contribution. When payment is made or property is transferred as consideration for admissions, sales of merchandise, performance of services, or furnishing facilities to the donor, the status of the payment or transfer under section 170(c) determines whether and to what extent the payment or transfer is a gift or contribution as distinguished from gross receipts from related activities.
The amount includible in computing support from gifts, grants, or contributions of property or use of property is the fair market or rental value of the property at the date of the gift or contribution.
P is a local agricultural club and is an organization described in section 501(c)(3). It makes awards at its annual fair for outstanding specimens of produce and livestock to encourage interest and proficiency by young people in farming and raising livestock. Most of these awards are cash or other property donated by local businessmen. When the awards are made, the donors are given recognition for their donations by being identified as the donor of the award. The recognition given to donors is merely incidental to the making of the award to worthy youngsters. For these reasons, the donations are contributions. The amount includible in computing support is equal to the cash contributed or the fair market value of other property on the dates contributed.
Grants often contain certain terms and conditions imposed by the grantor. Because of the imposition of terms and conditions, the frequent similarity of public purposes of grantor and grantee, and the possibility of benefit to the grantor, amounts received as grants for carrying on exempt activities are sometimes difficult to distinguish from amounts received as gross receipts from carrying on exempt activities.
In distinguishing the term gross receipts from the term grants, the term gross receipts means amounts received from an activity that isn't an unrelated trade or business, if a specific service, facility, or product is provided to serve the direct and immediate needs of the payor rather than primarily to confer a direct benefit on the general public. In general, payments made primarily to enable the payor to realize or receive some economic or physical benefit as a result of the service, facility, or product obtained will be treated as gross receipts by the payee.
For example, a profit-making organization, primarily for its own betterment, contracts with a nonprofit organization for a service from that organization. Any payments received by the nonprofit organization (whether from the profit-making organization or from another nonprofit) for similar services are primarily for the benefit of the payor and are therefore gross receipts, rather than grants.
Research leading to the development of tangible products for the use or benefit of a payor generally will be treated as a service provided to serve the direct and immediate needs of the payor, while basic research or studies carried on in the physical or social sciences generally will be treated as primarily to confer a direct benefit upon the general public.
Medicare and Medicaid payments are gross receipts from the exercise or performance of an exempt function. The individual patient, not a governmental unit, actually controls the ultimate recipient of these payments. Therefore, Medicare and Medicaid receipts for services provided to each patient are included as gross receipts to the extent they aren't more than the greater of $5,000 or 1% of the organization's total support for the tax year.
Membership fees distinguished from gross receipts.
The fact that a membership organization provides services, admissions, facilities, or merchandise to its members as part of its overall activities won't, in itself, result in the classification of fees received from members as gross receipts subject to the $5,000 or 1% limit rather than membership fees. However, if an organization uses membership fees as a means of selling admissions, merchandise, services, or the use of facilities to members of the general public who have no common goal or interest (other than the desire to buy the admissions, merchandise, services, or use of facilities), the fees aren't membership fees but are gross receipts.
On the other hand, to the extent the basic purpose of the payment is to provide support for the organization rather than to buy admissions, merchandise, services, or the use of facilities, the payment is a membership fee.
The term bureau or similar agency of a governmental unit for determining amounts subject to the $5,000 or 1% limit means a specialized operating unit of the executive, judicial, or legislative branch of government in which business is conducted under certain rules and regulations. Since the term bureau refers to a unit functioning at the operating, as distinct from the policy-making, level of government, it normally means a subdivision of a department of government. The term wouldn't usually include those levels of government that are basically policy-making or administrative, such as the office of the Secretary or Assistant Secretary of a department, but would consist of the highest operational level under the policy-making or administrative levels.
Amounts received from a unit functioning at the policy-making or administrative level of government are treated as received from one bureau or similar agency of the unit. Units of a governmental agency above the operating level are combined and considered a separate bureau for this purpose. Thus, an organization that has gross receipts from both a policy-making or administrative unit and an operational unit of a department will be treated as having gross receipts from two bureaus. For this purpose, the Departments of Air Force, Army, and Navy are separate departments and each has its own policy-making, administrative, and operating units.
The Bureau for Africa and the Bureau for Latin America are considered separate bureaus. Each is an operating unit under the Administrator of the Agency for International Development, a policy-making official. If an organization had gross receipts from both of these bureaus, the amount of gross receipts from each would be subject to the greater of $5,000 or the 1% limit.
A bureau is an operating unit under the administrative office of the Executive Director. The subdivisions of the bureau are Geographic Areas and Project Development Staff. If an organization had gross receipts from these subdivisions, the total gross receipts from these subdivisions would be considered gross receipts from the same bureau and would be subject to the greater of $5,000 or the 1% limit.
Grants from public charities.
For purposes of the one-third support test, grants received from a section 509(a)(1) organization (public charity) are generally includible in full in computing the numerator of the support fraction for that tax year.
However, if the amount received is considered an indirect contribution from one of the public charity's donors, it will retain its character as a contribution from the donor, and if, for example, the donor is a substantial contributor to the ultimate recipient, the amount is excluded from the numerator of the support fraction. If a public charity makes both an indirect contribution from its donor and an additional grant to the ultimate recipient, the indirect contribution is treated as made first.
An indirect contribution is one that is expressly or impliedly earmarked by the donor as being for, or for the benefit of, a particular recipient rather than for a particular purpose.
Section 509(a)(3) excludes from the definition of private foundation those organizations that meet all of the three following requirements.
Section 509(a)(3) differs from the other provisions of section 509 that describe a publicly supported organization. Instead of describing an organization that conducts a particular kind of activity or that receives financial support from the general public, section 509(a)(3) describes organizations that have established certain relationships in support of section 509(a)(1) or 509(a)(2) organizations. Thus, an organization can qualify as other than a private foundation even though it may be funded by a single donor, family, or corporation (with certain exceptions described in Organizations controlled by donors, later). This kind of funding ordinarily would indicate private foundation status, but a section 509(a)(3) organization has limited purposes and activities and gives up a significant degree of independence.
More than one type of relationship may exist between a supporting organization and a publicly supported organization. Any relationship, however, must ensure that the supporting organization will be responsive to the needs or demands of, and will be an integral part of or maintain a significant involvement in, the operations of one or more publicly supported organizations.
The Type I and Type II relationships rely on majority control of the governing body of the supporting organization by the publicly supported organization. They have the same rules for meeting the tests under requirement (1) and are discussed in Category one, below. The operated in connection with relationship requires that the supporting organization be responsive to and have operational relationships with publicly supported organizations. This third relationship has different rules for meeting the requirement (1) tests and is discussed separately in Category two, later.
An organization is organized exclusively for one or more of the purposes specified in requirement (1) only if its articles of organization:
In meeting the organizational test, the organization's purposes as stated in its articles can be as broad as, or more specific than, the purposes set forth in requirement (1) at the beginning of the discussion of Section 509(a)(3) Organizations. Therefore, an organization that by the terms of its articles is formed for the benefit of one or more specified publicly supported organizations will, if it otherwise meets the other requirements, be considered to have met the organizational test.
For example, articles stating that an organization is formed to perform the publishing functions of a specified university are enough to comply with the organizational test. A Type I or Type II supporting organization meets these requirements if the purposes set forth in its articles are similar to but no broader than the purposes set forth in the articles of its controlling organizations. However, a Type I or Type II supporting organization that supports a publicly supported section 501(c)(4), 501(c)(5), or 501(c)(6) organization (see Supporting other than section 501(c)(3) organizations, later) meets these requirements if its articles require it to carry on charitable, etc., activities within the meaning of section 170(c)(2).
Operational test — permissible beneficiaries.
A supporting organization must engage solely in activities that support or benefit its specified supported organizations. These activities may include making payments to or for the use of, or providing services or facilities for, individual members of the charitable class benefited by its supported organization(s).
For example, a supporting organization may make a payment indirectly through another unrelated organization to a member of a charitable class benefited by a specified publicly supported organization, but only if the payment is a grant to an individual rather than a grant to an organization. Similarly, a supporting organization may support or benefit a section 501(c)(3) organization, other than a private foundation, that is operated, supervised, or controlled directly by or in connection with its supported organization(s). However, a supporting organization's activities may not further its purpose other than supporting or benefiting its supported organization(s).
For the purposes of the rules discussed in this publication, the following persons are considered disqualified persons:
Remember, however, that foundation managers and publicly supported organizations aren't disqualified persons for purposes of this control requirement.
If a person who is a disqualified person with respect to a supporting organization, such as a substantial contributor, is appointed or designated as a foundation manager of the supporting organization by a supported organization to serve as its representative, that person is still a disqualified person.
An organization is considered controlled for this purpose if the disqualified persons, by combining their votes or positions of authority, can require the organization to perform any act that significantly affects its operations or can prevent the organization from performing the act. This includes, but isn't limited to, the right of any substantial contributor or spouse to designate annually the recipients from among the supported organizations of the income from his or her contribution. Except as explained under Proof of independent control, next, a supporting organization will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of those persons is 50% or more of the total voting power of the organization's governing body, or if one or more of those persons has the right to exercise veto power over the actions of the organization.
Thus, if the governing body of a foundation is composed of five trustees, none of whom has a veto power over the actions of the foundation, and no more than two trustees are at any time disqualified persons, the foundation isn't considered controlled directly or indirectly by one or more disqualified persons by reason of this fact alone. However, all pertinent facts and circumstances (including the nature, diversity, and income yield of an organization's holdings, the length of time particular stocks, securities, or other assets are retained, and its manner of exercising its voting rights with respect to stocks in which members of its governing body also have some interest) are considered in determining whether a disqualified person does in fact indirectly control an organization.
Category two - Type III supporting organizations.
This category includes organizations operated in connection with one or more organizations described in section 509(a)(1) or 509(a)(2).
All supporting organizations must be responsive to the needs and demands of, and must constitute an integral part of or maintain significant involvement in, their supported organizations. Type I and Type II supporting organizations are deemed to accomplish these responsiveness and integral part requirements by virtue of the control relationships discussed earlier. However, a Type III supporting organization isn't subject to the same level of control by its supported organization(s). Therefore, Type III supporting organizations must pass separate responsiveness and integral part tests, in addition to the organizational and operational tests applicable to all supporting organizations. Type III supporting organizations mustn't be controlled by disqualified persons (as described earlier), and may not receive contributions from certain controlling donors (see Contributions from controlling donors, later). In addition, a Type III supporting organization may not support any organization not organized in the United States.
Functional Integration. A Type III supporting organization may be “functionally-integrated” or “non-functionally integrated” depending on the manner in which it meets the integral part test (see Integral part test - functionally-integrated, and Integral part test - non-functionally integrated, later). Type III functionally-integrated supporting organizations are subject to fewer restrictions and requirements than Type III non-functionally integrated supporting organizations. In particular, distributions from private foundations to Type III non-functionally integrated supporting organizations aren't qualifying distributions for purposes of satisfying a private foundation's required annual distributions under section 4942, and may be taxable expenditures under section 4945.
The organizational test for a Type III supporting organization is generally the same as for a Type I or Type II supporting organization (described earlier). However, Type III supporting organizations are more limited regarding how their supported organizations must be “specified” in their articles. A Type III supporting organization's articles must specify its supported organization(s) by name, or the organization must demonstrate that the supporting organization and its supported organization(s) have a historic and continuing relationship, because of which a substantial identity of interests has developed between or among the organizations. “Class or purpose” designations don't satisfy the organizational test for Type III supporting organizations. However, a Type III supporting organization's articles may:
If the remote possibility referred to in (2) comes to pass and the supporting organization thereafter operates for the benefit of an organization that isn't a publicly supported organization, it will no longer qualify under section 509(a)(3).
Operational test. The operational rules described earlier for Type I and Type II supporting organizations apply as well to Type III supporting organizations (see Operational test - permissible beneficiaries, and Operational test - permissible activities, earlier). In addition, a Type III supporting organization must operate in a manner consistent with the requirements of the responsiveness test and the integral part test, discussed later.
A Type III supporting organization must be responsive to the needs or demands of its supported organization(s). To meet this test, the supported organizations must (1) elect one or more officers, directors, or trustees; (2) have one or more officers, directors, or trustees of the supported organization(s) serving simultaneously as officers, directors, or trustees of the supporting organization; or (3) maintain a close and continuous working relationship with the officers, directors, or trustees of the supporting organization. In addition, as a result of this representation or close working relationship, the supported organization(s) must have a significant voice in the investment policies of the supporting organization, the timing of grants and the manner of making them, the selection of recipients, and generally the use of the income or assets of the supporting organization.
Integral part test - functionally integrated.
A Type III supporting organization may satisfy the integral part test as functionally-integrated in one of three ways:
Direct furtherance activities. For purposes of the test in item (1), activities “directly further” a supported organization's exempt purposes only if conducted by the supporting organization itself. Direct furtherance activities include holding title to and managing exempt-use assets, but not fundraising or investing and managing non-exempt-use assets. Grantmaking may qualify as direct furtherance activities if the requirements of Regulations section 1.509(a)-4(i)(4)(ii)(D) are met.
Integral part test - non-functionally integrated. A Type III supporting organization that doesn't satisfy the integral part test as functionally-integrated will still qualify as a Type III non-functionally integrated supporting organization if it satisfies a distribution requirement and an attentiveness requirement. Alternatively, certain trusts established before November 20, 1970 may qualify if they meet the requirements of Regulations section 1.509(a)-4(i)(5)(i)(9).
Distribution Requirement. A Type III non-functionally integrated supporting organization must distribute a certain amount annually to or for the benefit of its supported organization(s). That amount is equal to the greater of 85% of the organization's adjusted net income and 3.5 percent of the fair market value of the organization's non-exempt-use assets (with certain adjustments). See Regulations section 1.509(a)-4(i)(5) and (8) for more information regarding the distribution requirement and valuation of non-exempt-use assets. See Regulations section 1.509(a)-4(i)(6) for more information regarding what distributions or expenditures count towards the distribution requirement.
Attentiveness Requirement. Each year, a Type III non-functionally integrated supporting organization must distribute one-third or more of the amount that it must distribute that year to one or more supported organizations that are attentive to the operations of the supporting organization and to which the supporting organization is responsive. A supported organization is “attentive” for these purposes if the amount received by the supported organization from the supporting organization:
Special rules of attribution.
To determine whether an organization meets the not-more-than-one-third support test in section 509(a)(2), amounts received by the organization from an organization that seeks to be a section 509(a)(3) organization because of its support of the organization are deemed gross investment income (rather than gifts or contributions) to the extent they are gross investment income of the distributing organization. (This rule also applies to amounts received from a charitable trust, corporation, fund, association, or similar organization that is required by its governing instrument or otherwise to distribute, or that normally does distribute, at least 25% of its adjusted net income to the organization, and whose distribution normally comprises at least 5% of its adjusted net income.) All income that is gross investment income of the distributing organization will be considered distributed first by that organization. If the supporting organization makes distributions to more than one organization, the amount of gross investment income considered distributed will be prorated among the distributees.
Also, treat amounts paid by an organization to provide goods, services, or facilities for the direct benefit of an organization seeking section 509(a)(2) status (rather than for the direct benefit of the general public) in the same manner as amounts received by the latter organization. These amounts will be treated as gross investment income to the extent they are gross investment income of the organization spending the amounts. An organization seeking section 509(a)(2) status must file a separate statement with its annual information return, Form 990 or 990-EZ, listing all amounts received from supporting organizations.
For more information about applying for section 501(c)(3) status see Life Cycle of a Private Foundation at IRS.gov.
Section 509(a)(4) excludes from classification as private foundations those organizations that qualify under section 501(c)(3) as organized and operated for the purpose of testing products for public safety. Generally, these organizations test consumer products to determine their acceptability for use by the general public.
If your organization ceases to qualify as a public charity under section 509(a)(1) – (4), it becomes a private foundation. The organization must file Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation to satisfy its filing obligation. The organization can no longer file Form 990, 990-EZ or 990-N. A private foundation retains that status unless or until it terminates its private foundation status under section 507.
Private foundations are divided into 2 categories -- nonoperating private foundations and private operating foundations. Nonoperating foundations generally accomplish their charitable purpose by making grants to other charities. Operating foundations make qualifying distributions directly for the active conduct of their educational, charitable, and religious purposes.
Most of the restrictions and requirements that apply to private foundations also apply to private operating foundations. However, there are advantages to being classified as a private operating foundation. For example, a private operating foundation (as compared to a private foundation) can be the recipient of grants from a private foundation without having to distribute the funds received currently within 1 year, and the funds nevertheless may be treated as qualifying distributions by the donating private foundation; charitable contributions to a private operating foundation qualify for a higher charitable deduction limit on the donor's tax return; and the excise tax on net investment income doesn't apply to an exempt operating foundation (a private operating foundation that meets certain additional requirements - see Exempt operating foundations, later).
A private operating foundation is any private foundation that meets the assets test, the support test, or the endowment test, and makes qualifying distributions directly, for the active conduct of its activities for which it was organized, of substantially all (85% or more) of the lesser of its:
This chapter contains specific information for certain organizations described in section 501(c), other than those organizations that are described in section 501(c)(3). Section 501(c)(3) organizations are covered in chapter 3 of this publication.
The Table of Contents at the beginning of this publication, as well as the Organization Reference Chart, may help you locate at a glance the type of organization discussed in this chapter.
If your organization isn't organized for profit and will be operated primarily to promote social welfare to benefit the community, it may qualify for exemption under section 501(c)(4).
To qualify for exemption under section 501(c)(4), no part of the organization's net earnings can inure to the benefit of any private shareholder or individual. If the organization provides an excess benefit to certain persons, an excise tax may be imposed. See Excise tax on excess benefit transactions, under Excess Benefit Transactions in chapter 5 for more information about this tax.
For more information on social welfare organizations, see Life Cycle of a Social Welfare Organization.
The following information should be contained in the application form and accompanying statements of certain types of civic leagues or social welfare organizations.
A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Even if an area represented by an association isn't a community, the association can still qualify for exemption if its activities benefit a community.
The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. It also must show that it doesn't engage in exterior maintenance of private homes.
A homeowners' association that isn't exempt under section 501(c)(4) and that is a condominium management association, a residential real estate management association, or a timeshare association generally can elect under the provisions of section 528 to receive certain tax benefits that, in effect, permit it to exclude its exempt function income from its gross income.
If you are a member of an organization that wants to obtain recognition of exemption from federal income tax as a labor, agricultural, or horticultural organization, you should submit an application on Form 1024. You must indicate in your application for exemption and accompanying statements that no part of the organization's net earnings will inure to the benefit of any member. In addition, you should follow the procedure for obtaining recognition of exempt status described in chapter 1. Submit any additional information that may be required, as described in this section.
A labor organization is an association of workers who have combined to protect and promote the interests of the members by bargaining collectively with their employers to secure better working conditions, wages, and similar benefits.
To show that your organization has the purpose of a labor organization, you should include in your organizing document or accompanying statements (submitted with your exemption application) information establishing that the organization is organized to better the conditions of workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations. In addition, no net earnings of the organization can inure to the benefit of any member.
Agricultural and horticultural organizations are connected with raising livestock, cultivating land, raising and harvesting crops or aquatic resources, cultivating useful or ornamental plants, and similar pursuits.
For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. The term harvesting, in this case, includes fishing and related pursuits.
Agricultural organizations are often designed to encourage the development of better agricultural and horticultural products through a system of awards, using income from entry fees, gate receipts, and donations to meet the necessary expenses of upkeep and operation. When the activities are directed toward the improvement of marketing or other business conditions in one or more lines of business, rather than the improvement of production techniques or the betterment of the conditions of persons engaged in agriculture, the organization must qualify for exemption as a business league, board of trade, or other organization, as discussed next in the section on 501(c)(6) organizations.
The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products.
The following list contains some examples of activities that show an agricultural or horticultural purpose.
For more information on agricultural or horticultural organizations, see Life Cycle of an Agricultural or Horticultural Organization.
If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax.
In applying for recognition of exemption, you should submit the information described in this section. Also see chapter 1 for the procedures to follow.
Typical organizations that should file for recognition of exemption as social clubs include:
To show that your organization possesses the characteristics of a club within the meaning of the exemption law, you should submit evidence with your application that personal contact, commingling, and fellowship exist among members. You must show that members are bound together by a common objective of pleasure, recreation, and other nonprofitable purposes.
Fellowship need not be present between each member and every other member of a club if it is a material part in the life of the organization. A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group.
The term other nonprofitable purposes means other purposes similar to pleasure and recreation. For example, a club that, in addition to its social activities, has a plan for the payment of sick and death benefits isn't operating exclusively for pleasure, recreation, and other nonprofitable purposes.
The membership in a social club must be limited. To show that your organization has a purpose that would characterize it as a club, you should submit evidence with your application that there are limits on admission to membership consistent with the character of the club.
A social club that issues corporate membership is dealing with the general public in the form of the corporation's employees. Corporate members of a club aren't the kind of members contemplated by the law. Gross receipts from these members would be a factor in determining whether the club qualifies as a social club. See Gross receipts from nonmembership
The fact that a social club may have an associate (nonvoting) class of membership won't be, in and of itself, a cause for nonrecognition of exemption. However, if one membership class pays substantially lower dues and fees than another membership class, although both classes enjoy the same rights and privileges in using the club facilities, there may be an inurement of income to the benefited class, resulting in a denial of the club's exemption.
This section describes the information to be provided upon application for recognition of exemption by two types of fraternal societies: beneficiary and domestic. The major distinction is that fraternal beneficiary societies provide for the payment of life, sick, accident, or other benefits to their members or their dependents, while domestic fraternal societies don't provide these benefits but rather devote their earnings to fraternal, religious, charitable, etc., purposes. The procedures to follow in applying for recognition of exemption are described in chapter 1.
If your organization is controlled by a central organization, you should check with your controlling organization to determine whether your unit has been included in a group exemption letter or can be added. If so, your organization need not apply for individual recognition of exemption. For more information, see Group Exemption Letter in chapter 1 of this publication.
A fraternal beneficiary society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. The application and accompanying statements should establish that the organization:
A domestic fraternal society, order, or association must file an application for recognition of exemption from federal income tax on Form 1024. The application and accompanying statements should establish that the organization:
The organization can arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status.
This section describes the information to be provided upon application for recognition of exemption by the following types of employees' associations:
Both the application form to file and the information to provide are discussed later under the section that describes your employee association. Chapter 1 describes the procedures to follow in applying for exemption.
A local association of employees whose membership is limited to employees of a designated person or persons in a particular municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes. A local employees' association must apply for recognition of exemption by filing Form 1024-A. The organization must submit evidence that:
A local association of employees that has established a system of paying retirement or death benefits, or both, to its members won't qualify for exemption since the payment of these benefits isn't considered as being for charitable, educational, or recreational purposes. Similarly, a local association of employees that is operated primarily as a cooperative buying service for its members in order to obtain discount prices on merchandise, services, and activities doesn't qualify for exemption.
An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024. The material submitted with the application must show that your organization:
Under section 4976, the reversion of funds from a section 501(c)(9) organization to the employer who created the beneficiary association may subject the employer to a 100% penalty excise tax on the amount of the reversion.
A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form 1024. The trust must be a valid, existing trust under local law and must be evidenced by an executed document. A conformed copy of the plan of which the trust is a part should be attached to the application.
To be complete, an application must include a copy of the document (such as the trust instrument) by which the organization was created; a full description of the benefits available to participants and the terms and conditions of eligibility for benefits (usually contained in a plan document); and, if providing benefits pursuant to a collective bargaining agreement, a copy of that agreement.
Under section 4976, the reversion of funds from a section 501(c)(17) organization to the employer who created the supplemental unemployment benefit trust may subject the employer to a 100% penalty excise tax on the amount of the reversion.
Each of the following organizations apply for recognition of exemption from federal income tax by filing Form 1024.
The information to be provided upon application by each of these organizations is described in this section. For information as to the procedures to follow in applying for exemption, see chapter 1.
These organizations, other than benevolent life insurance associations, must be organized and operated on a mutual or cooperative basis. They are associations of persons or organizations, or both, banded together to provide themselves a mutually desirable service approximately at cost and on a mutual basis. To maintain the mutual characteristic of democratic ownership and control, they must be so organized and operated that their members have the right to choose the management, to receive services at cost, to receive a return of any excess of payments over losses and expenses, and to share in any assets upon dissolution.
The rights and interests of members in the annual savings of the organization must be determined in proportion to their business with the organization. Upon dissolution, gains from the sale of appreciated assets must be distributed to all persons who were members during the period the assets were owned by the organization in proportion to the amount of business done during that period. The bylaws mustn't provide for forfeiture of a member's rights and interest upon withdrawal or termination.
All of the organizations listed above must submit evidence with their application that they receive 85% or more of their gross income from their members for the sole purpose of meeting losses and expenses. Nevertheless, certain items of income are excluded from the computation of the 85% requirement if the organization is a mutual or cooperative telephone or electric company.
The 85% requirement is applied on the basis of an annual accounting period. Failure of an organization to meet the requirement in a particular year precludes exemption for that year, but has no effect upon exemption for years in which the 85% requirement is met.
Gain from the sale or conversion of the organization's property isn't considered an amount received from members in determining whether the organization's income consists of amounts collected from members.
Because the 85% income test is based on gross income, capital losses can't be used to reduce capital gains for purposes of this test.
A benevolent life insurance association or an organization seeking recognition of exemption on grounds of similarity to a benevolent life insurance association must submit evidence upon applying for recognition of exemption that it will be of a purely local character, that its excess funds will be refunded to members or retained in reasonable reserves to meet future losses and expenses, and that it meets the 85% income requirement. If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which more than 15% of its income is derived, it won't be entitled to exemption.
To establish that your organization is of a purely local character, it should show that its activities will be confined to a particular community, place, or district irrespective of political subdivisions. If the activities of an organization are limited only by the borders of a state, it can't be purely local in character. A benevolent life insurance association that doesn't terminate membership when a member moves from the local area in which the association operates will qualify for exemption if it meets the other requirements.
A copy of each type of policy issued by your organization should be included with the application for recognition of exemption.
Mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations need not establish that they are of a purely local character. They can serve noncontiguous areas.
If your organization wishes to obtain recognition of exemption from federal income tax as a cemetery company or a corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, it must file an application on Form 1024. For the procedure to follow to file an application, see Application, Approval, and Appeal Procedures in chapter 1.
A nonprofit mutual cemetery company that seeks recognition of exemption should submit evidence with its application that it is owned and operated exclusively for the benefit of its lot owners who hold lots for bona fide burial purposes and not for purposes of resale. A mutual cemetery company that also engages in charitable activities, such as the burial of paupers, will be regarded as operating within this stan-
If your organization is a nonprofit corporation chartered solely for the purpose of the disposal of human bodies by burial or cremation, you should show that it isn't permitted by its charter to engage in any business not necessarily incident to that purpose. Operating a mortuary isn't permitted. However, selling monuments, markers, vaults, and flowers solely for use in the cemetery is permitted if the profits from these sales are used to maintain the cemetery as a whole.
No part of the net earnings of your organization can inure to the benefit of any private shareholder or individual.
Ordinary and necessary expenses in connection with the operation, management, maintenance, and improvement of the cemetery are permitted, as are reasonable fees for the services of a manager.
Buying cemetery property.
Payments can be made to amortize debt incurred to buy land, but can't be in the nature of profit distributions. You must show the method used to finance the purchase of the cemetery property and that the purchase price of the land at the time of its sale to the cemetery wasn't unreasonable.
Except for holders of preferred stock (discussed later), no person can have any interest in the net earnings of a tax-exempt cemetery company or crematorium. Therefore, if property is transferred to the organization in exchange for an interest in the organization's net earnings, the organization won't be exempt so long as that interest remains outstanding.
An equity interest in the organization is an interest in the net earnings of the organization. However, an interest in the organization that isn't an equity interest may still be an interest in the organization's net earnings. For example, a bond issued by a cemetery company that provides for a fixed rate of interest and also provides for additional interest payments based on the income of the organization is considered an interest in the net earnings of the organization. Similarly, a convertible debt obligation issued after July 7, 1975, is considered an interest in the net earnings of the organization.
Perpetual care organization.
A perpetual care organization, including, for example, a trust organized to receive, maintain, and administer funds that it receives from a nonprofit tax-exempt cemetery under state law and contracts, can apply for recognition of exemption on Form 1024, even though it doesn't own the land used for burial. However, the income from these funds must be devoted exclusively to the perpetual care and maintenance of the nonprofit cemetery as a whole. Also, no part of the net earnings can inure to the benefit of any private shareholder or individual.
In addition, a perpetual care organization not operated for profit, but established as a civic enterprise to maintain and administer funds, the income of which is devoted exclusively to the perpetual care and maintenance of an abandoned cemetery as a whole, may qualify for exemption.
Common and preferred stock.
A cemetery company that issues common stock can qualify for exemption only if no dividends may be paid. The payment of dividends must be legally prohibited either by the corporation's charter or by applicable state law.
Generally, a cemetery company or crematorium isn't exempt if it issues preferred stock. However, it can still be exempt if the preferred stock was issued before November 28, 1978, or was issued after that date under a written plan adopted before that date. The adoption of the plan must be shown by the acts of the responsible officers and appear on the official records of the organization.
The preferred stock issued either before November 28, 1978, or under a plan adopted before that date, must meet all the following requirements.
If your organization wants to obtain recognition of exemption as a credit union without capital stock, organized and operated under state law for mutual purposes and without profit, it must file the application for recognition of exemption on Form 1024.
Federal credit unions organized and operated in accordance with the Federal Credit Union Act, as amended, are instrumentalities of the United States and, therefore, are exempt under section 501(c)(1). They are included in a group exemption letter issued to the National Credit Union Administration. They aren't discussed in this publication.
State-chartered credit unions and other mutual financial organizations file applications for recognition of exemption from federal income tax under section 501(c)(14). The other mutual financial organizations must be corporations or associations without capital stock organized before September 1, 1957, and operated for mutual purposes and without profit to provide reserve funds for, and insurance of, shares or deposits in:
Building and loan associations, savings and loan associations, mutual savings banks, and cooperative banks, other than those described in this section, aren't exempt from tax. However, certain corporations organized and operated in conjunction with farmers' cooperatives can be exempt under section 521.
Your organization must show on its application that it is formed under a state credit union law, the state and date of incorporation, and that the state credit union law with respect to loans, investments, and dividends, if any, your organization is operated in compliance with.
Every other organization included in this section must show in its application the state in which the organization is incorporated and the date of incorporation; the character of the organization; the purpose for which it was organized; its actual activities; the sources of its receipts and the disposition thereof; whether any of its income may be credited to surplus or may benefit any private shareholder or individual; whether the law relating to loans, investments, and dividends is being complied with; and, in general, all facts relating to its operations that affect its right to exemption.
The application must include detailed information showing either that the organization provides both reserve funds for and insurance of shares and deposits of its member financial organizations or that the organization provides reserve funds for shares or deposits of its members and 85% or more of the organization's income is from providing reserve funds and from investments. There should be attached a conformed copy of the articles of incorporation or other document setting forth the permitted powers or activities of the organization; the bylaws or other similar code of regulations; and the latest annual financial statement showing the receipts, disbursements, assets, and liabilities of the organization.
A post or organization of past or present members of the Armed Forces of the United States must file Form 1024 to apply for recognition of exemption from federal income tax. You should follow the general procedures outlined in chapter 1. The organization must also meet the qualifications described in this section.
Examples of groups that qualify for exemption are posts or auxiliaries of the American Legion, Veterans of Foreign Wars, and similar organizations.
To qualify for recognition of exemption, your application should show:
In addition to these requirements, a veterans' organization also must be operated exclusively for one or more of the following purposes.
If your organization wishes to obtain recognition of exemption as a black lung benefit trust, it must file the application for recognition of exemption on Form 1024 and include a copy of its trust instrument. The general procedures to follow for obtaining recognition are discussed in chapter 1 of this publication. This section describes the additional (or specific) information to be provided upon application.
If your organization wants to obtain recognition of exemption from federal income tax as a corporation organized to hold title to property, collect income from that property, and turn over the entire amount less expenses to a single parent organization that is exempt from income tax, it must file its application on Form 1024. The information to submit upon application is described in this section. For a discussion of the procedures for obtaining recognition of exemption, see chapter 1, Application Procedures.
You must show that your organization is a corporation. If you are in doubt as to whether your organization qualifies as a corporation for this purpose, contact your IRS office.
A title-holding corporation will qualify for exemption only if there is effective ownership and control over it by the distributee exempt organization. For example, the distributee organization may control the title-holding corporation by owning its voting stock or possessing the power to select nominees to hold its voting stock.
If your organization wants to obtain recognition of exemption from federal income tax as an organization organized for the exclusive purpose of acquiring, holding title to, and collecting income from real property, and turning over the entire amount less expenses to member organizations exempt from income tax, it should file its application on Form 1024. For a discussion of the procedures for obtaining recognition of exemption, see chapter 1, Application Procedures.
A 501(c)(25) organization must be either a corporation or a trust. Only one class of stock is permitted in the case of a corporation. In the case of a trust, only one class of beneficial interest is allowed.
Organizations eligible to acquire or hold interests in this type of title-holding organization are qualified pension, profit-sharing, or stock bonus plans, governmental plans, governments and their agencies and instrumentalities, and charitable organizations.
The articles of incorporation or trust instrument must include provisions showing that the corporation or trust is organized to meet the requirements of the statute, including compliance with the limitations on membership and classes of stock or beneficial interest, and compliance with the income distribution requirements. The organizing document must permit the organization's shareholders or beneficiaries to dismiss the organization's investment advisor, if any, upon a vote of the shareholders or beneficiaries holding a majority interest in the organization.
The organizing document must permit the shareholders or beneficiaries to terminate their interests by at least one of the following methods.
A 501(c)(25) organization can be organized as a nonstock corporation if its articles of incorporation or bylaws provide members with the same rights as described above.
In general, the receipt of unrelated business income by a section 501(c)(25) organization will subject the organization to loss of exempt status since the organization can't be exempt from taxation if it engages in any business other than that of holding title to real property and collecting the income from the property. However, exempt status generally won't be affected by the receipt of debt-financed income that is treated as unrelated business taxable income solely because of section 514.
Under section 514(c)(9), certain shareholders or beneficiaries aren't subject to unrelated debt-financed income tax under section 514 on their investments through the organization. These shareholders are generally schools, colleges, universities, or supporting organizations of such educational institutions. Organizations other than these will take into account as gross income from an unrelated trade or business their pro rata share of income that is treated as unrelated debt-financed income because section 514(c)(9) doesn't apply. These organizations will also take their pro rata share of the allowable deductions from unrelated taxable income.
A state-sponsored organization established to provide medical care to high-risk individuals applies on Form 1024 for recognition of exemption from federal income tax under section 501(c)(26).
To qualify for exemption, the organization must be a membership organization established by a state exclusively to provide coverage for medical care on a nonprofit basis to high-risk individuals who are state residents. It can provide coverage either by issuing insurance itself or by entering into an arrangement with a health maintenance organization (HMO).
The state must determine the composition of membership in the organization. No part of the net earnings of the organization can inure to the benefit of any private shareholder or individual.
This includes a qualified nonprofit health insurance issuer which has received a loan or grant under the CO-OP Program under this section of the Code.
Section 501(c)(29), added to the Code by section 1322(h)(1) of the Affordable Care Act, provides for the exemption of qualified nonprofit health insurance issuers (QNHIIs) that have received a loan or grant under the Centers for Medicare and Medicaid Services (CMS) CO-OP program for periods that they meet both the requirements of section 1322 of the Affordable Care Act and of any loan agreement with CMS. The CO-OP program provides loans and repayable grants to foster the creation of member governed QNHIIs that will operate with a strong consumer focus and offer qualified health insurance plans. Notice 2011-23, 2011-13 I.R.B. 588, discussed requirements for tax exemption for QNHIIs described in Internal Revenue Code section 501(c)(29). The Notice provides guidance on the annual filing requirement for organizations that intend to apply for recognition of section 501(c)(29) status and modified and superseded by Rev. Proc. 2022-8. Under Rev. Proc. 2022-8, an organization applying for recognition of exemption from federal income tax under section 501(c)(29) applies on Form 1024. Rev. Proc. 2015-17, 2015-7 I.R.B. 599, sets out the procedures for issuing determination letters on the exempt status of QNHIIs and provides guidance on the effective date of exempt status. Rev. Proc. 2015-17, supplemented by Rev. Proc. 2022-5 exemption from federal income tax under section 501(c)(29) applies on Form 1024.
In general, section 501(c)(29) applies to certain organizations receiving loans or repayable grants under the CO-OP program. An organization will qualify for exemption under section 501(c)(29) only if:
An organization claiming exempt status under section 501(c)(29) that intends to file an application for recognition of exemption should begin filing Form 990, Return of Organization Exempt from Income Tax, and indicate on its return that it has not yet received a determination letter. In addition to the general information required on Form 990, these organizations must report certain information regarding required reserves.
An excise tax may be imposed on certain tax-exempt organizations.This chapter discusses:
Forms (and Instructions)
See chapter 6 for more information about getting Form 4720.
Section 4965 imposes an excise tax on:
Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction.
Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction.
To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720.
For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720.
Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. To report this tax, file Form 4720.
Excise tax on excess benefit transactions.
A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. A manager of the organization may also have to pay an excise tax under section 4958. These taxes are reported on Form 4720.
The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange.
There are three taxes under section 4958. Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax.
Taxes imposed on excess benefit transactions don't apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred.
An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. The disqualified person who benefited from the transaction is liable for the tax. See definition of Disqualified person, later at Disqualified person.
Additional tax on the disqualified person.
If the 25% tax is imposed and the excess benefit transaction isn't corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved.
If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes.
To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued.
If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation wasn't willful and was due to reasonable cause. This tax can't exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. There is also joint and several liability for this tax. A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction.
A person participates in a transaction knowingly if the person:
An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization.
To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts.
Supporting organization transactions occurring after July 25, 2006.
For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a:
Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)).
The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. For additional information, see the Instructions for Form 4720.
Excess benefit transaction rules generally don't apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes.
An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year.
In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, isn't subject to a substantial risk of forfeiture. Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes.
Correcting the excess benefit.
An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards.
A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. The correction amount equals the excess benefit plus the interest on the excess benefit. The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred.
A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. In this case, the disqualified person is treated as making a payment equal to the lesser of:
If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference.
If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference.
An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction.
An applicable tax-exempt organization doesn't include:
An organization isn't treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization wasn't tax-exempt under section 501(a), but only if the determination wasn't based on private inurement or one or more excess benefit transactions.
Exception under section 4943(g).
Section 4943(g) added by the Bipartisan Budget Act of 2018, Pub. L. No. 115-123, 132 Stat. 64 (2018), provides an exception for certain limited holdings to independently operated businesses. In general, the excess business holdings provisions of section 4943(a) shall not apply with respect to the holdings of a private foundation in any business enterprise which meets all the requirements of section 4943(g)(2), (3), and (4).
The requirements of section 4943(g)(2) are met if:
The requirements of section 4943(g)(3) are met if the business enterprise, no later than 120 days after the close of the tax year, distributes an amount equal to its net operating income for such tax year to the private foundation. For purposes of section 4943(g) , the net operating income of any business enterprise for any tax year is an amount equal to the gross income of the business enterprise for the tax year, reduced by the sum of:
The requirements of section 4943(g)(4) are met if, at all times during the tax year:
This provision does not apply to any donor advised fund treated as a private foundation by section 4943(e), a supporting organization treated as a private foundation by section 4943(f), a trust described in section 4947(a)(1), or a trust described in section 4947(a)(2).
Section 4943(g) shall apply to tax years beginning after December 31, 2017.
There is an excise tax on the net investment income of most domestic private foundations. Capital gains from appreciation are included in the tax base on private foundation net investment income. This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. Form 990-W is used to calculate the estimated tax.
In addition, there are several other rules that apply to excise taxes on private foundations. These include:
Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons.
For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF.
A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. Both of these excise taxes are reported on Form 6069. See the instructions for Form 6069 and Form 990 for more information on these taxes and what has to be filed, even if the trust is excepted from filing.
For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. These entities must meet section 501(r)(3) requirements at all times during their tax year. Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). See Schedule H, Hospitals (Form 990), for details.
New section 4960 imposes an excise tax on an organization that pays to any covered employee more than $1 million in remuneration or pays an excess parachute payment during the year starting in 2018. See section 4960 and Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, final regulations TD 9938 (Regulations sections 53.4960-0 through 53.4960-6), and Notice 2019-09, 2019-04 I.R.B. 403, for more information.
New section 4968 imposes an excise tax on the net investment income of certain private colleges and universities. A private college or university will be subject to the excise tax on net investment income under section 4968 if four tests are met.
See the Instructions for Form 990, Part V, Line 16 for more information about organizations subject to the excise tax. See Instructions for Form 4720, Schedule O, and final regulations TD 9917 (Regulations sections 53.4968-1 through 53.4968-4) for more information about calculating the excise tax.
Organization Reference Chart
Acknowledgment of contributions, Acknowledgment of Charitable Contributions of $250 or More Adverse determination, Adverse determination. Affordable Care Act Hospitals, Requirements for section 501(c)(3) hospitals under the Affordable Care Act. Agricultural organization, Agricultural and Horticultural Organizations Airport, Other organizations. Alumni association, Alumni association. Amateur athletic organizations, Amateur Athletic Organizations Animals, prevention of cruelty to, Prevention of Cruelty to Children or Animals Appeal procedures, Appeal Procedures Application procedures, Application Procedures, Required Information and Documents Bylaws, Bylaws. Conformed copy, Conformed copy. Description of activities, Description of activities. Employer identification number, Required Information and Documents Financial Unless you are filing Form 1023-EZ, y, Financial data. Organizing If you are submitting a Form 1023 or Form 1024, y, Organizing documents. Aquatic resources, Agricultural and Horticultural Organizations Articles of organization, Articles of Organization Assistance (see Tax help) Athletic organization, Athletic organization., Amateur Athletic Organizations Attorney's fees, Acceptance of attorneys' fees. Attribution, special rules, Special rules of attribution.
Cemetery company, 501(c)(13) - Cemetery Companies Chamber of commerce, Chamber of commerce. Change in legal structure, Organizational Changes and Exempt Status Charitable contributions, Acknowledgment of Charitable Contributions of $250 or More, Contributions to 501(c)(3) Organizations Charitable organization, Section 501(c)(3) Organizations, Charitable Organizations Charitable risk pools, Charitable Risk Pools Child care organization, Child care organizations. Children, prevention of cruelty to, Prevention of Cruelty to Children or Animals Church, Churches. Integrated auxiliaries, Integrated auxiliaries. Civic leagues, 501(c)(4) - Civic Leagues and Social Welfare Organizations Clinic, Clinic. CO-OP Health Insurance Issuers, 501(c)(29) - CO-OP Health Insurance Issuers College bookstore, restaurant, College book stores, cafeterias, restaurants, etc. Community association, Other organizations. Community trust, Community Trusts Contributions, charitable, Acknowledgment of Charitable Contributions of $250 or More, Contributions to 501(c)(3) Organizations Court appeals, Appeal to Courts Credit union, 501(c)(14) - Credit Unions and Other Mutual Financial Organizations
Determination letter, Determination Letters Disclosures, required, Disclosure of Quid Pro Quo Contributions Dues used for lobbying, Dues Used for Lobbying or Political Activities Nondeductible contributions, Solicitation of Nondeductible Contributions Quid pro quo contributions, Disclosure of Quid Pro Quo Contributions Services available from government, Penalties. Dispositions of donated property, Donee Information Return Disqualified persons, Disqualified persons. Domestic fraternal society, Domestic Fraternal Societies (501(c)(10)) Donor advised funds Excess benefit transaction, Donor advised fund transactions occurring after August 17, 2006. Dues used for political or legislative activities, Dues Used for Lobbying or Political Activities, Deduction not allowed for dues used for political or legislative activities.
Educational organizations, Educational Organizations, Educational organizations. Employees' association, 501(c)(4), 501(c)(9), and 501(c)(17) - Employees' Associations Employment taxes, Employment Tax Returns Endowment fund, Endowment funds. Estimated tax, Estimated tax. Excess benefit transaction, Excess Benefit Transaction, Supporting organization transactions occurring after July 25, 2006. Disqualified person, Tax on Disqualified Persons, Disqualified Person Controlled entity, 35%, 35% controlled entity. Family members, Family members. Substantial influence, Persons not considered to have substantial influence. Disregarded benefits, Disregarded benefits. Donor advised funds, Donor advised fund transactions occurring after August 17, 2006., Exception. Excise tax, Excise tax on excess benefit transactions. Initial contracts, Special exception for initial contracts. Reasonable compensation, Reasonable compensation. Rebuttable presumption, Rebuttable presumption that a transaction isn't an excess benefit transaction. Excise tax Black lung benefit trust, Excise taxes. Lobbying expenditures, Tax on excess expenditures to influence legislation., Tax on disqualifying lobbying expenditures. Political expenditures, Excise taxes on political expenditures. Private foundations, Excise taxes on private foundations., Excise Taxes on Private Foundations Exempt function, Political Organization Income Tax Return Exempt purposes, Section 501(c)(3) Organizations Exemption for terrorist organization, Non-exemption for terrorist organizations. Extensions of time, Discretionary extension of time for filing.
Facts and circumstances test, Facts and circumstances test. Fair market value, estimate of, Good faith estimate of fair market value (FMV). Filing requirements, Annual Information Returns Annual information returns, Annual Information Returns Donee information return, Donee Information Return Due date, Political Organization Income Tax Return Employment tax, Employment Tax Returns Excise tax, Excise taxes on private foundations., Excise Taxes on Private Foundations Political organization, Political Organization Income Tax Return Private foundations, Form 990-PF Unrelated business income, Unrelated Business Income Tax Return Form 990-N, Annual Electronic Notice Filing Requirement for Small Tax-Exempt Organizations Forms, Forms Required 1023, Forms Required, Administrative Remedies, 270-day period., Information required for subordinate organizations., Annual Information Return, Form 1023 or Form 1023-EZ., Organizations Not Required to File Form 1023 or Form 1023-EZ, Private Schools, When to file application., Lobbying Expenditures, Volunteer fire companies. 1023-EZ, Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code., Form 1023 or Form 1023-EZ. 1024, Forms Required, Annual Information Return, 501(c)(4) - Civic Leagues and Social Welfare Organizations, 501(c)(6) - Business Leagues, etc., 501(c)(7) - Social and Recreation Clubs, 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal Societies, Fraternal Beneficiary Societies (501(c)(8)), Domestic Fraternal Societies (501(c)(10)), Local Employees' Associations (501(c)(4)), Voluntary Employees' Beneficiary Associations (501(c)(9)), Supplemental Unemployment Benefit Trusts (501(c)(17)), 501(c)(13) - Cemetery Companies, 501(c)(19) - Veterans' Organizations, 501(c)(2) - Title-Holding Corporations for Single Parent Corporations, 501(c)(25) - Title-Holding Corporations or Trusts for Multiple Parent Corporations 1040, Effect on employees. 1065, Annual Information Returns 1120–POL, Political Organization Income Tax Return 1128, Central organizations. 2848, Power of attorney., Representation. 4720, Tax on excess expenditures to influence legislation. 5578, Certification. 5768, Making the election. 6069, Tax treatment of donations. 8274, FICA tax exemption election. 8282, Dispositions of donated property. 8283, Form 8283. 8300, Report of Cash Received 8718, Forms Required, Power of attorney. 8821, Representation. 8871, Reporting Requirements for a Political Organization, Annual Information Return 8872, Reporting Requirements for a Political Organization, Annual Information Return 990, Keeping the Group Exemption Letter in Force, Forms 990 and 990-EZ, Annual Information Return, Making the election. 990-BL, Annual Information Returns, 990-EZ, Forms 990 and 990-EZ, Form 990-EZ. 990-PF, Form 990-PF, Excise taxes on private foundations., Excise Taxes on Private Foundations 990-T, Unrelated Business Income Tax Return SS-4, Required Information and Documents, Employer identification number. W–2, Revoking the election. Fraternal beneficiary society, Fraternal Beneficiary Societies (501(c)(8)) Fraternal societies, Organizations subject to requirements., 501(c)(8) and 501(c)(10) - Fraternal Beneficiary Societies and Domestic Fraternal Societies Funeral benefit insurance, Burial and funeral benefit insurance organization.
Gifts and contributions, public charity, Gifts, contributions, and grants distinguished from gross receipts. Governmental unit, Governmental units. Grant Distinguished from gross receipts, Grants. Exclusion for unusual grant, Unusual grants., Unusual grants. From public charity, Grants from public charities., Grants from public charities. Grantor and contributor, reliance on ruling, Reliance by grantors and contributors. Gross receipts from nonmembership sources, Gross receipts from nonmembership sources. Group exemption letter, Group Exemption Letter
Labor organization, Organizations subject to requirements., Labor Organizations Law, public interest, Public-interest law firms. Legislative activity, Lobbying Expenditures, Legislative activity. Listed transaction, Prohibited tax shelter transaction. Literary organizations, Literary Organizations Loans, organizations providing, Organization providing loans. Lobbying expenditures, Lobbying Expenditures Local benevolent life insurance associations, Local Life Insurance Associations Local employees' association, Local Employees' Associations (501(c)(4)) Lodge system, Lodge system.
Penalties, Penalties for failure to file. Failure to allow public inspection, Penalties Failure to disclose, Penalty for failure to disclose., Penalties., Penalty. Failure to file, Penalties for failure to file. Perpetual care organization, Perpetual care organization. Political activity, Dues Used for Lobbying or Political Activities, Political activity., Political activity. Political organization Income tax return, Political Organization Income Tax Return Taxable income, Political Organization Income Tax Return Power of attorney, Power of attorney. Preferred stock, Common and preferred stock. Prevention of cruelty to children or animals, Prevention of Cruelty to Children or Animals Private delivery service, Private delivery service. Private foundations, Private Foundations Private operating foundation, Private Operating Foundations Private school, Private Schools, Racially Nondiscriminatory Policy Prohibited tax shelter transactions Entity managers, Entity manager. Entity managers excise tax, Manager Level Tax Listed transaction, Prohibited tax shelter transaction. Prohibited reportable transactions, Prohibited tax shelter transaction. Subsequently listed transaction, Subsequently listed transaction. Tax-exempt entities, Tax-exempt entities. Public charity Gifts and contributions, Gifts, contributions, and grants distinguished from gross receipts. Grant from, Grants from public charities. Section 509(a)(1), Section 509(a)(1) Organizations Section 509(a)(2), Section 509(a)(2) Organizations Section 509(a)(3), Section 509(a)(3) Organizations Section 509(a)(4), Section 509(a)(4) Organizations Support test, One-third support test., One-third support test. Public inspection Annual return, Annual Information Return Exemption applications, Public Inspection of Exemption Applications, Annual Returns, and Political Organization Reporting Forms Forms 8871 and 8872, Public Inspection of Exemption Applications, Annual Returns, and Political Organization Reporting Forms Public-interest law firm, Public-interest law firms. Publications (see Tax help) Publicly supported organization, Publicly supported organizations., Qualifying as Publicly Supported Attraction of public support, Attraction of public support requirement. Ten-percent-of-support, Ten-percent-of-support requirement.
Racial composition, How to determine racial composition. Racially nondiscriminatory policy, Racially Nondiscriminatory Policy Real estate board, Real estate board. Recognition of exemption, application, Application for Recognition of Exemption Religious organizations, Religious Organizations Requests other than applications, Form 8940, Request for Miscellaneous Determination. Responsiveness test, Responsiveness test. Revocation of exemption, Revocation of Exemption Ruling letter, Determination Letters
Scholarship Private school, Scholarship and loan programs. Scholarships, Scholarships. School, private, Private Schools Scientific organizations, Scientific Organizations Section 501(c)(3) organizations Amateur athletic, Amateur Athletic Organizations Literary, Literary Organizations Prevention of cruelty, Prevention of Cruelty to Children or Animals Private foundations, Private Foundations and Public Charities Public charities, Public Charities Qualifications, Section 501(c)(3) Organizations Religious, Religious Organizations Scientific, Scientific Organizations Section 501(c)(3) Organizations Charitable, Charitable Organizations Educational, Educational Organizations and Private Schools Single entity, Single entity. Social clubs, Organizations subject to requirements., 501(c)(7) - Social and Recreation Clubs Social welfare organization, Organizations subject to requirements., 501(c)(4) - Civic Leagues and Social Welfare Organizations Specified organizations, Specified organizations. Sports organization, amateur, Qualified amateur sports organization. State-sponsored, 501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations High-risk health coverage organization, 501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations Workers' compensation reinsurance organization, 501(c)(27) - Qualified State-Sponsored Workers' Compensation Organizations Stock or commodity exchange, Stock or commodity exchange. Supplemental unemployment benefit trust, Supplemental Unemployment Benefit Trusts (501(c)(17)) Support, Support., Support from a governmental unit., Support from the general public. Support test, One-third support test. Facts and circumstances, Facts and circumstances test. One-third, One-third support test. Public charity, One-third support test. Supporting organization, Supporting organization transactions occurring after July 25, 2006.