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501 (C) (3) Organization
501 (C) (3) Organization
501 (C) (3) Organization
501(c)(3) organization
A 501(c)(3) organization is a United States corporation, trust, unincorporated association or other
type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United
States Code. It is one of the 29 types of 501(c) nonprofit organizations[1] in the US.
501(c)(3) tax-exemptions apply to entities that are organized and operated exclusively for religious,
charitable, scientific, literary or educational purposes, for testing for public safety, to foster national
or international amateur sports competition, or for the prevention of cruelty to children, women or
animals. 501(c)(3) exemption applies also for any non-incorporated community chest, fund,
cooperating association or foundation organized and operated exclusively for those purposes.[2][1]
There are also supporting organizations—often referred to in shorthand form as "Friends of"
organizations.[3][4][5][6][7]
Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging
if not fatal to a charity's continued operation, as many foundations and corporate matching funds do
not grant funds to a charity without such status, and individual donors often do not donate to such a
charity due to the unavailability of tax deduction for contributions.[8]
Contents
Types
Obtaining status
Tax-deductible charitable contributions
Transparency
Limitations on political activity
Churches
Political campaign activities
Constitutionality
Lobbying
Foreign activities
Allowance of tax-deduction by donors
Foreign subsidiaries
References
External links
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Types
The two exempt classifications of 501(c)(3) organizations are as follows:
A public charity, identified by the Internal Revenue Service (IRS) as "not a private foundation",
normally receives a substantial part of its income, directly or indirectly, from the general public or
from the government. The public support must be fairly broad, not limited to a few individuals or
families. Public charities are defined in the Internal Revenue Code under sections 509(a)(0)
through 509(a)(4).[9]
A private foundation, sometimes called a non-operating foundation, receives most of its income
from investments and endowments. This income is used to make grants to other organizations,
rather than being disbursed directly for charitable activities. Private foundations are defined in the
Internal Revenue Code under section 509(a) as 501(c)(3) organizations, which do not qualify as
public charities.[10][11]
Obtaining status
The Basic requirement of obtaining tax-exempt status is that the organization is specifically limited in
powers to purposes that the IRS classifies as tax-exempt purposes. Unlike for-profit corporations that
benefit from broad and general purposes, non-profit organizations need to be limited in powers to
function with tax-exempt status, but a non-profit corporation is by default not limited in powers until
it specifically limits itself in the articles of incorporation or nonprofit corporate bylaws. This limiting
of the powers is crucial to obtaining tax exempt status with the IRS and then on the state level.[12]
Organizations acquire 501(c)(3) tax exemption by filing IRS Form 1023.[13] As of 2006 the form must
be accompanied by a $850 filing fee if the yearly gross receipts for the organization are expected to
average $10,000 or more.[14][15] If yearly gross receipts are expected to average less than $10,000, the
filing fee is reduced to $400.[14][15] There are some classes of organizations that automatically are
treated as tax exempt under 501(c)(3), without the need to file Form 1023:
The IRS released a software tool called Cyber Assistant in 2013, which was succeeded by Form 1023-
EZ in 2014.
There is an alternative way for an organization to obtain status if an organization has applied for a
determination and either there is an actual controversy regarding a determination or the Internal
Revenue Service has failed to make a determination. In these cases, the United States Tax Court, the
United States District Court for the District of Columbia, and the United States Court of Federal
Claims have concurrent jurisdiction to issue a declaratory judgment of the organization's qualification
if the organization has exhausted administrative remedies with the Internal Revenue Service.[20][21]
Prior to October 9, 1969, nonprofit organizations could declare themselves to be tax-exempt under
Section 501(c)(3) without first obtaining Internal Revenue Service recognition by filing Form 1023
and receiving a determination letter.[22] A nonprofit organization that did so prior to that date could
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An individual may not take a tax deduction on gifts made to a 501(c)(3) organization that is organized
and operated exclusively for the testing for public safety.[24]
In the case of tuition fees paid to a private 501(c)(3) school or a church school, the payments are not
tax-deductible charitable contributions because they are payments for services rendered to the payee
or the payee's children.[25][26][27] The payments are not tax-deductible charitable contributions even
if a significant portion of a church school's curriculum is religious education.[28][29] For a payment to
be a tax-deductible charitable contribution, it must be a voluntary transfer of money or other property
with no expectation of procuring financial benefit equal to the transfer amount.[30]
Before donating to a 501(c)(3) organization, a donor may wish to consult the searchable online IRS
list of charitable organizations to verify that the organization qualifies to receive tax-deductible
charitable contributions.[31]
Consumers may file IRS Form 13909, with documentation, to complain about inappropriate or
fraudulent (i.e., fundraising, political campaigning, lobbying) activities by any 501(c)(3)
organization.[32]
Most 501(c)(3) must disclose the names and addresses of certain large donors to the Internal Revenue
Service on their annual returns, but this information is not required to be made available to the
public,[33]
unless the organization is a private foundation.[34] Churches are generally exempt from
this reporting requirement.[35]
Transparency
All 501(c)(3) organizations must make available for public inspection its application for tax-
exemption, including its Form 1023 or Form 1023-EZ and any attachments, supporting documents,
and follow-up correspondence with the Internal Revenue Service.[36] The same public inspection
requirement applies to the organization's annual return, namely its Form 990, Form 990-EZ, Form
990-PF, Form 990-T, and Form 1065, including any attachments, supporting documents, and follow-
up correspondence with the Internal Revenue Service, with the exception of the names and addresses
of donors on Schedule B.[36][37] Annual returns must be made publicly available for a three-year
period beginning with the due date of the return including any extension of time for filing.[36][37]
The Internal Revenue Service provides information about specific 501(c)(3) organizations through its
Tax Exempt Organization Search online.[38][39]
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ProPublica's Nonprofit Explorer provides copies of each organization's Form 990 and, for some
organizations, audited financial statements.[42]
Churches
Churches must meet specific requirements to obtain and maintain tax-exempt status; these are
outlined in "IRS Publication 1828: Tax Guide for Churches and Religious Organizations".[48] This
guide outlines activities allowed and not allowed by churches under the 501(c)(3) designation.[48]
In 1980, the United States District Court for the District of Columbia recognized a 14-part test in
determining whether a religious organization is considered a church for purposes of the Internal
Revenue Code.
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Court has stated that, while a church can certainly broadcast its religious services by radio, radio
broadcasts themselves do not constitute a congregation unless there is a group of people physically
attending those religious services.[52] A church can conduct worship services in various specific
locations rather than in one official location.[53] A church may have a significant number of people
associate themselves with the church on a regular basis, even if the church does not have a traditional
established list of individual members.[53]
To qualify as a tax-exempt church, church activities must be a significant part of the organization's
operations.[54][55]
Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely
prohibited from directly or indirectly participating in, or intervening in, any political
campaign on behalf of (or in opposition to) any candidate for elective public office.
Contributions to political campaign funds or public statements of position (verbal or
written) made on behalf of the organization in favor of or in opposition to any candidate
for public office clearly violate the prohibition against political campaign activity. Violating
this prohibition may result in denial or revocation of tax-exempt status and the imposition
of certain excise taxes.
Certain activities or expenditures may not be prohibited depending on the facts and
circumstances. For example, certain voter education activities (including presenting public
forums and publishing voter education guides) conducted in a non-partisan manner do
not constitute prohibited political campaign activity. In addition, other activities intended
to encourage people to participate in the electoral process, such as voter registration and
get-out-the-vote drives, would not be prohibited political campaign activity if conducted in
a non-partisan manner.
On the other hand, voter education or registration activities with evidence of bias that (a)
favor one candidate over another, (b) oppose a candidate in some manner, or (c) favor a
candidate or group of candidates, constitute prohibited participation or intervention.
Constitutionality
Since section 501(c)(3)'s political-activity prohibition was enacted, "commentators and litigants have
challenged the provision on numerous constitutional grounds," such as freedom of speech, vagueness,
and equal protection and selective prosecution.[58] Historically, Supreme Court decisions, such as
Regan v. Taxation with Representation of Washington, suggested that the Court, if it were to
squarely examine the political-activity prohibition of § 501(c)(3), would uphold it against a
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constitutional challenge.[58] However, some have suggested that a successful challenge to the political
activities prohibition of Section 501(c)(3) might be more plausible in light of Citizens United v.
FEC.[59]
Lobbying
In contrast to the prohibition on political campaign interventions by all section 501(c)(3)
organizations, public charities (but not private foundations) may conduct a limited amount of
lobbying to influence legislation. Although the law states that "no substantial part" of a public
charity's activities can go to lobbying, charities with large budgets may lawfully expend a million
dollars (under the "expenditure" test) or more (under the "substantial part" test) per year on
lobbying.[60]
The Internal Revenue Service has never defined the term "substantial part" with respect to
lobbying.[61]
To establish a safe harbor for the "substantial part" test, the United States Congress enacted §501(h),
called the Conable election after its author, Representative Barber Conable. The section establishes
limits based on operating budget that a charity can use to determine if it meets the substantial test.
This changes the prohibition against direct intervention in partisan contests only for lobbying. The
organization is now presumed in compliance with the substantiality test if they work within the limits.
The Conable election requires a charity to file a declaration with the IRS and file a functional
distribution of funds spreadsheet with their Form 990. IRS form 5768 is required to make the
Conable election.[62]
Foreign activities
A 501(c)(3) organization is allowed to conduct some or all of its charitable activities outside the
United States.[63][64] A 501(c)(3) organization is allowed to award grants to foreign charitable
organizations if the grants are intended for charitable purposes and the grant funds are subject to the
501(c)(3) organization's control.[65] Additional procedures are required of 501(c)(3) organizations
that are private foundations.[64][66]
Donors' contributions to a 501(c)(3) organization are tax-deductible only if the contribution is for the
use of the 501(c)(3) organization, and that the 501(c)(3) organization is not merely serving as an agent
or conduit of a foreign charitable organization.[65] The 501(c)(3) organization's management should
review the grant application from the foreign organization, decide whether to award the grant based
on the intended use of the funds, and require continuous oversight based on the use of funds.[65]
If the donor imposes a restriction or earmark that the contribution must be used for foreign activities,
then the contribution is deemed to be for the foreign organization rather than the 501(c)(3)
organization, and the contribution is not tax-deductible.[65]
The purpose of the grant to the foreign organization cannot include endorsing or opposing political
candidates for elected office in any country.[65]
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Foreign subsidiaries
If a 501(c)(3) organization sets up and controls a foreign subsidiary to facilitate charitable work in a
foreign country, then donors' contributions to the 501(c)(3) organization are tax-deductible even if
intended to fund the foreign charitable activities.[65][67]
If a foreign organization sets up a 501(c)(3) organization for the sole purpose of raising funds for the
foreign organization, and the 501(c)(3) organization sends substantially all contributions to the
foreign organization, then donors' contributions to the 501(c)(3) organization are not tax-deductible
to the donors.[65]
References
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profits/charitable-organizations/exempt-purposes-internal-revenue-code-section-501c3). irs.gov.
3. Hopkins, Bruce R. (2011), The Law of Tax-Exempt Organizations (10 ed.), John Wiley and Sons,
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4. Judith S. Ballan, "How To Aid a Foreign Charity Through an 'American Friends of' Organization",
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5. "Legal Dimensions of International Grantmaking: How a Private Foundation Can Use "Friends of"
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36. "Public Disclosure and Availability of Exempt Organizations Returns and Applications: Documents
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46. Elacqua, Amelia. "Eyes wide shut: The ambiguous "political activity" prohibition and its effects on
501(c)(3) organizations (http://www.hbtlj.org/v08p1/v08p1elacquaar.pdf) Archived (https://web.arc
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47. Chick, Raymond; Henchey, Amy. "Political Organizations and IRC IRC 501(c)(3)" (https://www.irs.
gov/pub/irs-tege/eotopicm95.pdf) (PDF). Exempt Organizations-Technical Instruction Program for
FY 1995. Internal Revenue Service.
48. "Tax guide for churches and religious organizations" (https://www.irs.gov/pub/irs-pdf/p1828.pdf)
(PDF). 26 USC 501(c)(3). Internal Revenue Service. Archived (https://web.archive.org/web/20110
429180346/https://www.irs.gov/pub/irs-pdf/p1828.pdf) (PDF) from the original on April 29, 2011.
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F2/927/335/109709/)". 927 F.2d 335 (8th Cir. 1991).
50. "Church of Eternal Life and Liberty, Inc. v. Commissioner of Internal Revenue (https://www.casemi
ne.com/judgement/us/5914c251add7b049347bef00)". 86 T.C. 916, 924 (1986).
51. Louthian, Robert; Miller, Thomas (1994). "Defining "Church" - The Concept of a Congregation (htt
ps://www.irs.gov/pub/irs-tege/eotopica94.pdf)". Exempt Organization Continuing Professional
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95/891/1524529/)". 195 F. Supp. 891 (N.D. Cal. 1961).
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External links
Tax Exempt Organization Search (https://www.irs.gov/charities-non-profits/tax-exempt-organizatio
n-search). Internal Revenue Service.
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