Responsive Documents - IRS: CREW: Regarding Regarding 501c Correspondence and Work Plan - 3/18/14

U.S. Department of Justice

Tax Division

KK:DSM:YGelblum Post Office Box 227 Telephone: (202) 353-3850

5-16-4588 Washington, DC 20044 Telecopier: (202) 514-6866

CMN 2013101974March 18, 2014

Sent By Email Anne Weismann ([email protected]) Citizens for Responsibility and Ethicsin Washington1400 Eye Street, N.W. Suite 450Washington, D.C. 20005

Re: Citizens for Responsibility and Ethics in Washington v. Dep’t of Treasury,No. 0:13-0835 (USDC D. C)

Dear Ms. Weismann:

The Internal Revenue Service has instructed me to release a set of records inresponse to the Citizens for Responsibility and Ethics in Washington’s (CREW) Freedom ofInformation Act (FOIA) request subject of the above referenced suit. These records arecontained in the attached e-mail and bear control numbers REL 00715 - REL 01041. PageREL 01019 is partially redacted; the basis for each redaction is listed in the redaction. Please note that redactions such as those on page REL 00716, which do not contain theFOIA statute inside the redaction, are not redactions asserted by the Service.

These documents, and the documents previously released to you on March 11, 2014,(with the exception of the pages REL 00699 - REL 00714), were not located in the initialagency search of a database containing summaries of Congressional correspondence usingthe keyword “501(c)(4).” One document previously to you on March 11, 2014 was locatedusing the term “501c4.” The remaining documents were located in additional searchesusing the terms “social welfare” and “exempt organizations.” We note that agency'spost-litigation search efforts and release of documents may demonstrate not that the initialsearch efforts were inadequate, but rather that the agency was attempting to comply withits FOIA obligations in good faith. See e.g., Meeropol v. Meese, 790 F.2d 942, 953 (D.C. Cir.1986), quoting Military Audit Project v. Casey, 656 F.2d 724, 754 (D.C. Cir. 1981)( "We findhere, as in Military Audit Project, that the additional releases 'suggest a stronger, ratherthan a weaker, basis' for accepting the integrity of the search.)

The documents previously released to you on March 11, 2014, bearing controlnumbers REL 00699 - REL 00714, had been provided to this office by the agency for release

- 2 -

to you in November 2013 and were mistakenly left out of the release due to error on ourpart. We apologize for the delay in producing these records.

Please feel free to call me or Carmen Banerjee about any issues in this case.

Sincerely yours,

/s/ Yonatan Gelblum

YONATAN GELBLUMTrial Attorney

Civil Trial Section, Eastern Region

cc: AM Gulas, IRS, Office of Chief Counsel (by e-mail)

9017810.1

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SUBCOMMITTEE ON OVERSIGHT

March 1,2012

RECEIVED Honorable Douglas H. Shulman MAR 07 to;? Commissioner

CONG.CORRInternal Revenue Service CL:LA . BRII I I Constitution Avenue, NW

Washington, DC 20224

Dear Commissioner Shulman:

On October 6, 2011, I wrote to you requesting information about the status of various IRS compliance efforts involving the tax-exempt sector and issues related to audits of tax-exempt organizations. While awaiting a complete response to that letter, I have since heard the IRS has been questioning new tax-exempt applicants, including grassroots political entities such as Tea Party groups, about their operations and donors. In addition to the unanswered questions from my October 6, 201 1,Ietter, I have additional questions relating to the IRS' oversight of applications for tax exemption for new organizations.

In particular. I am seeking additional information as it relates to the IRS review of new applications for section 501(c)(3) and (c)(4) tax-exempt status, including answers to the questions detailed below. Please provide your responses no later than March 15,2012.

t. How many new tax-exempt organiultions has the IRS recognized each year since 20087

2, How many new applications for 501(c)(3} and (c)(4) tax-exempt status have been received by the IRS since 2008? Provide a breakdown by year and type of organization.

3. What is the IRS process for reviewing each tax-exempt status application? Is this process the same for entities applying for section 501(c)(3) and (c)(4) taxexempt status? Please describe the process for both section 501(c)(3) and (c)(4) applications in detail.

REL 00715

4. Your preliminary response to my October 6. 201 I. letter stated that. "if the application is substantially complete, the IRS may retain the application and request additional information as needed." How does the IRS determine that an application for tax-exempt status is "substantially complete?" Please provide guidelines or any other materials used in this process.

S. Does the IRS have standard procedures or forms it uses to "request additional infonnation as needed" from applicants seeking talC-exempt status? Please provide any forms and related materials used.

6. Does the IRS select applications for "follow-up" on an automated basis or is there an office or individual responsible for selecting incomplete applications'! Please explain and provide details on any automated system used for these purposes. If decisions are made on an individual basis, please provide the guidelines and any related materials used.

7. How many tax-exempt applications since 2008 have been selected for "follow-up"? How many entities selected for follow-up were granted taxexempt status?

Should you have any questions regarding this request, please contact_or at (202) 225-5522.

Sincerely,

Charles Boustany, Jr. Chairman

2

REL 00716

Internal Revenue Service Department of the Treasury P.o. Box 2508 Cincinnati, OH 45201

Date: * Employer Identification Number: xx-xxxxxxx

* Person to Contact Group #: * Specialist Name - XXXX * ID#XXXXXXX * Contact Telephone Numbers:

XXX-XXX-XXXX Phone XXX-XXX-XXXX Fax (859-669-3783 for TEDS)

Cases) Response Due Date:

* Dear Sir or Madam:

We need more information before we can complete our consideration of your application for exemption. Please provide the information requested on the enclosed Information Request by the response due date shown above. Your response must be signed by an authorized person or an officer whose name is listed on your application. Also, the information you submit should be accompanied by the following declaration:

Under penalties ofperjury, 1declare that 1have examined this information, including accompanying documents, and, to the best ofmy knowledge and belief, the information contains all the relevantfacts relating to the request for the information, and such facts are true, correct, and complete.

If we approve your application for exemption, we will be required by law to make the application and the information that you submit in response to this letter available for public inspection. Please ensure that your response doesn't include unnecessary personal identifying information, such as bank account numbers or Social Security numbers, that could result in identity theft or other adverse consequences if publicly disclosed. If you have any questions about the public inspection of your application or other documents, please call the person whose name and telephone number are shown above.

To facilitate processing of your application, please attach a copy of this letter and the enclosed Application Identification Sheet to your response and all correspondence related to your application. This will enable us to quickly and accurately associate the additional documents with your case file. Also, please note the following important response submission information:

• Please don't fax and mail your response. Faxing and mailing your response will result in unnecessary delays in processing your application. Each piece of correspondence submitted (whether fax or mail) must be processed, assigned, and reviewed by an EO Determinations specialist.

• Please don't fax your response multiple times. Faxing your response multiple times will delay the processing of your application for the reasons noted above.

REL 00717

2

Name EIN

• Please don't call to verify receipt of your response without allowing for adequate processing time. It takes a minimum of three workdays to process your faxed or mailed response from the day it is received.

If we don't hear from you by the response due date shown above, we will assume you no longer want us to consider your application for exemption and will close your case. As a result, the Internal Revenue Service will treat you as a taxable entity. If we receive the information after the response due date, we may ask you to send us a new application.

*******************************DELETE IF NOT A 501 (c)(3) APPLICATION**************************

In addition, if you don't respond to the information request by the due date, we will conclude that you have not taken all reasonable steps to complete your application for exemption. Under Internal Revenue Code section 7428(b)(2), you must show that you have taken all the reasonable steps to obtain your exemption letter under IRS procedures in a timely manner and exhausted your administrative remedies before you can pursue a declaratory judgment. Accordingly, if you fail to timely provide the information we need to enable us to act on your application, you may lose your rights to a declaratory jUdgment under Code section 7428.

*****************************DELETE IF NO POWER OF ATTORNEY*******************************

We have sent a copy of this letter to your representative as indicated in Form 2848, Power of Attorney and Declaration of Representative.

*************************************************************************************************************

If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely yours,

Specialist Name Exempt Organizations Specialist

Enclosure: Information Request Application Identification Sheet

Letter 1312 (Rev. 05-2011)

Additional Information Requested:

REL 00718

3 Name EIN

*

PLEASE DIRECT ALL CORRESPONDENCE REGARDING YOUR CASE TO:

Selective: (EDS Cases)

US Mail:

Internal Revenue Service Exempt Organizations P. O. Box 2508 Cincinnati, OH 45201 ATT: Specialist Name

Room XXXX GroupXXXX

(TEDS Cases)

US Mail:

Internal Revenue Service Exempt Organizations P. O. Box 12192 Covington, KY 41012-0192

Street Address for Delivery Service:

Internal Revenue Service Exempt Organizations 550 Main St, Federal Bldg. Cincinnati, OH 45202 ATT: Specialist Name

Room XXXX Group XXXX

Street Address for Delivery Service:

Internal Revenue Service Exempt Organizations 201 Rivercenter Blvd ATTN: Extracting Stop 312 Covington, KY 41011

REL 00719

REL 00720

Internal Revenue

[Q)M~~@UOmJ HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

SPECIAL ANNOUNCEMENT

T.D. 9559, page 252. Final regulations amend the user fee regulations and establish a new user fee for individuals to take the registered tax return preparer competency examination.

INCOME TAX

Rev. Rul. 2012-1, page 255. Recurring item exception to the all events test. This ruling clarifies the treatment of certain liabilities under the recurring item exception to the economic performance requirement un· der section 46Hh)(3) of the Code. It also addresses the appli· cation of the "not material" and "better matching" requirement of the recurring item exception in the context of a lease and a service contract each having a term of one year. The ruling distinguishes contracts for the provision of services from insurance and warranty contracts and applies the recurring item exception differently. Rev. Proc. 2011-14 modified and amplified.


REG-149625-10, page 279. Proposed regulations under section 382 of the Code provide exceptions to the segregation rules, under which certain transactions may create one or more additional public groups treated as 5-percent shareholders, for certain sales of loss corporation stock to small shareholders and for certain re-

Bulletin No. 2012-2 January 9, 2012

demptions of small shareholders. The regulations also provide that in certain circumstances certain entities owning the loss corporation generally will be treated as having no more than one public group.

EXEMPT ORGANIZATIONS

Rev. Proc. 2012-9, page 261. This procedure sets forth issuing determination letters and rulings on the exempt status of organizations under sections 501 and 521 of the Code. The procedures also apply to the revocation and modification of determination letters or rulings, and provide guidance on the exhaustion of administrative remedies for purposes of declaratory judgment under section 7428 of the Code. Rev. Proc. 2011-9 superseded.

Rev. Proc. 2012-10, page 273. This procedure sets forth updated procedures with respect to issuing rulings and determination letters on private foundation status under § 509(a) of the Code, operating foundation status under § 4942(j)(31, and exempt operating foundation status under § 4940(d)(2), of organizations exempt from Federal income tax under § 501 (c)(3). This procedure also applies to the issuance of determination letters on the foundation status under § 509(a)(3) of nonexempt charitable trusts described in § 4947(a)( 1). Rev. Proc. 2011-10 superseded.

(Continued on the next page)

Finding Lists begin on page Ii.

~.,& Department of the Treasury t&/~ Internal Revenue Service

REL 00721

ADMINISTRATIVE


Notice 2012-1, page 260. Optional standard mileage rates for 2012. This notice announces 55.5 cents as the optional standard mileage rate for substantiating the amount of the deduction for the business use of an automobile, 14 cents as the optional rate for use of an automobile as a charitable contribution, and 23 cents as the optional rate for use of an automobile as a medical or moving expense for 2012. The notice also provides the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate and the maximum standard automobile cost for automobiles under a FAVR allowance. Notice 2010-88, as modified by Announcement 2011-40, is superseded.

Rev. Proc. 2012-12, page 275. This procedure describes the procedures and standards that organizations must follow to be identified by the Service as a qualifying organization that may accredit continuing education providers under section 10.9(a)(1 )(iii) of Circular 230 and the procedures and standards that individuals and entities must follow to be approved as continuing education providers under section 10.9(a)(1) of Circular 230.

Announcement 2012-2, page 285. This announcement contains an update to Publication 1220, Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922,5498,8935 and W-2G, Electronically, revised 9-2011, concerning the filing of Form 1099-K.

January 9, 2012 2012-21.R.B. REL 00722

26 CFR 601.201: Ridings and determination fellers.

Rev. Proc. 2012-9

TABLE OF CONTENTS

SECTION 1. WHAT IS THE PURPOSE OF TIllS REVENUE PROCEDURE? 262 .01 Description of terms used in this revenue procedure " " , 262 .02 Updated annually 263

SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES , 263 .01 Rev. Proc. 2011-9 is superseded , " 263 .02 Related revenue procedures : 263 .03 What changes have been made to Rev. Pmc. 2011-9? 263

SECTION 3. WHAT ARE THE PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPT STATUS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 264

.01 In general. " , " " , 264

.02 User fee 264

.03 Form 1023 application , 264

.04 Form 1024 application , " " " ., , 264

.05 Letter application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 264

.06 Form 1028 application , , " , .. " " 264

.07 Form 8871 notice for political organizations , " 264

.08 Requirements for a substantially completed application 264

.09 Terrorist organizations not eligible to apply for recognition of exemption 265

SECTION 4. WHAT ARE THE STANDARDS FOR ISSUING A DETERMINATION LETTER OR RULING ON EXEMPT STATUS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 265

.01 Exempt status must be established in application and supporting documents , " " " .. 265

.02 Determination letter or ruling based solely on administrative record 265

.03 Exempt status may be recognized in advance of actual operations 265

.04 No letter if exempt status issue in litigation or under consideration within the Service 266

.05 Incomplete application " 266

.06 Even if application is complete, additional information may be required " 266

.07 Expedited handling 266

.08 May decline to issue group exemption 266

SECTION S. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER OR RULING? 267 .01 EO Determinations issues a determination letter in most cases 267 .02 Certain applications referred to EO Technical 267 .03 Technical advice may be requested in certain cases 267 .04 Technical advice must be requested in certain cases 267

SECTION 6. WITHDRAWAL OF AN APPLICATION 267 .0 I Application may be withdrawn prior to issuance of a determination letter or ruling 267 .02 § 7428 implications of withdrawal of application under § 501 (c)(3) 267

SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED? 267 .01 Proposed adverse determination letter or ruling 267 .02 Appeal of a proposed adverse determination letter issued by EO Determinations 268 .03 Protest of a proposed adverse ruling issued by EO Technical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 268 .04 Final adverse determination letter or ruling where no appeal or protest is submitted 268 .05 How EO Determinations handles an appeal of a proposed adverse determination letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 268 .06 Consideration by the Appeals Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 268 .07 If a protest of a proposed adverse ruling is submitted to EO Technical. 268 .08 An appeal or protest may be withdrawn , 268 .09 Appeal or protest and conference rights not applicable in certain situations 268

SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS AND RULINGS 268

January 9, 2012 261 2012-2 tR.B. REL 00723

.01 Disclosure of applications, supporting documents, and favorable determination letters or rulings 269

.02 Disclosure of adverse determination letters or rulings 269

.03 Disclosure to State officials when the Service refuses to recognize exemption under § 501 (c)(3) " 269

.04 Disclosure to State officials of information about § 501 (c)(3) applicants " 269

SECTION 9. REVIEW OF DETERMINATION LETTERS BY EO TECHNICAL " . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 269 .01 Determination letters may be reviewed by EO Technical to assure uniformity " 269 .02 Procedures for cases where EO Technical takes exception to a determination letter " 269

SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428 " 270 .01 Actual controversy involving certain issues " 270 .02 Exhaustion of administrative remedies " 270 .03 Not earlier than 270 days after seeking determination 270 .04 Service must have reasonable time to act on an appeal or protest " 270 .05 Final determination to which § 7428 applies 270

SECTION 11. EFFECT OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION 270 .01 Effective date of exemption " 270 .02 Reliance on determination letter or ruling 271

SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION " 271

.01 Revocation or modification of a determination letter or ruling may be retroactive 271

.02 Appeal and conference procedures in the case of revocation or modification of exempt status letter 271

SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES 272

SECTION 14. EFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 272

SECTION 15. PAPERWORK REDUCTION ACT " 272

DRAFTING INFORMATION 272

SECTION 1. WHAT IS THE This revenue procedure sets forth procedures for issuing determination letters and rulings PURPOSE OF THIS REVENUE on the exempt status of organizations under §§ 501 and 521 of the Internal Revenue Code other PROCEDURE? than those subject to Rev. Proc. 2012-6, last bulletin (relating to pension. profit-sharing, stock

bonus, annuity, and employee stock ownership plans). Generally, the Service issues these determination letters and rulings in response to applications for recognition of exemption from Federal income tax. These procedures also apply to revocation or modification of determination letters or rulings. This revenue procedure also provides guidance on the exhaustion of administrative remedies for purposes of declaratory judgment under § 7428 of the Code.

Description of terms used in this .01 For purposes of this revenue procedure revenue procedure

(1) The term "Service" means the Internal Revenue Service.

(2) The term "application" means the appropriate form or letter that an organization must file or submit to the Service for recognition of exemption from Federal income tax under the applicable section of the Internal Revenue Code. See section 3 for information on specific forms.

(3) The term "EO Determinations" means the office of the Service that is primarily responsible for processing initial applications for tax-exempt status. It includes the main EO Determinations office located in Cincinnati, Ohio, and other field offices that are under the direction and control of the Manager, EO Determinations. Applications are generally processed in the centralized EO Determinations office in Cincinnati, Ohio. However, some applications may be processed in other EO Determinations offices or referred to EO Technical.

(4) The term "EO Technical" means the office of the Service that is primarily responsible for issuing letter rulings to taxpayers on exempt organization matters, and for providing technical

2012-2 I.R.B. 262 January 9, 2012 REL 00724

Updated annually

SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES

Rev. Proc. 2011-9 is superseded

Related revenue procedures

What changes have been made to Rev. Proc. 2011-9?

advice or technical assistance to other offices of the Service on exempt organization matters. The EO Technical office is located in Washington, DC.

(5) The term "Appeals Office" means any office under the direction and control of the Chief. Appeals. The purpose of the Appeals Office is to resolve tax controversies, without litigation, on a fair and impartial basis. The Appeals Office is independent of EO Determinations and EO Technical.

(6) The term "determination letter" means a written statement issued by EO Determinations or an Appeals Office in response to an application for recognition of exemption from Federal income tax under §§ 501 and 521. This includes a written statement issued by EO Determinations or an Appeals Office on the basis of advice secured from EO Technical pursuant to the procedures prescribed herein and in Rev. Proc. 2012-5.

(7) The term "ruling" means a written statement issued by EO Technical in response to an application for recognition of exemption from Federal income tax under §§ 501 and 521.

(8) The term "Code" means the Internal Revenue Code.

.02 This revenue procedure is updated annually, but may be modified or amplified during the year.

.01 This revenue procedure is a general update of Rev. Proc. 2011-9,2011-2 I.R.B. 283, which is hereby superseded.

.02 This revenue procedure supplements Rev. Proc. 201 2-10, this Bulletin, with respect to the effects of § 7428 of the Code on the classification of organizations under §§ 509(a) and 49420)(3). Rev. Proc. 80-27, 1980-1 C.B. 677, sets forth procedures under which exemption may be recognized on a group basis for subordinate organizations affiliated with and under the general supervision and control of a central organization. Rev. Proc. 72-5, 1972-1 C.B. 709, provides information for religious and apostolic organizations seeking recognition of exemption under § SOI(d). General procedures for requests for a determination letter or ruling are provided in Rev. Proc. 2012--4. User fees for requests for a determination letter or ruling are set forth in Rev. Proc. 2012-8.

.03 Notable changes to Rev. Proc. 2011-9 that appear in this year's update include

(I) Section 3.01 clarifies that Form 8718, User Fee for Exempt Organization Detennination Letter Request, is not a determination letter application.

(2) A reference to § 501 (r) is added to section 3.03 to cover hospitals seeking exemption under § SOl (c)(3l.

(3) Section 4.08 is added to describe existing practice that the Service may decline to issue a group exemption letter when appropriate in the interest of sound tax administration. See Rev. Proc. 2012--4, section 8.01.

(4) A new item (6) is added to section 12 to reflect revocation of exemption automatically pursuant to § 6033U) for failure to file a required annual return or notice for three consecutive years.

January 9, 2012 263 2012-2 I.R.B. REL 00725

SECTION 3. WHAT ARE THE PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPT STATUS?

In general

User fee

Form 1023 application


Letter application


Form 8871 notice for political organizations

Requirements for a substantially completed application

.01 An organization seeking recognition of exempt status under § SOl or § 521 is required to submit the appropriate application. In the case of a numbered application form, the current version of the form must be submitted. A central organization that has previously received recognition of its own exemption can request a group exemption letter by submitting a letter application along with Form 8718, User Fee for Exempt Organization Determination Letter Request. See Rev. Proc. 80-27. Form 8718 is not a determination letter application. Attach this form to the determination letter application.

.02 An application must be submitted with the correct user fee, as set forth in Rev. Proc. 2012-8.

.03 An organization seeking recognition of exemption under § 50 I(c)(3) and § 50 I(e), (f),

(k), (n), (q), or (r) must submit a completed Form 1023, Applicationfor Recognition ofExemption Under Section 501(c)(3) of the 1nternal Revenue Code. In the case of an organization that provides credit counseling services, see § 501(q) of the Code. In the case of an organization that is a hospital and is seeking exemption under § SOl (c)(3), see § SOl (r) of the Code.

.04 An organization seeking recognition of exemption under § SOl (c)(2), (4), (5), (6), (7), (8), (9), (10), (12), (13), (IS), (17), (19), or (25) must submit a completed Form 1024, Applicationfor Recognition ofExemption Under Section 501(a), along with Form 8718. In the case of an organization that provides credit counseling services and seeks recognition of exemption under § 501 (c)(4), see § 501(q) of the Code.

.05 An organization seeking recognition of exemption under § 501 (c)(l1), (14), (16), (18), (21), (22), (23), (26), (27), (28), or (29), or under § 501 (d), must submit a letter application along with Form 8718.

.06 An organization seeking recognition of exemption under § 521 must submit a completed Form 1028, Application for Recognition ofExemption Under Section 521 of the 1nternal Revenue Code, along with Form 8718.

.07 A political party, a campaign committee for a candidate for federal, state or local office, and a political action committee are all political organizations subject to tax under § 527. To be tax-exempt, a political organization may be required to notify the Service that it is to be treated as a § 527 organization by electronically filing Form 8871, Political Organization Notice of Section 527 Status. For details, go to the IRS website at www.irs.gov/polorgs .

.08 A substantially completed application, including a letter application, is one that:

(I) is signed by an authorized individual;

(2) includes an Employer Identification Number (EIN);

(3) for organizations other than those described in § 501 (c)(3), includes a statement of receipts and expenditures and a balance sheet for the current year and the three preceding years (or the years the organization was in existence, if less than four years), and if the organization has not yet commenced operations or has not completed one accounting period, a proposed budget for two full accounting periods and a current statement of assets and liabilities; for organizations described in § 501 (c)(3), see Form 1023 and Notice 1382;

(4) includes a detailed narrative statement of proposed activities, including each of the fundraising activities of a § SOl (c)(3) organization, and a narrative description of anticipated receipts and contemplated expenditures;

2012-2 I.R.B. 264 January 9, 2012 REL 00726

Terrorist organizations not eligible to apply for recognition of exemption

SECTION 4. WHAT ARE THE STANDARDS FOR ISSUING A DETERMINATION LETTER OR RULING ON EXEMPT STATUS?

Exempt status must be established in application and supporting documents

Determination letter or ruling based solely on administrative record

Exempt status may be recognized in advance of actual operations

January 9, 2012

(5) includes 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 otherwise meets the requirements of a "conformed copy" as outlined in Rev. Proc. 68-14, 1968-1 C.B. 768;

(6) if the organizing or enabling document is in the form of articles of incorporation, includes evidence that it was filed with and approved by an appropriate state official (e.g., stamped "Filed" and dated by the Secretary of State); alternatively, a copy of the articles of incorporation may be submitted if accompanied by a written declaration signed by an authorized individual that the copy is a complete and accurate copy of the original copy that was filed with and approved by the state; if a copy is submitted, the written declaration must include the date the articles were filed with the state;

(7) if the organization has adopted by-laws, includes a current copy; the by-laws need not be signed if submitted as an attachment to the application for recognition of exemption; otherwise, the by-laws must be verified as current by an authorized individual; and

(8) is accompanied by the correct user fee and Form 8718, when applicable.

.09 An organization that is identified or designated as a terrorist organization within the meaning of § 501 (p)(2) of the Code is not eligible to apply for recognition of exemption.

.01 A favorable determination letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which excmption from Federal income tax is claimed.

.02 A determination letter or ruling on cxempt status is issued based solely upon the facts and representations contained in the administrative record.

(1) The applicant is responsible for the accuracy of any factual representations contained in the application.

(2) Any oral representation of additional facts or modification of facts as represented or alleged in the application must be reduced to writing over the signature of an officer or director of the taxpayer under a penalties of perjury statement.

(3) The failure to disclose a material fact or misrepresentation of a material fact on thc application may adversely affect the reliance that would otherwise be obtained through issuance by the Service of a favorable determination letter or ruling .

.03 Exempt status may be recognized in advance of the organization's operations if the proposed activities are described in sufficient detail to permit a conclusion that the organization will clearly meet the particular reqUirements for exemption pursuant to the section of the Code under which exemption is claimed.

(\) A mere restatement of exempt purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement.

(2) The organization must fulIy describe all of the activities in which it expects to engage. including the standards, criteria, procedures, or other means adopted or planned for carrying out the activities, the anticipated sources of receipts, and the nature of contemplated expenditures.

(3) Where the organization cannot demonstrate to the satisfaction of the Service that it qualifies for exemption pursuant to the section of the Code under which exemption is claimed, the

265 2012-2 I.R.B. REL 00727

No letter if exempt status issue in litigation or under consideration within the Service

Incomplete application

Even if application is complete, additional information may be required

Expedited handling

May decline to issue group exemption

Service will generally issue a proposed adverse determination letter or ruling. See also section 7 of this revenue procedure.

.04 A determination letter or ruling on exempt status ordinarily will not be issued if an issue involving the organization's exempt status under § 50 I or § 521 is pending in litigation, is under consideration within the Service, or if issuance of a determination letter or ruling is not in the interest of sound tax administration. If the Service declines to issue a determination or ruling to an organization seeking exempt status under § 50 I(c)(3), the organization may be able to pursue a declaratory judgment under § 7428, provided that it has exhausted its administrative remedies.

.05 If an application does not contain all of the items set out in section 3.08 of this revenue procedure, the Service may return it to the applicant for completion.

(I) In lieu of returning an incomplete application, the Service may retain the application and request additional information needed for a substantially completed application.

(2) In the case of an application under § 501 (c)(3) that is returned incomplete, the 270-day period referred to in § 7428(b)(2) will not be considered as starting until the date a substantially completed Form 1023 is refiled with or remailed to the Service. If the application is mailed to the Service and a postmark is not evident, the 270-day period will start to run on the date the Service actually receives the substantially completed Form 1023. The same rules apply for purposes of the notice requirement of § 508.

(3) Generally, the user fee will not be refunded if an incomplete application is filed. See Rev. Proc. 2012-8, section 10.

.06 Even though an application is substantially complete, the Service may request additional information before issuing a determination letter or ruling.

(I) If the application involves an issue where contrary authorities exist, an applicant's failure to disclose and distinguish contrary authorities may result in requests for additional information, which could delay final action on the application.

(2) In the case of an application under § 501 (c)(3), the period of time beginning on the date the Service requests additional information until the date the information is submitted to the Service will not be counted for purposes of the 270-day period referred to in § 7428(b)(2).

.07 Applications are normally processed in the order of receipt by the Service. However, expedited handling of an application may be approved where a request is made in writing and contains a compelling reason for processing the application ahead of others. Upon approval of a request for expedited handling, an application will be considered out of its normal order. This does not mean the application will be immediately approved or denied. Circumstances generally warranting expedited processing include:

(I) a grant to the applicant is pending and the failure to secure the grant may have an adverse impact on the organization's ability to continue to operate;

(2) the purpose of the newly created organization is to provide disaster relief to victims of emergencies such as flood and hurricane; and

(3) there have been undue delays in issuing a determination letter or ruling caused by a Service error.

.08 The Service may decline to issue a group exemption letter when appropriate in the interest of sound tax administration.

2012-2 I.R.B. 266 January 9, 2012 REL 00728

SECTION 5. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER OR RULING?

EO Determinations issues a determination letter in most cases

Certain applications referred to EO Technical

Technical advice may be requested in certain cases

Technical advice must be requested in certain cases

SECTION 6. WITHDRAWAL OF AN APPLICATION

Application may be withdrawn prior to issuance of a determination letter or ruling

§ 7428 implications of withdrawal of application under § 501(c)(3)

SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED?

Proposed adverse determination letter or ruling

.01 Under the general procedures outlined in Rev. Proc. 2012-4, EO Determinations is authorized to issue determination letters on applications for exempt status under §§ 501 and 521.

.02 EO Determinations will refer to EO Technical those applications that present issues which are not specifically covered by statute or regulations, or by a ruling, opinion, or court decision published in the Internal Revenue Bulletin. In addition, EO Determinations will refer those applications that have been specifically reserved by revenue procedure or by other official Service instructions for handling by EO Technical for purposes of establishing uniformity or centralized control of dcsignated categories of cases. EO Technical will notify the applicant organization upon receipt of a referred application, and will consider each such application and issue a ruling directly to the organization.

.03 If at any time during the course of consideration of an exemption application by EO Determinations the organization believes that its case involves an issue on which there is no published precedent, or there has been non-uniformity in the Servicc's handling of similar cases, the organization may request that EO Determinations either refer the application to EO Technical or seek technical advice from EO Technical. See Rev. Proc. 2012-5, sections 4.04 and 4.05.

.04 If EO Determinations proposes to rccognize the exemption of an organization to which EO Technical had issued a previous contrary ruling or technical advice, EO Determinations must seek technical advice from EO Technical before issuing a determination letter. This does not apply where EO Technical issued an adverse ruling and the organization subsequently made changes to its purposes, activities, or operations to remove the basis for which excmpt status was denied.

.01 An application may be withdrawn upon the written request of an authorized individual at any time prior to the issuance of a determination letter or ruling. Therefore, an application may not be withdrawn after the issuance of a proposed adverse determination letter or ruling.

(1) When an application is withdrawn, the Servicc will retain the application and all supporting documents. The Service may consider the information submitted in connection with the withdrawn request in a subscquent examination of the organization.

(2) Generally, the user fee will not be refunded if an application is withdrawn. See Rev. Proc. 20 12-8, section 10.

.02 The Service will not consider the withdrawal of an application under § 501 (c)(3) as either a failurc to make a determination within the meaning of § 7428(a)(2) or as an exhaustion of administrative remedies within the meaning of § 7428(b)(2).

.Ollf EO Determinations or EO Technical reaches the conclusion that the organization does not satisfy the requirements for exempt status pursuant to the section of the Code under which exemption is claimed, the Service generally will issue a proposed adverse determination letter or ruling, which will:

(I) include a detailed discussion of the Service's rationale for the denial of tax-exempt status; and

January 9, 2012 267 2012-2 I.R.B. REL 00729

Appeal of a proposed adverse determination letter issued by EO Determinations

Protest of a proposed adverse ruling issued by EO Technical

Final adverse determination letter or ruling where no appeal or protest is submitted

How EO Determinations handles an appeal of a proposed adverse determination letter

Consideration by the Appeals Office

If a protest of a proposed adverse ruling is submitted to EO Technical

An appeal or protest may be withdrawn

Appeal or protest and conference rights not applicable in certain situations

SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS AND RULINGS

(2) advise the organization of its opportunity to appeal or protest the decision and request a conference.

.02 A proposed adverse determination letter issued by EO Determinations will advise the organization of its opportunity to appeal the determination by requesting Appeals Office consideration. To do this, the organization must submit a statement of the facts, law and arguments in support of its position within 30 days from the date of the adverse determination letter. The organization must also state whether it wishes an Appeals Office conference. Any determination letter issued on the basis of technical advice from EO Technical may not be appealed to the Appeals Office on issues that were the subject of the technical advice.

.03 A proposed adverse ruling issued by EO Technical will advise the organization of its opportunity to file a protest statement within 30 days and to request a conference. If a conference is requested, the conference procedures outlined in Rev. Proc. 2012-4, section 12, are applicable.

.04 If an organization does not submit a timely appeal of a proposed adverse determination letter issued by EO Determinations, or a timely protest of a proposed adverse ruling issued by EO Technical, a final adverse determination letter or ruling will be issued to the organization. The final adverse letter or ruling will provide information about the filing of tax returns and the disclosure of the proposed and final adverse letters or rulings.

.05 If an organization submits an appeal of the proposed adverse determination letter, EO Determinations will first review the appeal, and, if it determines that the organization qualifies for tax-exempt status, issue a favorable exempt status determination letter. If EO Determinations maintains its adverse position after reviewing the appeal, it will forward the appeal and the exemption application case file to the Appeals Office.

.06 The Appeals Office will consider the organization's appeal. If the Appeals Office agrees with the proposed adverse determination, it will either issue a final adverse determination or, if a conference was requested, contact the organization to schedule a conference. At the end of the conference process, which may involve the submission of additional information, the Appeals Office will either issue a final adverse determination letter or a favorable determination letter. If the Appeals Office believes that an exemption or private foundation status issue is not covered by published precedent or that there is non-uniformity, the Appeals Office must request technical advice from EO Technical in accordance with Rev. Proc. 2012-5, sections 4.04 and 4.05 .

.07 If an organization submits a protest of a proposed adverse exempt status ruling, EO Technical will review the protest statement. If the protest convinces EO Technical that the organization qualifies for tax-exempt status, a favorable ruling will be issued. If EO Technical maintains its adverse position after reviewing the protest, it will either issue a final adverse ruling or, if a conference was requested, contact the organization to schedule a conference. At the end of the conference process, which may involve the submission of additional information, EO Technical will either issue a final adverse ruling or a favorable exempt status ruling .

.08 An organization may withdraw its appeal or protest before the Service issues a final adverse determination letter or ruling. Upon receipt of the withdrawal request, the Service will complete the processing of the case in the same manner as if no appeal or protest was received.

.09 The opportunity to appeal or protest a proposed adverse determination letter or ruling and the conference rights described above are not applicable to matters where delay would be prejudicial to the interests of the Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limitations, or where immediate action is necessary to protect the interests of the Government).

Sections 6104 and 6110 of the Code provide rules for the disclosure of applications, including supporting documents, and determination letters and rulings.

2012-2 i.R.B. 268 January 9, 2012 REL 00730

Disclosure of applications, supporting documents, and favorable determination letters or rulings

Disclosure of adverse determination letters or rulings

Disclosure to State officials when the Service refuses to recognize exemption under § 501(c)(3)

Disclosure to State officials of information about § 501(c)(3) applicants

SECTION 9. REVIEW OF DETERMINATION LETTERS BY EO TECHNICAL

Determination letters may be reviewed by EO Technical to assure uniformity

Procedures for cases where EO Technical takes exception to a determination letter

.01 The applications, any supporting documents, and the favorable determination letter or ruling issued, are available for public inspection under § 6104(a)(l) of the Code. However, there are certain limited disclosure exceptions for a trade secret, patent, process, style of work, or apparatus, if the Service determines that the disclosure of the information would adversely affect the organization.

(1) The Service is required to make the applications, supporting documents, and favorable determination letters or rulings available upon request. The public can request this information by submitting Form 4506-A, Request for Public Inspection or Copy ofExempt or Political Organization IRS Fonn. Organizations should ensure that applications and supporting documents do not include unnecessary personal identifying information (such as bank account numbers or social security numbers) that could result in identity theft or other adverse consequences if publicly disclosed.

(2) The exempt organization is required to make its exemption application, supporting documents, and determination letter or ruling available for public inspection without charge. For more information about the exempt organization's disclosure obligations, see Publication 557, Tax-Exempt Status for Your Organization.

.02 The Service is required to make adverse determination letters and rulings available for public inspection under § 61 IO of the Code, Upon issuance of the final adverse determination letter or ruling to an organization, both the proposed adverse determination letter or ruling and the final adverse determination letter or ruling will be released pursuant to § 6110.

(1) These documents are made available to the public ~fter the deletion of names, addresses, and any other information that might identify the taxpayer. See § 61 IO(c) for other specific disclosure exemptions.

(2) The final adverse determination letter or ruling will enclose Notice 437, Notice of Intention to Disclose, and redacted copies of the final and proposed adverse determination letters or rulings. Notice 437 provides instructions if the organization disagrees with the deletions proposed by the Service.

.03 The Service may notify the appropriate State officials of a refusal to recognize an organization as tax-exempt under § 50 I(c)(3). See § 6104(c) of the Code. The notice to the State officials may include a copy of a proposed or final adverse determination letter or ruling the Service issued to the organization. In addition, upon request by the appropriate State official, the Service may make available for inspection and copying the exemption application and other information relating to the Service's determination on exempt status.

.04 The Service may disclose to State officials the name, address, and identification number of any organization that has applied for recognition of exemption under § 50 I(c)(3).

.01 Determination letters issued by EO Determinations may be reviewed by EO Technical. or the Office of the Associate Chief Counsel (Passthroughs and Special Industries) (for cases under § 521), to assure uniform application of the statutes or regulations, or rulings, court opinions, or decisions published in the Internal Revenue Bulletin.

,02 If EO Technical takes exception to a determination letter issued by EO Determinations, the manager of EO Determinations will be advised. If EO Determinations notifies the organization of the exception taken, and the organization disagrees with the exception, the file will be returned to EO Technical. The referral to EO Technical will be treated as a request for technical advice, and the procedures in Rev. Proc. 2012-5 will be followed.

January 9, 2012 269 2012-2 I.R.B. REL 00731

SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428

Actual controversy involving certain issues

Exhaustion of administrative remedies

Not earlier than 270 days after seeking determination

Service must have reasonable time to act on an appeal or protest

Final determination to which § 7428 applies

SECTION 11. EFFECT OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION

Effective date of exemption

.01 Generally, a declaratory judgment proceeding under § 7428 of the Code can be filed in the United States Tax Court, the United States Court of Federal Claims, or the district court of the United States for the District of Columbia with respect to an actual controversy involving a determination by the Service or a failure of the Service to make a determination with respect to the initial or continuing qualification or classification of an organization under § 501 (c)(3) (charitable, educational, etc.); § 170(c)(2) (deductibility of contributions); § 509(a) (private foundation status); § 49420)(3) (operating foundation status); or § 521 (farmers cooperatives) .

.02 Before filing a declaratory judgment action, an organization must exhaust its administrative remedies by taking, in a timely manner, all reasonable steps to secure a determination from the Service. These include:

(I) the filing of a substantially completed application Form 1023 under § 501 (c)(3) pursuant to section 3.08 ofthis revenue procedure, or the request for a determination of foundation status pursuant to Rev. Proc. 2012-10, this Bulletin, or its successor;

(2) in appropriate cases, requesting relief pursuant to Treas. Reg. § 301.9100-1 of the Procedure and Administration Regulations regarding the extension of time for making an election or application for relief from tax;

(3) the timely submission of all additional infonnation requested by the Service to perfect an exemption application or request for determination of private foundation status; and

(4) exhaustion of all administrative appeals available within the Service pursuant to section 7 of this revenue procedure.

.03 An organization will in no event be deemed to have exhausted its administrative remedies prior to the earlier of:

(I) the completion of the steps in section 10.02, and the sending by the Service by certified or registered mail of a final determination letter or ruling; or

(2) the expiration of the 270-day period described in § 7428(b)(2) in a case where the Service has not issued a final determination letter or ruling, and the organization has taken, in a timely manner, all reasonable steps to secure a determination letter or ruling.

.04 The steps described in section 10.02 will not be considered completed until the Service has had a reasonable time to act upon an appeal or protest, as the case may be.

.05 A final determination to which § 7428 of the Code applies is a determination letter or ruling, sent by certified or registered mail, which holds that the organization is not described in § 50 J(c)(3) or § 170(c)(2), is a public charity described in a part of § 509 or § 170(b)( I)(A) other than the part under which the organization requested classification, is not a private foundation as defined in § 4942U)(3), or is a private foundation and not a public charity described in a part of § 509 or § J70(b)(l)(A).

.0 I A determination letter or ruling recognizing exemption is usually effective as of the date of formation of an organization if its purposes and activities prior to the date of the determination letter or ruling were consistent with the requirements for exemption. However, special rules under § 508(a) of the Code may apply to an organization applying for exemption under § 501(c)(3), and special rules under § 505(c) may apply to an organization applying for exemption under § 501 (c)(9), (17), or (20).

2012-2 tR.B. 270 January 9, 2012 REL 00732

Reliance on determination letter or ruling

SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION

Revocation or modification of a determination letter or ruling may be retroactive

Appeal and conference procedures in the case of revocation or modification of exempt status letter

January 9, 2012

(I) If the Service requires the organization to alter its activities or make substantive amendments to its enabling instrument, the exemption will be effective as of the date specified in a determination letter or ruling.

(2) If the Service requires the organization to make a nonsubstantive amendment, exemption will ordinarily be recognized as of the date of formation. Examples of nonsubstantive amendments include correction of a clerical error in the enabling instrument or the addition of a dissolution clause where the activities of the organization prior to the determination letter or ruling are consistent with the requirements for exemption.

.02 A determination letter or ruling recognizing exemption may not be relied upon if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization, or a change in the applicable law. Also, a determination letter or ruling may not be relied upon if it was based on any inaccurate material factual representations. See section 12.01.

A determination letter or ruling recognizing exemption may be revoked or modified: (1) by a notice to the taxpayer to whom the determination letter or ruling was issued; (2) by enactment of legislation or ratification of a tax treaty; (3) by a decision of the Supreme Court of the United States; (4) by the issuance of temporary or final regulations; (5) by the issuance of a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin; or (6) automatically, pursuant to § 6033(j), for failure to file a required annual return or notice for three consecutive years .

.01 The revocation or modification of a determination letter or ruling recognizing exemption may be retroactive if there has been a change in the applicable law, the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented, or, in the case of organizations to which § 503 of the Code applies, engaged in a prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purpose and such transaction involved a substantial part of the corpus or income of such organization. In certain cases an organization may seek relief from retroactive revocation or modification of a determination letter or ruling under § 7805(b). Requests for § 780S(b) relief are subject to the procedures set forth in Rev. Proc. 2012--4.

(I) Where there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of an organization, revocation or modification will ordinarily take effect as of the date of such material change.

(2) In the case where a determination letter or ruling is issued in error or is no longer in accord with the Service's position and § 7805(b) relief is granted (see sections 13 and 14 of Rev. Proc. 2012--4), ordinarily, the revocation or modification will be effective not earlier than the date when the Service modifies or revokes the original determination letter or ruling.

.02 In the case of a revocation or modification of a determination letter or ruling, the appeal and conference procedures are generally the same as set out in section 7 of this revenue procedure, including the right of the organization to request that EO Determinations or the Appeals Office seek technical advice from EO Technical. However, appeal and conference rights are not applicable to matters where delay would be prejudicial to the interests of the Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limitations, or where immediate action is necessary to protect the interests of the Government).

( I) If the case involves an exempt status issue on which EO Technical had issued a previous contrary ruling or technical advice, EO Determinations generally must seek technical advice from EO Technical.

(2) EO Determinations does not have to seek technical advice if the prior ruling or technical advice has been revoked by subsequent contrary published precedent or if the proposed revocation involves a subordinate unit of an organization that holds a group exemption letter issued by EO Technical, the EO Technical ruling or technical advice was issued under the Internal

271 2012-2 tR.D. REL 00733

SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES

SECTION 14. EFECTIVE DATE

SECTION 15. PAPERWORK REDUCTION ACT

DRAFTING INFORMATION

Revenue Code of 1939 or prior revenue acts, or if the ruling was issued in response to Form 4653, Notification Concerning Foundation Status.

Rev. Proc. 2011-9 is superseded.

This revenue procedure is effective January 9, 2012.

The collection of information for a letter application under section 3.05 of this revenue procedure has been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.c. § 3507) under control number 1545-2080. All other collections of information under this revenue procedure have been approved under separate OMB control numbers.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of this information is required if an organization wants to be recognized as tax-exempt by the Service. We need the information to determine whether the organization meets the legal requirements for tax-exempt status. In addition, this information will be used to help the Service delete certain information from the text of an adverse determination letter or ruling before it is made available for public inspection, as required by § 6110.

The time needed to complete and file a letter application will vary depending on individual circumstances. The estimated average time is 10 hours.

Books and records relating to the collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. The rules governing the confidentiality of letter applications are covered in § 6104.

The principal authors of this revenue procedure are Mr. Dave Rifkin and Mr. Matt Perdoni of the Exempt Organizations, Tax Exempt and Government Entities Division. For further information regarding this revenue procedure, please contact the TE/GE Customer Service office at (877) 829-5500 (a toll-free call), or send an e-mail to [email protected] and include "Question about Rev. Proc. 2012-9" in the subject line.

2012-2 I.R.B. 272 January 9, 2012 REL 00734

DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

COMMISSIONER TAX EXEMPT AND

GOVERNMENT ENTITIES DIVISION

April 26, 2012

The Honorable Charles Boustany, Jr., M.D. Chairman Subcommittee on Oversight Committee on Ways and Means U.S. House of Representatives Washington, D.C. 20515

Dear Mr. Chairman:

This information supplements my March 23, 2012, response to your March 1, 2012, letter to Commissioner Schulman.

Your letter asked how many new tax-exempt organizations the IRS has recognized each year since 2008. The chart below adds preliminary information on approved cases for FY 2012, from October 1, 2011 through April 11, 2012.

FY Number of Determination Approvals'

2008 69,957

2009 62,459

2010 53,693

2011 54,713

2012" 29,958

I FY 2008 -2011 data - SOl data from IRS Data Book, Table 24, Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section, Fiscal Year 2008 (and subsequent fiscal years 2009-2011) at http;,/wW\li.lrs.gov/taxstalsiindex.lJtml. This data reflects all case closures for the Exempt Organizations Determinations function. These include not only initial applications for tax-exempt status, but also other determinations, such as public and private foundation status determinations, advance approval of scholarship grant ~rocedures, and group d.eterminations of tax-exempt status. ... . . " The data for FY 2012 in the supplemental charts reflects the prelmunary mformatlOn available. SOl Data Book information is updated annually, with the complete FY 2012 information expected in March 2013.

REL 00735

2

The second question in your letter asked how many new applications for 501 (c)(3) and (c)(4) tax-exempt status the IRS has received since 2008. The below chart adds preliminary information on cases received for FY 2012, from October 1, 2011 through April 1, 2012.

FY 501(c)(3) 501 (c)(4)

2008 51,073 1,410

2009 52,303 1,571

2010 50,266 1,591

2011

2012

55,962

33,307

2,242

1,715

I

I hope this information is helpful. If you have questions, please contact me or have your staff contact Cathy Barre at (202) 622-3720.

Sincerely,

REL 00736

Action Routing Sheet (3/~v1 Request for Signature of e-trak Control Number Due date U/

,/()!d . 300.2 IJoseph H. Grant 04/25/2012

Subject

Supplemental response to The Honorable Charles Boustany. Jr.. M.D.

Reviewing Office

NaLee Park

Dawn Marx

Lois Lerner

Joseph Grant

Summary

ReviewerSupport Staff CommentInitial I Date Initial I Date

/~ 'iPS/;., "\ ,v" ,LLi,v' , Lll" I -~~ ,,77e~fI< h

~AJI-o,-J/./"'''' f'4:12 i:) <2,0\ 'l.

Prepared By Phone number Office Location I Building Return to

Dawn Marx 202-283-8861

Form 14074 (Rev. 9-2010) Catalog Number 53167M publish.no.irs.gov Department of the Treasury - Internal Revenue Service REL 00737





March 23, 2012


Dear Mr. Chairman:

I am responding to your letter to Commissioner Shulman dated March 1,2012, requesting additional information about the tax-exempt sector. This response supplements my previous responses dated November 18,2011, and March 12,2012, and addresses the additional questions raised in your recent letter.

Question 1. How many new tax-exempt organizations has the IRS recognized each year since 20081

The following table provides the total number of determination approvals1 for FY 2008 - 2011:

FY Number of Determination Approvals

2008 69,957

2009 62,459

2010 53,693

2011 54,713

1 SOl data from IRS Data Book, Table 24, Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section, Fiscal Year 2008 (and subsequent fiscal years 2009-2011) at http://www.irs.gov/taxstats/index.htmI.This data reflects all case closures for the Exempt Organizations Determinations function. These include not only initial applications for tax-exempt status, but also other determinations, such as public charity and private foundation status determinations, advance approval of scholarship grant procedures, and group determinations of tax-exempt status.

REL 00738

2

Question 2. How many new applications for 501 (c)(3) and (c)(4) tax-exempt status have been received by the IRS since 2008? Provide a breakdown by year and type of organization. .

The following table provides the number of new applications for tax-exempt status under sections 501 (c)(3) and (c)(4) of the Code that were received for FY 2008 - 2011:

FY 501 (c)(3) 501(c)(4)

2008 51,073 1,410

2009 52,303 1,571

2010 50,266 1,591

2011 55,962 2,242

Question 3. What is the IRS process for reviewing each tax-exempt status application? Is this process the same for entities applying for section 501(c)(3) and (c)(4) tax-exempt status? Please describe the process for both section 501 (c)(3) and (c)(4) applications in detail.

The EO Submission Processing Center in Cincinnati, Ohio receives all applications for taxexempt status. The Submission Processing Center inputs the applications into the EP/EO Determination System and processes the attached user fees. The application is then sent for initial technical screening.

This technical screening is conducted by EO Determinations' most experienced revenue agents who review the applications and, based on that review, separate the applications into the following four categories:

• Applications that can be approved immediately based on the completeness of the application and the information submitted;

• Applications that need only minor additional required information in the file in order to approve the application;

• Applications that do not contain the information needed to be considered substantially complete; and

• Applications that require further development by an agent in order to determine whether the application meets the reqUirements for tax-exempt status.

REL 00739

3

Organizations whose applications fall into the fourth category are sent letters informing them that more development of their application is needed, and that they will be contacted once their application has been assigned to a revenue agent. The applications are sent to unassigned inventory. They are held in unassigned inventory until a revenue agent with the appropriate level of experience for the issues involved has an opening in his or her caseload, which permits the assignment of a new case.2

Once the case is assigned I the revenue agent notifies the organization and reviews the application. Based upon established precedent and the facts and circumstances of the application, the agent requests additional relevant information and documentation to complete the application record and make a determination. Where an application for exemption presents issues that require further development to complete the application record, the IRS engages in a back and forth dialogue with the organization in order to obtain the needed information. This back and forth dialogue helps applicants better understand the requirements for exemption and what is needed to meet them. and it helps the IRS obtain all the information relevant to the determination.

Tools are available to promote consistent handling offull development cases. For example, in situations where there are a number of cases involving similar issues (such as credit counseling organizations, down payment assistance organizations, organizations that were automatically revoked and are seeking retroactive reinstatement, and most recently, advocacy organizations), the IRS will assign cases to designated employees to promote consistency. Additionally, EO Technical works with Chief Counsel to develop educational materials to assist the employees in issue spotting and crafting questions to develop cases consistently.

A complete application record is important. If the application is approved, not only is the application record made publicly available, but organizations that act as described in the application record have reliance on the IRS determination. If the application is denied, the organization may seek review from the Appeals Office, which reviews the complete application record and makes its own independent determination of whether the organization meets the requirements for tax-exempt status. If the Appeals Office decides the organization meets the reqUirements for tax-exempt status, the application will be approved. If the Appeals Office agrees that the application should be denied, there are two avenues that the applicant may take for seeking relief. All denied applicants may pay the tax owed as a taxable entity and seek a refund in federal court. Additionally, applicants requesting recognition under section 501 (c)(3) may seek immediate declaratory judgment relief pursuant to section 7428 of the Code.

In those cases where the application raises issues for which there is no established published precedent or for which non-uniformity may exist, EO Determinations refers the application to EO Technical. In EO Technical, the applications are reviewed by tax law specialists whose job is to interpret and provide guidance on the law and who work closely with IRS Chief Counsel attorneys on the issues.

2 Enclosure A describes the criteria used to determine the appropriate level of experience.

REL 00740

4

Similar to the process in EO Determinations, EO Technical tax law specialists develop cases based on the facts and circumstances of the issues in the specific application. If upon review of all of the information submitted, it appears that an organization does not meet the requirements for tax-exempt status, a proposed denial explaining the reasons the organization does not meet the requirements is issued. The organization is then entitled to a conference of right where it may provide additional information. Following the conference of right, a final determination is issued. If the application is approved, the application record is made publicly available, and if the organization acts as described in the application record, it has reliance on the IRS determination. If the application is denied, there are two avenues that the applicant may take for seeking relief. All denied applicants may pay the tax owed as a taxable entity and seek a refund in federal court. Additionally, applicants requesting recognition under section 501 (c)(3) may seek immediate declaratory judgment relief pursuant to section 7428 of the Code.

The above described process for EO Determinations and EO Technical is identical for organizations applying for tax-exempt status under both section 501 (c)(3) and under section 501 (c)(4), with a few minor differences. First, organizations seeking 501 (c)(3) tax-exempt status use Form 1023, Application for Recognition of Exemption Under Section 501 (c)(3) of the Internal Revenue Code. Organizations seeking 501 (c)(4) tax-exempt status use Form 1024, Application for Recognition Under Section 501 (a). Second, organizations recognized under section 501 (c)(3) must also be classified as a public charity or a private foundation, a classification that does not apply for 501 (c)(4) organizations. Third, ~s noted above, a 501 (c)(3) applicant may seek immediate declaratory judgment relief under section 7428 of the Code if the application for tax-exempt status is denied.

Question 4. Your preliminary response to my October 6, 2011 letter stated that "if the application is substantially complete, the IRS may retain the application and request additional information as needed." How does the IRS determine that an application for tax-exempt status is "substantially complete?" Please provide guidelines or any other materials used in this process.

Preliminarily, when EO Determinations revenue agents initiate the technical screening process, they look to see whether the application is substantially complete. If it is, the agent then reviews the information in the application to determine whether the application can be approved immediately based on the information contained in the application or whether more development is needed. If the application is not substantially complete, the application is sent back to the organization with a letter explaining why it is being returned.

Revenue Procedure 2012-9,2012-2 I.R.B 261 (updated annually) provides minimal requirements of what constitutes a substantially complete application. Enclosure B is a copy of this revenue procedure for your review. Revenue Procedure 2012-9 provides that an application is substantially complete when it contains the following information:

• It is signed by an authorized individual;

• It includes an Employee Identification Number (EIN);

REL 00741

5

• It includes, for organizations other than those described in section 501 (c)(3), a statement of receipts and expenditures and a balance sheet for the current year and the three preceding years (or the years the organization was in existence, if less than four years). and if the organization has not yet commenced operations or has not completed one accounting period, a proposed budget for two full accounting periods and a current statement of assets and liabilities (for organizations described in section 501 (c)(3), see Form 1023 and Notice 1382)

• It includes a detailed narrative statement of proposed activities, including each of the fundraising activities of a section 501 (c)(3) organization, and a narrative description of anticipated receipts and contemplated expenditures;

• It includes 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 otherwise meets the requirements of a "conformed copy" as outlined in Rev. Proc. 68-14.

• If the organiZing or enabling document is in the form of articles of incorporation. it includes evidence that the articles were filed with and approved by an appropriate state official (e.g., stamped "Filed" and dated by the Secretary of State); alternatively, a copy of the articles of incorporation may be submitted if accompanied by a written declaration signed by an authorized individual that the copy is a complete and accurate copy of the original copy that was filed and approved by the state; if a copy is submitted, the written declaration must include the date the articles were filed with the state;

• If the organization has adopted by-laws, it includes a current copy; the by-laws need not be signed if submitted as an attachment to the application for recognition of exemption; otherwise the by-laws must be verified as current by an authorized individual; and

• It is accompanied by the correct user fee and Form 8718, when applicable.

Question 5. Does the IRS have standard procedures or forms it uses to "request additional information as needed" from applicants seeking tax-exempt status? Please provide any forms and related materials used.

Yes, the general procedures for requesting additional information to develop an application are included in section 7.20.2 of the Internal Revenue Manual.3 Although there is a template letter that describes the general information on the case development process, the letter does not specify the information to be requested from any particular organization. Enclosure C is a copy of the template letter.

The amount and type of development necessary to process an application to ensure that the legal requirements of tax-exemption are satisfied depends on several factors, which include the particular subsection under which the applicant seeks tax-exempt status, the comprehensiveness of the information provided in the application, and the issues raised by the application. Consequently, revenue agents prepare individualized questions and requests for

3 IRM 7.20.2 is available at http://www.irs.gov/irm/part7/irm 07-020-002html.

REL 00742

6

documents relevant to the application, which are attached to the above described general template letter. As noted in the response to question 3, with certain types of applications where the issues are similar or more complex, EO Technical, in coordination with Chief Counsel, develops educational materials to assist the revenue agents in issue spotting and crafting questions to develop those cases consistently.

Question 6. Does the IRS select applicants for "follow-up" on an automated basis or is there an office or individual responsible for selecting incomplete applications? Please explain and provide details on any automated system used for these purposes. If decisions are made on an individual basis, please provide the guidelines and any related materials used.

With regard to whether the decision to send an application for further development is an automated process, the answer is no. The range of organizations eligible for tax-exempt status under section 501 (c), the requirements they must meet under the various subsections, and the diversity of the facts and circumstances presented by the applications, require individualized consideration. To ensure quality and consistency, only the most experienced EO Determinations revenue agents are assigned to technically screen applications. These agents use sound reasoning based on training and experience to determine whether the information in the application is sufficient to meet the organizational, operational, and other technical requirements of the Code and regulations for tax-exempt status, or whether the application needs further development.

Question 7. How many tax-exempt applications since 2008 have been selected for "follow-up"? How many entities selected for follow-up were granted tax-exempt status?

Preliminarily, please note that, with the exception of the number of applications received per year, all IRS statistics relating to applications for exempt status are based only on the application cases closed in any particular year. Additionally, applications are not always closed in the same year that they are received for a variety of reasons, inclUding when during the year the applications were filed, whether a case can close through technical screening or requires full development, the back and forth dialogue between the revenue agent and the applicant to fully develop the application, and whether a case is transferred to EO Technical. Consequently, there often is no match between the year an application was filed and the year the application case is closed.

REL 00743

7

The below chart provides the total number of applications closed for FY 2008-2011, along with the percentage of applications closed each year through the technical screening process (Le., cases in which further development was not required).

Fiscal Year

2008 2009 2010 2011

Total number of applications closed4

84,220 77,305 65,590 61,004

Percentage of applications closed through technical screening 59% 57% 56% 60%

The below chart provides complete information regarding the nature of closures for all fUlly developed determination applications closed during FY 2008 - 2011.

EDS Closed Case Status Codes Fiscal Year 2008 2009 2010 2011

Status 01 - A roved Status 02 - Disa roved

20,252 1,242

18,778 480

17237 517

17,850 217

Status 03 - Returned Incom lete 68 2,307 1,763 1,132 Status 04 - Withdrawn b Tax a er 1,051 1,451 1,315 1,499 Status 08 - Refusal to Rule * 0 0 5 Status 11 - Failure to Establish 7,877 6,402 2,554 Status 12 - Other 1,948 1,369 610 Status 30 - Correction Dis osal 782 545 275

* 3 or fewer

Lastly, during the December 16, 2011 meeting with your staff, they requested examination results information on the listed transaction disclosures discussed in my November 18,2011 response (under Question 5(b)(iv». We are providing the results in this supplemental response.

Pursuant to Treasury Regulations section 1.6011-4, a party that has participated in a listed or other reportable transaction must file a Form 8886 to meet its disclosure requirements. Failure to make such disclosure is subject to the penalty for failure to include reportable transaction information under section 6707A. Also, pursuant to Treas. Reg. section 1.6033-5, certain taxexempt entities that are subject to section 4965 taxes are required to file Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction, to disclose information with respect to each prohibited tax shelter transaction to which the entity is a party.

4 sal data from IRS Data Book, Table 24, Closures of Applications for TaX-Exempt Status, by Organization Type and Internal Revenue Code Section, Fiscal Year 2008 (and SUbsequent fiscal years 2009-2011) at http://www.irs.gov/taxstats/index.htmI.This data reflects all case closures for the Exempt Organizations Determinations function. These include not only initial applications for tax-exempt status, but also other determinations, such as public charity and private foundation status determinations, advance approval of scholarship grant procedures, and group determinations of tax-exempt status

REL 00744

8

We previously provided you with the number of filed Forms 8886 and Forms 8886-T related to TEGE. Your staff requested examination results information on the listed transaction disclosures. The chart below provides collective examination results for the 110 Forms 8886 and Forms 8886-T Disclosures on listed transactions from 2006 - 2010.

When reviewing the chart, please note the following. First, taxpayers filing the disclosure forms often are uncertain whether they are subject to the disclosure filing requirements and, as a result, sometimes file protective disclosures to avoid potential penalties or to protect potential refund claims in the future. Therefore, some of these disclosed transactions may not warrant examination, as reflected by the 32 filed forms that resulted in no audit! examination potential.

Second, Form 8886 and Form 8886-T disclosures are coded in the IRS data system based on the IRS Counsel office that has jurisdiction to address legal issues of the specific shelter type, not by which IRS office has compliance or examination jurisdiction over the taxpayer involved in the shelter. In other words, the IRS system codes the disclosures based on who has ownership over the legal issues, rather than who has jurisdiction over the taxpayer. So, even if the disclosure relates to a type of tax shelter transaction that falls under the legal oversight of TE/GE Counsel, the taxpayer who filed the disclosure may not be tax-exempt, but rather a forprofit, and therefore does not fall under TE/GE compliance jurisdiction, as shown by the 45 filed forms in the chart.

Third, in the 8 cases examined and closed as reflected in the chart, approximately $234,000 in §6707A penalties were assessed for failure to timely disclose reportable, including listed, transactions. During examinations of TE/GE taxpayers engaged in certain listed transactions, the IRS discovered that non-TE/GE taxpayers had not timely filed Forms 8886 to disclose their participation in the same transactions. Although the taxpayers eventually filed the Forms 8886 that were shown in the IRS database, the lateness of those filings resulted in the assessment of the $234,000 in section 6707A enalties.

Currentl for examination otential 25

No audit! examination otential found 32

45

Examined and closed with Closin A reement * 8

Total 110

• When an examination concludes with a closing agreement, the agreement generally sets forth all adjustments. including penalties, to which the taxpayer has agreed.

REL 00745

, .

9

I hope this information is helpful. If you have questions, please contact me or have your staff contact Floyd L. Williams at (202) 622-4725.

Sincerely,

Enclosures

REL 00746

I

EXEMPT ORGANIZATION DETERMINATIONS CASE ASSIGNMENT GUIDE CASE GRADING CRITERIA

CASE COMPLEXITY GRADE LEVEL DISTINCTIONS FACTORS GS-11 GS-12 GS-13

Analysis of Application is basic; facts Application is complex and facts Application is extremely complex (e.g., Application regarding nature and purpose must be determined through involves inurement, private benefit, related

are easily discernible. Private analysis and questioning of entities) and significant additional benefit/inurement issues unlikely applicant. Private benefit/inurement documentation is required of applicant. but possible issues possible.

Factual Complexity Issues are of average complexity Issues may be sensitive or involve Case development methods and procedures of Issues and sensitivity. Established controversy. Case development must be adapted to unique situations. Issues

case development methods and methods and procedures must be are novel and unusual and involve the largest procedures are usually and most complex EO's. adequate.

adapted to case.

Application of Tax Tax laws are in most cases Tax laws are not always directly Tax laws or other legal issues involve points Law applicable but occasionally of law without precedent or with conflicting

involve unusual interpretation applicable. Research and analysis

precedents. Research and analysis are and application.

are required to establish proper necessary to establish significant similarities

precedents. interpretation and use of

with related issues. Interpersonal Skills Contacts are with Contacts are with officials of very large or

representatives of applicants, I representatives and officers of Contacts are with a variety of EO

prominent organizations and persons with organization members and national reputations in business, legal and contributors. Tact and

considerable prominence in the community including accountants I accounting circles and others of outstanding

diplomacy are required to and legal representatives. political, social or economic influence. resolve and elicit information and Considerable tact and skillful Considerable tact and discretion are required resolve questions and problems. negotiations are necessary since for resolution of issues.

issues discussed are sometimes controversial and sensitive.

Impact of Work Determination decision may Determination decision may affect Determination decision may impact other impact other organizations; larger organizations of regional or organizations nationwide; applicant has applicant's sole source of national stature; applicant's income significant resources and determination income may be from donations; is from a variety of sources; and decision may have significant social and and, the likelihood of media media attention is likely. economic implications with recurring effects in attention is limited. prior or subsequent tax years; and,

widespread media attention is probable.

Revised November 25, 2002

REL 00747

DEPARTMENT OFTHE TREASURY INTERNAL REVENUE SERVICE




March 12,2012


Dear Mr. Chairman:

This response relates to your letter to Commissioner Shulman dated October 6, 2011

requesting information about the tax-exempt sector. This response supplements my

November 18, 2011 response and addresses the additional issues raised by your staff

in discussions with my staff on December 16, 2011. We believe the in-person meeting

with your staff was a helpful exchange that enabled us to provide additional pertinent

information. This letter contains responses to questions raised by your staff.

Overview of the Exempt Organizations Office

Your staff requested additional information on the general activities of the Exempt

Organizations office within the Tax-Exempt and Government Entities Division and on

the Form 990 redesign. The Exempt Organizations office of the IRS is responsible for

the compliance of approximately 1.8 million groups with diverse goals and purposes. In

order to encourage the highest degree of compliance with tax law, EO conducts both an

active dialogue and an ambitious communications and outreach program with exempt

organizations and professional practitioners in the sector. The result is that when we

initiate major undertakings - such as legislatively mandated automatic revocation or the

comprehensive redesign of Form 990 - we seek and receive extensive input on

development and implementation from the sector and the public. The redesign of Form

990 is a case in point.

REL 00748

Because the Form 990 is a publicly disclosable document, the information reported is

not used by the IRS alone. Many states require nonprofit corporations operating within

their borders to file Form 990 to satisfy state reporting requirements. Many foundations

and other donors use Form 990 to identify and choose responsible charities to which to

send their charitable contributions. The press, researchers, and watchdog groups also

review and analyze information from Form 990.

The IRS began redesigning Form 990 in 2004. The basic format and content of the

form had remained essentially the same since 1979, while the community of tax-exempt

organizations had grown dramatically in size, variety, and complexity. Tax-exempt

organizations had come under increasing scrutiny by Congress and in the news media

over practices such as participating in prohibited tax shelter transactions, paying

excessive compensation, accommodating donors claiming inflated or other

inappropriate deductions, and operating business franchises or engaging in business

ventures with for-profit enterprises.

The prior Form 990, with its emphasis only on revenues and expenses, assets and

liabilities, had become outdated. It was primarily a series of yes/no checkboxes and

numbers, but did not provide an accurate portrait of what an exempt organization was

actually doing or reflect the full scope, activities, and dynamics of the modem,

sometimes multi-leveled tax-exempt organization. The form needed to be updated to

meet the needs of the IRS and the public to understand the activities of tax-exempt

organizations, and to confirm that these organizations were continuing to operate

consistently with their tax-exempt purposes.

In redesigning the Form, the IRS followed three guiding principles:

• Promote compliance with the tax law

• Promote transparency and

• Minimize burden (where consistent with the first two principles)

2 REL 00749

The redesign was a collaborative effort in which the IRS sought and received extensive

input from the pUblic sector. We met with nonprofit associations, state charity

regulators, public interest groups, policymakers, and various representatives of the tax

exempt community. We redesigned the Form 990 based on input from both our own

internal stakeholders (e.g., our Examinations and Submission Processing functions) and

these external groups.

Once we developed a draft redesigned form, we released it for public comment and

encouraged the public and exempt sector to provide us feedback. For a year and a

half, we held seminars and provided speakers for interested parties such as trade

association-type groups, particular sub-sectors that had an interest in the questions,

and the sector in general. We explained the new format (core form and schedules),

what we were asking for and why, and we solicited comments. We wanted to know

from affected organizations and practitioners whether the draft form's questions were

relevant, reasonable, and feasible to complete.

We received more than 5,000 pages of comments, which we are proViding to your staff

in disk form at their request (the format of the disk is discussed later in this response).

We met with various stakeholders, who had provided comments to make sure we

understood them, and we had conversations about what we - and they - were trying to

accomplish. Where recommended revisions furthered our goals of transparency,

compliance, and/or minimizing taxpayer burden, we revised the form. We then released

the revised version for public comment. We also released the Form 990 instructions for

similar comment. We considered all comments and made many further changes based

on those comments. The final Form 990 took effect in 2008. The feedback we have

received from the sector is that most agree that the process was fair and that the form

as a whole is a good one. The redesign is evolving and we continue to receive

comments from the sector and refine the form.

We recognized that the transition from the old to the new redesigned Form 990 would

change the way some organizations capture and track data needed to complete the

3 REL 00750

form. To give small and mid-sized organizations with fewer legal, accounting, and

administrative resources more time to adapt to the redesigned form, we provided

transition relief. We implemented a three-year phase-in period, raising the asset and

gross receipts thresholds for Form 990 filing by ten-fold (from $100,000 in gross

receipts and $250,000 in assets to $1 million and $2.5 million, respectively) for tax year

2008, by five-fold for tax year 2009 ($500,000 and $1.25 million), and ending at

$200,000 and $500,000 for tax years 2010 and later. The transition allowed hundreds

of thousands of smaller and mid-sized organizations that would have been required to

file the Form 990 for tax years 2008 and 2009 to file the shorter Form 990-EZ for one or

both of those years. This transition period also gave organizations time to progressively

enable their internal systems to respond to the new requirements.

Form 990 was redesigned to make it more user-friendly, streamlined, and better

organized. We eliminated unstructured attachments, replacing them with structured

schedules to promote uniformity and reduce ambiguity over how to report supplemental

information. We also added many tools to the instructions, including a glossary,

appendices, examples and illustrations, and a sequencing list, to help filers complete

the form more easily.

The Form's significant changes in how to report compensation and activities involving

related organizations now give the IRS the information needed to identify complicated

compensation and financial arrangements that may be indications of private inurement,

excess benefit, and/or private benefit. The "checklist of required schedules" shows at a

glance whether the organization has engaged in activities that may involve

noncompliant or potentially noncompliant activity, such as excessive lobbying or political

campaigning, excess benefit transactions, transactions with an interested person, or a

major disposition of assets. New schedules for reporting on foreign activities, hospitals,

and tax-exempt bonds shed greater light on, and show whether such activities are being

conducted consistently with tax-exempt purposes. By calling attention to practices and

activities that could provide occasion for waste or abuse, the form is designed to

encourage organizations to examine and exercise care in their operations.

4 REL 00751

The redesigned 990 provides us with a wealth of information about exempt

organizations and has become an important tool in EO's strategic planning.

To best focus our resources, a Strategic Planning Working Group (the SPWG), which

includes representatives from all EO functions - Rulings and Agreements, Guidance,

Determinations, Examinations, as well as related Communications and Outreach,

Research, and Counsel- reviews information from numerous sources, including

trending data from the Form 990, applications for exemption, PIC codes, the news

media and external and internal referrals. The process highlights areas of concern and

areas where we know we need to learn more to strengthen compliance and improve tax

administration. We then develop projects to focus on those areas.

One frequently used compliance tool is the compliance check questionnaire. These do

not require the same level of resources by the government or the taxpayer as an

examination, but they do provide us with a wealth of information about issues that affect

the sector as a whole or about segments of the sector. For example, we recently

looked closely at tax exempt hospitals. Hospitals are one of the largest parts of the

exempt sector by revenues, but exams of hospitals are resource-intensive, so we

cannot do more than a few of them a year. We developed a compliance check

questionnaire that asked about demographic information, about the hospitals' basis for

exemption, whether they were providing enough community benefit, and about their

executive compensation-setting practices. We sent the questionnaire to 500 hospitals,

small, medium, and large; ones that were in the cities, in the country, and across

different demographics. In advance of sending out the questionnaire we posted it on

our website and explained publicly what we intended to do in the project. We have

found that this transparency encourages organizations to respond to this and other

questionnaires. We generally have a greater than 90 percent response rate. After

analyzing the questionnaire responses, we issued a public report providing the results

of our analysis (not organization-specific). We have found such reports to be useful

tools and helpful to the exempt organizations' sector as most organizations are looking

to be compliant, and the information we proVide helps them do so.

5 REL 00752

We also conduct a limited number of follow-up examinations based on questionnaire

responses and Form 990 information. In the case of hospitals, for example, we focused

on very highly compensated executives to determine whether that compensation was

reasonable. At the end of the exam portion of the project we issued a final report to the

public regarding compensation issues and the use of the rebuttable presumption of

reasonableness.

To the extent possible, we also use a project's results to issue formal or informal

guidance to exempt organizations. In the case of hospitals, we learned that there was

inconsistency in how the hospitals were thinking about their community benefit

activities, the basis for a hospital's tax exemption, and how they were reporting them.

The interim report recommended development of a standardized Schedule H as part of

the redesign of the Form 990 so that all hospitals would be reporting the same kind of

information on community benefit, which would allow for better comparison and

transparency. We released a draft Schedule H for public comment, met with and

received input from representatives of the hospital community, made some adjustments,

and issued the new Schedule H for tax year 2008.

As part of our compliance efforts, we also have a Review of Operations (ROO) office. It

has three main functions. First, if we have examined an organization and found that the

organization is off track, but not so far off track that it should lose its exemption, we

require in a closing agreement that it make changes to come into full compliance. We

then can refer the organization to ROO, which will take a look at the organization in the

future to make sure it is maintaining compliance. The ROO review is not an

examination. Rather, the ROO looks at Forms 990 and other publicly-available

information; it looks on the web to see how the organizations are conducting their

business and whether they are still compliant. If not, the ROO will refer the organization

for examination.

The ROO also reviews a random sample of approved applications for recognition of

exemption and looks at them a year or two after approval. Many organizations that

6 REL 00753

apply are not fully operational at the time of application, so their exemption

determinations are made based more on their aspirations than their actual activities to

date. The ROO reviews public information to ensure that the organizations continue to

be organized and operated for tax-exempt purposes. If not, they are referred for

examination. Finally, the ROO also conducts the statutorily mandated community

benefit reviews of tax-exempt hospitals.

Information gained from the projects, the application process, and the examination

process is fed back into our strategic planning, and the planning cycle begins again. All

of this becomes transparent to the public through our Implementing Guidelines. The

Guidelines are comprised of the annual report and an outline of the planned work for the

year ahead. This is another way for us to communicate with the sector, let the sector

know where our compliance concerns lie, provide guidance, and be transparent about

our office and our processes.

Question 1(b). Your staff asked for additional information on Exempt Organizations' appropriations data.

In Exhibit 1(b)-1 of our November 18, 2011 response, we provided a breakdown of Tax

Exempt/Government Entities (TE/GE) appropriations data for FY 2008 - FY 2011.

Per your staff's request, below is a description of the categories that reflect the Exempt

Organizations' funding streams for the staffing, training, and direct support for the

management of various operational programs. The categories have been sorted

according to the functional areas in the previously provided exhibit.

Exempt Organizations financial structure contains two primary appropriations: Taxpayer

Services and Enforcement. The labor and support funding is distributed to the following

functional areas: 1C Taxpayer Communication and Education, 7A Compliance Services

Management, 7G Tax Reporting Compliance - Field Exam, 8C Tax Law Interpretation &

Published Guidance and 8E Rulings and Agreements. Functional Area 1 falls under

Taxpayer Services, Functional Areas 7 and 8 fall under Enforcement.

7 REL 00754

~ Taxpayer Comm & Education or Taxpayer Communication and Education

(Functional Area 1C):

• Encompasses Customer Education and Outreach (CE&O) staffing, which

offers specialized education and outreach programs to help exempt

organizations understand their tax responsibilities. CE&O oversees the

Charities and Nonprofits pages of IRS.gov, develops publications and

web-based materials, manages the Academic Institution Initiative, and

offers face-to-face workshops and seminars on EO tax laws. In addition to

CE&O core staff, subject-area experts from Examinations and Rulings and

Agreements (R&A) support EO outreach efforts and augment CE&O's

mission.

~ Compliance Services Mgmt or Compliance Services Management (Functional

Area 7A):

• Encompasses EO Director's direct support staff, as well as the program

staff.

~ Tax Report Compliance - Fld or Tax Reporting Compliance - Field Exam

(Functional Area 7G):

• Includes resources to support services provided to taxpayer after a return

is filed (post-filing stage), particularly for enforcement activities, including

both compliance checks and audits of exempt organizations.

• EO Examinations is made up of field exam groups; the Exempt

Organization Compliance Unit (EOCU), which conducts compliance

checks; Review of Operations (ROO), which does follow-up reviews of

organizations; and Compliance Strategies Critical Initiative (CSCI), which

coordinates EO's strategic planning, monitors progress of critical

initiatives, and analyzes the results of these projects.

~ International Exams (Functional Area 7Q):

• Separate funding stream tracked due to IRS-wide initiative with other

divisions, including LB&1.

• Supports the international exam programs involving U.S. citizens residing

abroad, non-resident aliens, expatriates, as well as examinations involving

8 REL 00755

other international issues, including legal support (e.g., Foreign Tax

Credit, Foreign Earned Income Exclusion, Corporations, Non-Profits,

Pension Plans, etc.).

~ Tax Law Interpretation and/or Tax Law Interpretation and Published Guidance

(Functional Area 8C):

• Includes Guidance staff in Washington D.C., who provides direct support

for interpretations of the tax law through published guidance, technical

advice and other technical legal services.

~ Rulings &Agreements (Functional Area 8E):

• Includes Determinations staff in Cincinnati and Technical staff in

Washington D.C., who are responsible for reviewing applications for

exemption, issuing private letter rulings, providing technical advice, and

collaborating with Chief Counsel's office and the Department of the

Treasury to deliver formal guidance.

Question 1(c). Your staff requested additional information regarding the average length of a tax-exempt audit since 2008.

The average length of time for completing examination returns that were closed in FY

2011 is 210 days. The following are the average number of days for completing

examination returns that were closed during FY 2008 - FY 2010:

• FY 2010: 225 days

• FY 2009: 267 days

• FY 2008: 264 days

Your staff also requested additional information regarding the use of Principal Issue Codes (PIC codes) in identifying issues for audit.

PIC codes are one of the indicators or ways to identify issues and trends. These codes

are selected to capture the issues on which an agent spent time during the examination

or that resulted in a change. The determination of which PIC codes are applicable to a

particular case is a judgment made by the agent. The list of PIC codes we provided you

9 REL 00756

with my November 18, 2011 response is the same list our agents use. (The list is re

enclosed under Enclosure A for your convenience.) As part of their training, our agents

are prepared to recognize legal issues that may arise during their examination of a tax

return, and understand the relationship of the PIC codes to the issues.

We are providing IRM section 4.75.16.9 as Enclosure B. As discussed in my November

18,2011 response, IRM section 4.75.16.9 provides gUidance on the use of PIC codes,

including which codes should be used in closing EO Examination cases. The IRM

provides several specific examples on the correct use of these PIC codes, as well as

addresses the use of PIC code 34 - "Other". We review the PIC codes as the sector

changes and new areas develop to ensure our agents have the tools to accurately and

consistently capture these new issues or trends.

Question 2(a). Your staff asked for more concrete examples regarding usage of data from Form 990 on the effect of enforcement and compliance.

As noted above, the Form 990 is a significant tool in our strategic planning as well as in

examining tax-exempt organizations and in identifying tax-exempt organizations for

exam. As discussed, the redesigned Form 990 includes information that was not

included in the prior Form 990, including two key areas that we review frequently in

examinations: governance and executive compensation. The IRS uses Form 990

information in all compliance projects, including the following:

~ College and university project. The IRS sent 400 questionnaires to public and

private four-year colleges and universities asking about their executive compensation

practices, endowments, and unrelated business income, including how they allocate

gains and losses among their taxable and non-taxable activities. As part of this project,

the IRS is conducting examinations of approximately 34 colleges and universities,

focusing on their organizational structures, exempt and unrelated business activities,

endowments, executive compensation, and governance practices based, in part, on

data from the questionnaires and Forms 990.

10 REL 00757

~ Form 990-N mis-filer project. The Pension Protection Act of 2006 (PPA) added the

Form 990-N (e-Postcard) filing requirement to ensure that the IRS and potential donors

have current information about smaller tax-exempt organizations. Organizations with

average annual gross receipts of $50,000 or less may elect to file the e-Postcard rather

than the Form 990 or Form 990-EZ. A tax-exempt organization's filing obligations may

change annually, depending on its levels of gross receipts and total assets. Based on

information provided in Form 990-series retums regarding an organization's gross

receipts, the IRS has identified organizations that filed the Form 990-N (a-Postcard)

when they apparently should have filed Form 990 or 990-EZ for a particular year. The

IRS is contacting these organizations to learn more about their current filing obligations

before taking appropriate action.

~ Community benefit reviews. The IRS is statutorily required to review the community

benefit activities of hospital organizations at least once every three years. The IRS is

reViewing Forms 990 in conducting these reviews. The IRS will continue to use the

information gathered from the reviews for research, reporting, and compliance

purposes, as well as to identify areas where additional guidance, education, and Form

990 changes may be needed.

~ Section 501 (c)(4), (5) and (6) organizations. Unlike section 501 (c)(3) public charities

that generally must apply to the IRS for recognition of tax exemption under section 508,

section 501 (c)(4), (5), and (6) organizations (social welfare organizations; labor,

agricultural and horticultural groups; and business leagues such as a chamber of

commerce) are not covered by Section 508, and may self-declare as tax-exempt

organizations. The Form 990 has prOVided the IRS with additional information on all

categories of tax-exempt organizations, including section 501 (c)(4), (5) and (6)

organizations. With the increased information available on the redesigned Form 990, we

are looking at issues including political activity, inurement and the extent of compliance

with the reqUirements for tax exemption by organizations that self-identified themselves

as a section 501 (c)(4), (5) or(6) organization.

11 REL 00758

~ Charitable spending initiative. This project is designed to learn more about how

charities raise and spend their funds. The IRS has selected certain organizations for

examination under the first phase of the project using data from Form 990, including

high levels of fundraising expenses coupled with relatively low levels of program service

expenditures, high ratios of officer compensation in comparison to the organization's

program service expenditures, and low levels of program service expenditures in

comparison to the organization's total revenue.

~ 'Mutual" Organizations- The IRC §501(c)(12) Project. Organizations exempt under

section 501(c)(12) include benevolent life insurance associations, mutual ditch or

irrigation companies, and cooperative telephone companies. These organizations must

collect at least 85 percent of their income from members for the sole purpose of meeting

losses and expenses. The results of the member-income "test" determine the

organization's yearly filing reqUirement. An organization should file Form 990 for the

years in which it meets the 85 percent member-income test, and it should file Form

1120 for the years in which it fails to meet the test. The Forms 990 filed by some section

501 (c)(12) organizations indicate that these organizations are not meeting the 85

percent member-income test every year. To address this issue, the IRS mailed

questionnaires to affected organizations in early FY 2010, and 40 percent of the

questionnaire respondents were selected for examination. We began conducting these

examinations in FY 2011, and the examinations are still in process.

Question 2(c). Your staff requested additional information regarding IRS actions in response to taxpayer concerns on redesigned Form 990.

As discussed above, the Form 990 redesign was a collaborative effort in which the IRS

sought and received extensive input from the public sector. The IRS met with nonprofit

associations, state charity regulators, public interest groups, policymakers, and various

representatives of the tax-exempt community. We redesigned the Form 990 based on

input from both our own internal stakeholders (e.g., our Examinations and Submission

Processing functions) and these external groups. Changes were made throughout the

redesign process to address comments from stakeholders.

12 REL 00759

As discussed, we requested public comment on the draft redesigned Form in 2007, and

on the draft instructions in 2008. In response, we received over 800 formal public

comments. We have provided these comments in the two enclosed CD-ROMs: one

contains pdf files of 2007 comments on the redesigned Form 990 (Enclosure C) and the

second contains .pst files on draft instructions comments from 2008 as well as

comments to the recent Announcement 2011-36 (Enclosure D). Based on feedback

from these public comments, we made extensive revisions to the Form 990, schedules,

and instructions to increase clarity and minimize burden. We are including copies of the

background papers that detail some of these revisions as Enclosure E.

To help all filers become familiar with the Form and complete it more accurately, we

developed multiple on-line educational resources (at IRS.gov/eo) describing how the

Form had changed and tips for completing it. We have since added audio and video

programs to further assist filers in understanding and completing the Form.

Although the major redesign of the Form 990 is complete, the IRS has continued to

receive informal public comments on the form, schedules, and instructions, and to refine

the Form, schedules, and instructions based on those comments. We have made

clarifications, corrected errors, and added examples to make the Form easier to

understand and complete. For instance, since the Form 990 was redesigned we have

made further significant changes to the Form, schedules, and instructions in response

to public comment that include:

~ Eliminating supplemental Form 990 schedules that confused taxpayers (e.g.,

Schedule J-2) and instead asking taxpayers to provide supplemental information in new

narrative sections to schedules and/or duplicate copies of schedules;

~ Allowing a filer to answer "Yes" to Form 990, Part VI (Governance) questions on

whether its governing boards adopted certain governance policies if such policies were

13 REL 00760

adopted by either the board or a committee of the board with authority to adopt the

policies;

~ Stating that the compensation columns in Form 990, Part VII (Compensation) should

be left blank for short year returns in which there is no calendar year that ends within

the short year, to reduce the compensation reporting burden for short year filers;

~ Adding a new appendix containing activity codes for Form 990, Part VIII (Statement

of Revenue) so that filers do not have to review Form 990-T instructions for these

codes;

~ Revising Form 990, Part XII (Financial Statements and Reporting) to allow Form 990

filers to report that they were included in consolidated financial statements that were

compiled, reviewed, or audited by an independent accountant;

~ Changing the definition of "interested person" for Form 990, Schedule L, Part IV

business transaction reporting to exclude section 501 (c)(3) organizations, which

reduces the reporting burden of exempt organizations that have overlapping boards;

~ Revising the definition of 'significant disposition of net assets' to exclude grants or

assistance made in the ordinary course of the organization's exempt activities, thereby

reducing the reporting reqUired in Form 990, Schedule N (Dissolution or Significant

Disposition of Assets); and

~ Revising the definition of "related organization" so that a trust typically does not need

to report on Form 990, Schedule R (Related Organizations) its trustee, if that trustee is

a financial institution that is trustee of more than one trust.

Some taxpayers expressed concern that disclosure of certain types of information (e.g.

compensation, related organizations, foreign activities) on Form 990 would violate

expectations of privacy. In response to public comments, the IRS does not require

14 REL 00761

disclosure of any personal addresses, email addresses, phone numbers, or Social

Security numbers on the redesigned Form 990. Also in response to public comment,

Schedule F (Statement of Activities Outside the United States) does not require

reporting of the names of the 990 filers' foreign grant recipients or the countries in which

the filers conduct activities. In addition, based on responses to Announcement 2011

36, effective tax year 2011 we no longer require reporting of the names, employer

identification numbers, or addresses of related charitable remainder trusts and other

split-interest trusts in Schedule R (Related Organizations). We are currently

considering other exceptions based on comments issued in response to Announcement

2011-36 (see below).

As described in our previous response, the IRS added a new Part V, Section B to the

2010 Form 990, Schedule H (Hospitals) to gather infonnation related to new

requirements for tax-exempt hospital facilities, and to related policies and practices. In

response to comments from the public that more time was needed for the hospital

community to familiarize itself with the new questions and gather the information

needed to report, the IRS made the entire Schedule H, Part V, Section B optional for the

2010 tax year.

On June 2,2011, the IRS requested public comment on 11 transitional issues and

frequently asked questions involving the redesigned Form 990 in Announcement 2011

36. We have received just over 100 comments in response to Announcement 2011-36,

and are now in the process of analyzing these comments. We have included these

comments in the enclosed CD-ROM. Any changes in response to the comments will be

made as appropriate on an ongoing basis to minimize potential burden while promoting

compliance and transparency. We will continue to receive and review input on the Form

990, schedules, and instructions at [email protected].

15 REL 00762

Questions 2(g)(ii) and (iii). Your staff requested additional information relating to the auto-revocation list.

No auto-revoked taxpayer seeking reinstatement of tax-exempt status has been denied

exemption to date. Of the larger organizations that requested retroactive reinstatement,

as of March 1, 2012, approximately 21 had been retroactively reinstated. The

remaining larger organizations were reinstated as of the postmark date of their

reinstatement application.

Question 5(b)(iv). Your staff requested examination results information on the listed

transaction disclosures discussed in my November 18,2011 response. We expect to

have this information shortly and will provide it in a supplemental response.

Question 5(c)(ii). Your staff requested additional information on how IRS is preparing for the report required under section 9007(e).

The IRS and the Department of Health and Human Services (HHS) have been

collecting data to produce the reports to Congress required under Affordable Care Act

section 9007(e). Affordable Care Act section 9007(e) requires the Secretary of the

Treasury, in consultation with the Secretary of Health and Human Services, to submit to

the Congress an annual report on levels of charity care provided by hospitals. The IRS

and HHS are working together to prepare a report that includes information with respect

to private tax-exempt, taxable, and government-owned hospitals regarding the levels of

charity care, bad debt expenses, and un-reimbursed Medicare and Medicaid services.

The staffs of IRS and HHS have discussed the sources of government data that may be

available and presently plan to present data in the report from a combination of IRS and

Centers for Medicare and Medicaid Services (CMS) data. When this data is available,

we will begin the process of preparing the report.

As discussed above, effective for tax years starting in 2009, hospital organizations

exempt from tax and described under Internal Revenue Code (lRC) section 501 (c)(3)

were required to file Form 990 Schedule H unless they were exempt from filing as a

government unit. Such hospitals report costs of providing financial assistance and other

16 REL 00763

community benefits on Form 990 Schedule H. Depending on the start of a hospital

organization's fiscal year and grants of extensions of time to file, due dates for timely

filing 2009 Forms 990 could be as early as May 15, 2010, or in the case of an

organization with a fiscal year that starts in December and has been granted two three

month extensions of time to file, as late as October 15, 2011.

Data from the Form 990 Schedule H is being prepared for statistical analysis by the IRS

Statistics of Income division. It is expected that IRS data presented in the report will be

extracted from the Tax Year 2009 Statistics of Income Exempt Organizations sample.

We expect the data will be available in July 2012, at which time the IRS will begin to

assemble the data for purposes of meeting the objectives of the report to transmit to

Congress.

Critical access hospitals and short-term acute care hospitals are required to report to

eMS charge and cost data associated with providing inpatient and outpatient hospital

services for which the hospitals are not compensated by filing with CMS. We expect

such data also to become available in 2012.

If you have any questions, please contact me or have your staff contact Floyd L.

Williams at (202) 622-4725.

Sincerely,

."",oAD~.~ ~~:~rant

ting Commissioner

Enclosures

17 REL 00764

CJanitrd ~tatr5 ~rnatr WASHINGTON, DC 20510

March 9, 2012 ..If.H9ceived by the

Hon. Douglas H. Shulman commissioner'S C()lT8spondence OfficeCommissioner RECEIVED

Internal Revenue Service MAR ~ 11.0\L Room 3000 IR MAR 21 2011. 1111 Constitution Avenue, N.W.

CONG.CORR.BR Dear Commissioner Shulman: CL:LA

We write to ask the Internal Revenue Service ("IRS") to immediately change the administrative framework for enforcement of the tax code as it applies to groups designated as "social welfare" organizations. These groups receive tax and other advantages under section 501 (c)(4) of the Internal Revenue Code (hereinafter, "IRC" or the "Code"), but some of them also are engaged in a substantial amount of political campaign activity. As you know, we sent a letter last month expressing concerns about the 501 (c)(4) issue; an investigation this week by the New York Times has uncovered 'new, specific problems on how 501 (c)(4)s conduct business. We wanted to address those new concerns in this letter.

IRS regulations have long maintained that political campaign activity by a 50 1(c)(4) eritity must not be the "primary purpose" of the organization. These regulations are intended to implement the statute, which requires that such organizations be operated exclusively for the public welfare. aut we think the existing IRS regulations run afoul ofthe law since they only require social welfare activities to be the "primary purpose" of a nonprofit when the Code says this must be its "exclusive" purpose. In recent years, this daylight between the law and the IRS regulations has been exploited by groups devoted chiefly to political election activities that operate behind a facade of charity work.

A related concern, raised in a March 7th New York Times article, concerns whether certain nonprofits may be soliciting corporate contributions that are then treated by the company as a business expense eligible for a tax deduction. The Times wrote: "Under current law, there is little to no way to tell whether contributions are being deducted, especially because many of the most political companies are privately held." This potential abuse distorts the objectives of vital revenue mechanisms and undermines the faith that we ask citizens to place in their electoral system.

We propose that the IRS make three administrative changes to curtail these questionable' practices and bring IRS tax regulations 'back into alignment with the letter and spirit intended by those who crafted the Code: ' . '

• First, we urge the IRS to adopt a bright line test in 'applying its "primary purpose" regulation that is consistent with the Code's 501 (c)(4) exclusivity language. The IRS currently only requires that the purpose of these non-profits be "primarily" related to social welfare activities, without defining what "primarily" means. This standard should

REL 00765

be spelled out more fully by the IRS. Some have suggested 51 percent as an appropriate threshold for establishing that a nonprofit is adhering to its mission, but even this number would seem to allow for more political election activity than should be permitted under the law. In the absence of clarity in the administration of section 501 (c)(4), organizations are tempted to abuse its vagueness, or worse, to organize under section 501 (c)(4) so that they may avail themselves of its advantages even though they are not legitimate social welfare organizations. If the IRS does not adopt a bright line test, or if it adopts one that is inconsistent with the Code's exclusivity language, then we plan to pursue legislation codifying such a test.

• Second, such organizations should be further obligated to document in their 990 IRS form the exact percentage of their undertakings dedicated to "social welfare." Organizations should be required to "show their math" to demonstrate that political election activities and other statutorily limited or prohibited activities do not violate the "primary purpose" regulation.

• Third, 501 (c)(4) organizations should be required to state forthrightly to potential donors what percentage of a donation, if any, may be taken as a business expense deduction. As the New York Times reported in its March 7th article, some of these organizations do not currently inform donors whether a contribution is tax deductible as a business expense at all.

The IRS should already possess the authority to issue immediate guidance on this matter. We urge the IRS to take these steps immediately to prevent abuse of the tax code by political groups focused on federal election activities. But if the IRS is unable to issue administrative guidance in this area then we plan to introduce legislation to accomplish these important changes.

~~Sincerely, ~f(-~'

Charles E. Schumer Michael Bennet United States Senator United States Senator

~ ([;.uR~ Tom Udall

United States Senator United States Senator

A-~I." itt ~rkley United States Senator

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CHIEF COUNSEL APR 25 2012

The Honorable Michael Bennet United States Senate Washington, DC 20510

Dear Senator Bennet:

I am responding to the letter dated March 9, 2012, from you and your colleagues to Commissioner Douglas Shulman. You proposed that the IRS make three changes to the tax rules governing section 501 (c)(4) "social welfare" organizations.

First. you requested that the IRS adopt a bright line test when analyzing whether an organization satisfies the statutory language of IRC 501 (c)(4) providing exemption for organizations that are "operated exclusively for social welfare." Second, you requested thatthe IRS require section 501 (c)(4) organizations to disclose on their annual Form 990 the percentage of their undertakings dedicated to "social welfare." Third, you requested that section 501 (c)(4) organizations be required to notify potential donors what percentage of a donation, if any, may be taken as a business expense deduction.

The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with Tax-Exempt and Government Entities and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other pUblished guidance.

I hope this information is helpful. I am sending a similar response to your colleagues. If you have questions, please contact me or have your staff contact Cathy Barre at (202) 622-3720.

Sincerely,

(if1{i£t-~ William J. Wilkins Chief Counsel

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The Honorable Sheldon Whitehouse United States Senate Washington, DC 20510

Dear Senator Whitehouse:

I am responding to the letter dated March 9, 2012, from you and your colleagues to Commissioner Douglas Shulman. You proposed that the IRS make three changes to the tax rules governing section 501(c)(4) "social welfare" organizations.

First, you requested that the IRS adopt a bright line test when analyzing whether an organization satisfies the statutory language of IRC 501 (c)(4) providing exemption for organizations that are "operated exclusively for social welfare." Second, you requested that the IRS require section 501 (c)(4) organizations to disclose on their annual Form 990 the percentage of their undertakings dedicated to "social welfare." Third, you requested that section 501 (c)(4) organizations be required to notify potential donors what percentage of a donation, if any, may be taken as a business expense deduction.

The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with Tax-Exempt and Government Entities and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.


Sincerely,

{it/(Itt,,--', William J. Wilkins Chief Counsel

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CHIEF COUNSEL

APR 25 2012

The Honorable Tom Udall United States Senate Washington, DC 20510

Dear Senator Udall:


First, you requested that the IRS adopt a bright line test when analyzing whether an organization satisfies the statutory language of IRC 501 (c)(4) providing exemption for organizations that are "operated exclusively for social welfare." Second, you requested that the IRS require section 501(c)(4) organizations to disclose on their annual Form 990 the percentage of their undertakings dedicated to "social welfare." Third I you requested that section 501 (c)(4) organizations be required to notify potential donors what percentage of a donation, if any, may be taken as a business expense deduction.



Sincerely,

/ . -f..!.-~ "1t'-! ('/ i /1 / j , / (, / l /L,/'v" ~ Z/ {;

of /

~,v

William J. Wilkins Chief Counsel

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CHIEF COUNSEL

APR 25 7.012

The Honorable Jeanne Shaheen United States Senate Washington, DC 20510

Dear Senator Shaheen:

I am responding to the letter dated March 9, 2012, 'from you and your colleagues to Commissioner Douglas Shulman. You proposed that the IRS make three changes to the tax rules governing section 501 (c)(4) "social welfare" organizations.

First, you requested that the IRS adopt a bright line test when analyzing whether an organization satisfies the statutory language of IRC 501(c)(4) providing exemption for organizations that are "operated exclusively for social welfare." Second, you requested that the IRS require section 501 (c)(4) organizations to disclose on their annual Form 990 the percentage of their undertakings dedicated to "social welfare." Third, you requested that section 501 (c)(4) organizations be required to notify potential donors what percentage of a donation, if any, may be taken as a business expense deduction.



Sincerely,

/ I>£i.! ~11., /(1 1 "",-'(/ j! L/ Cv William J. Wilkins Chief Counsel

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CHIEF' COUNSEL APR '2 5 in17

The Honorable Jeff Merkley United States Senate Washington, DC 20510

Dear Senator Merkley:





Sincerely, •

{~jffj(ltf·(~' William J. Wilkins Chief Counsel

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APR 25 2012

The Honorable AI Franken United States Senate Washington, DC 20510

Dear Senator Franken:





Sincerely.

' ~.,ill . u .( t~.- (ilt.. ~ William J. Wilkins Chief Counsel

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The Honorable Charles E. Schumer United States Senate Washington, DC 20510

Dear Senator Schumer:



The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with Tax-Exempt and Government Entities and 'the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.


Sincerely,

urk!!Ilt,,-- , William J. Wilkins Chief Counsel

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WASHINGTON OFFICE:KENNY MARCHANT 1110 LONGWORTH HOUSE OFFICE BUILDING

24TH QISTRICT, TEXAS WASHINGTON, DC 20515 (202) 225-£605

DISTRICT OFFICE:COMMITIEE ON 9901 EAST VALLEY RANCH PARKWAY WAYS AND MEANS (tCongrt55 of tbt Wntttb ~tatt5

SUITE 3035 IRVING, TX 75063 (972) 556-{)162

SUBCOMMITTEE ON ~OU~t of l\tprt~tntattbt~ SELECT REVENUE MEASURES

"a~tngton, t!)QC 20515-4324 SUBCOMMITTEE ON OVERSIGHT March 28, 2012

e\'lEld '0'1 ,\'\0 o¢.8nC0 SUBCOMMITTEE ON y.eC Col18s{)SOCIAL SECURITY (\9(5

COI1\I1\\sS\O (%Ice

The Honorable Douglas Shulman RECEIVED o ~i 1~\1

Commissioner of Internal Revenue ~\'" APR 05 201210th Street and Pennsylvania Avenue

Washington, DC 20004 CONG.CORR.BR CL:LA


I am writing to voice my concerns over recent inquiries by the IRS into the tax-exempt status of conservative organizations, including several Tea Party groups across the nation.

Since the beginning of the year, groups such as the Tea Party have received numerous lengthy questionnaires and intrusive information demands from the IRS. The questions contained in these IRS letters, such as asking these organizations for their membership lists and their relationships with candidates for public office, appear to violate the First Amendment rights of the groups. Demanding that these groups reveal their internal workings, the identity of their members, donors and volunteers, and even what they discuss at their private meetings, is well beyond the scope of any legitimate IRS inquiry.

According to Jay Sekulow, a former lawyer at the Office of the Chief Counsel of the IRS, to comply with one of these IRS letters could take up to 7,000 pieces ofpaper. This kind ofoverlyburdensome information request diverts resources away from the important work of Tea Party groups and other grassroots organizations, and it is simply unacceptable.

I join my colleagues in the House and concerned citizens throughout the 24th Congressional District of Texas in calling for an answer on this matter. The actions and intentions of the IRS in sending these letters to private, non-profit groups must be explained. I look forward to your response.

since~7~1/ ,-"",'

./ ) /2::'-c:~ Kenny Marchant Member of Congress

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C!tongrellll of t~t 1ltnitti\ ~tafe5 lIaslJingtolt. BOt 20515

April 23) 2012 RECEIVED The Honorable Douglas H. Shulman APR 232012 Commissioner~ Internal Revenue Service Room 3000 IR CONG.CORR.BR 1111 Constitution Avenue, NW CL:LA Washington~ DC 20224


It has come to our attention that numerous nonprofit civic organizations across the country have experienced extensive delays and received excessively burdensome infonnation requests in connection with their applications for tax-exempt status under 26 U.S.C. §501(c). These requests have included demands for complete records of every oral statement ever provided by any member of the organization, vague probes into tangential associations with private citizens and excessively long questionnaires all to be returned within unreasonably short time periods. These demands go well beyond good-faith due diligence and appear designed to be logistically and financially impossible to comply with.

Tax-exempt status exists to ensure that taxation does not hinder citizens' engagement in social welfare and civic activities. To wit, 26 U.S.C. §501(c)(4)(A) exempts "[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare...the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes." Further~ the I.R.S. has affinned that these organizations "may carry on lawful political activities and remain exempt as long as it is primarily engaged in activities that promote social welfare." (Rev. Rule 81-95~ 1981-1 C.B. 332)

These recent inquiries appear to constitute disparate treatment for no apparent reason other than the political persuasion of applicants. Such practices chill these groups' Constitutionallyguaranteed rights to civic participation, freedom ofassociation and free speech and are better left to despotic regimes than a revenue-collection agency in a free country.

It does not appear that the misSions and activities of these organizations require infonnation beyond the scope of Form 1024 and Schedule B) which we understand to have been traditionally required. We request that you provide a response demonstrating how these recent requests by the I.R.S are consistent with precedent and supported by law. We further request that the I.R.S. refrain from any additional unwarranted and excessive information demands and other dilatory tactics.

Thank you for your attention to this matter. We look forward to your timely response.

Sincerely,

m McClintock Bill Flores Member ofCongress Member ofCongress

PRINTED ON RECVCLED PAPER

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DEPUTY COMMISSIONER

June 15, 2012

The Honorable Bill Flores U.S. House of Representatives Washington, DC 20515

Dear Mr. Flores:

I am responding to the letter from you and your colleagues to Commissioner Shulman dated April 23, 2012, requesting information about the tax-exempt sector. In particular, your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4), the organization must file Form 990 annual information returns.

All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("EOn

) Determinations office in Cincinnati, Ohio for initial technical screening.

This technical screening is conducted by experienced revenue agents who review the applications and, based on that review, separate the applications into the following four categories:




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WASHINGTON, D.C 20224

DEPUTY COMMISSIONER

June 15, 2012

The Honorable James Lankford U.S. House of Representatives Washington, DC 20515

Dear Mr. Lankford:

I am responding to the letter from you and your colleagues to Commissioner Shulman dated April 23,2012, requesting information about the tax-exempt sector. In particular, your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("EO") Determinations office in Cincinnati, Ohio

- for initial technical screening.





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WASHINGTON, DC. 20224

DEPUTY COMMISSIONER June 15, 2012

The Honorable Dennis Ross U.S. House of Representatives Washington, DC 20515

Dear Mr. Ross:


Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("EO") Determinations office in Cincinnati, Ohio for initial technical screening.





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DEPUTY COMMISSIONER

June 15, 2012

The Honorable Gus Bilirakis U.S. House of Representatives Washington, DC 20515

Dear Mr. Bilirakis:


Application Process







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DEPUTY COMMISSIONER

June 15,2012

The Honorable Francisco "Quico" Canseco U. S. House of Representatives Washington, DC 20515

Dear Mr. Canseco:


Application Process







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DEPUTY COMMISSIONER

June 15,2012

The Honorable Lynn Westmoreland U.S. House of Representatives Washington, DC 20515

Dear Mr. Westmoreland:


Application Process







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DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERViCE


DEPUTY COMMISSIONER

June 15, 2012

The Honorable Trent Franks U.S. House of Representatives Washington, DC 20515

Dear Mr. Franks:


Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("EO") Determinations office in Cincinnati, Ohio for initial techriical screening.





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... ---- -_..-- - -- ---_._----


WASHINGTON, DC. 20224

DEPUTY COMMISSIONER

June 15, 2012

The Honorable Mike Pompeo U.S. House of Representatives Washington, DC 20515

Dear Mr. Pompeo:


Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4) , are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("EO") Determinations office in Cincinnati, Ohio for initial technical screening.





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DEPARTMENT OF THE TREASU Y INTERNAL REVENUE SERVICE


DEPUTY COMMISSIONER

June 15, 2012

The Honorable Raul Labrador U.S. House of Representatives Washington, DC 20515

Dear Mr. Labrador:


Application Process







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DE:PARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE



The Honorable W. Todd Akin U.S. House of Representatives Washington, DC 20515

Dear Mr. Akin:

I am responding to the letter from you and your colleagues to Commissioner Shulman dated April 23, 2012, requesting information about the tax-exempt sector. In particular,

'. your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4) , the organization must file Form 990 annual information returns.






REL 00794




The Honorable Alan Nunnelee U.S. House of Representatives Washington, DC 20515

Dear Mr. Nunnelee:


Application Process







REL 00795



DEPUTY coMMISSIONER June 15, 2012

The Honorable Steve King U.S. House of Representatives Washington, DC 20515

Dear Mr. King:


Application Process







REL 00796

VI ~ DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE



The Honorable Joe Wilson U.S. House of Representatives Washington, DC 20515

Dear Mr. Wilson:


Application Process







REL 00797



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Lynn Jenkins U.S. House of Representatives Washington, DC 20515

Dear Ms. Jenkins:


Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4). the organization must file Form 990 annual information returns.






REL 00798


WASHINGTON, 0 C 20224

OEPU TV r;OMMISSIONER June 15, 2012

The Honorable John Kline U.S. House of Representatives Washington, DC 20515

Dear Mr. Kline:


Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c) (4), the organization must file Form 990 annual information returns.






REL 00799

-----------_.- . · ----- -- - _._-



DEPUTY COMMISSIONER June 15,2012

The Honorable Diane Black U.S. House of Representatives Washington, DC 20515

Dear Ms. Black:

I am responding to the letter from you and your collea"gues to Commissioner Shulman dated April 23,2012, requesting information about the tax-exempt sector. In particular, your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4) , are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("Eon) Determinations office in Cincinnati, Ohio for initial technical screening.





REL 00800

DEPARTMENT OF THE TREASURY INTERN L REVENUE SERVICE

WASHINGTON, D.C 20224


The Honorable Ted Poe U.S. House of Representatives Washington, DC 20515

Dear Mr. Poe:


Application Process







REL 00801

DEPARTMENTOFTHETREASURY INTERNAL REVENUE SERVICE

WASHINGTON, D,C, 20224

DEPUTY COMMISSIONER

June 15, 2012

The Honorable Tom Graves U.S. House of Representatives Washington, DC 20515

Dear Mr. Graves:


Application Process







SESIGN&nAT£'

REL 00802



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Mick Mulvaney U.S. House of Representatives Washington, DC 20515

Dear Mr. Mulvaney:


Application Process







REL 00803



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Randy Hultgren U.S. House of Representatives Washington, DC 20515

Dear Mr. Hultgren:


Application Process



This technical screening is conducted by experienced revenue agents who review the applications and, based on that review, separate the applications into the follOWing four categories:

• Applications that can be approved immediately based on the completeness of the application and the information submitted; .



REL 00804



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Ann Marie Buerkle U.S. House of Representatives Washington, DC 20515

Dear Ms. Buerkle:


Application Process







REL 00805



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Sam Johnson U.S. House of Representatives Washington, DC 20515

Dear Mr. Johnson:


Application Process







REL 00806


WASHINGTON. D.C. 20224

DEPUTY COMMISSIONER

June 15, 2012

The Honorable Scott Tipton U. S. House of Representatives Washington, DC 20515

Dear Mr. Tipton:


Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("Eon) Determinations office in Cincinnati, Ohio for initial technical screening.




• Applications that do not contain the information needed to be considered SUbstantially complete; and

REL 00807


WASHINGTON, D.C. 2.022.4

DEPUTY COMMISSIONER

June 15, 2012

The Honorable Randy Forbes U.S. House o'f Representatives Washington, DC 20515

Dear Mr. Forbes:


Application Process







REL 00808



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Marsha Blackburn U.S. House of Representatives Washington, DC 20515

Dear Ms. Blackburn:


Application Process

The law allows section. 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4) , the organization must file Form 990 annual information returns.






REL 00809



DEPUTY COMMISSIONER

June 15,2012

The Honorable Cliff Stearns U.S. House of Representatives Washington, DC 20515

Dear Mr. Stearns:


Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501(c)(4), the organization must file Form 990 annual information returns.






REL 00810

DEPARTMENT OFTHE TREASURY INTERNAL REVENUE SERVICE


DEPUTY COMMISSIONER

June 15, 2012

The Honorable Paul Gosar U.S. House of Representatives Washington, DC 20515

Dear Mr. Gosar:


Application Process







REL 00811



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Paul Gosar U.S. House of Representatives Washington, DC 20515

Dear Mr. Gosar:


Application Process







REL 00812


WASHINGTON, D.C. 202.24

DEPUTY COMMISSIONER

June 15, 2012

The Honorable Bobby Schilling U.S. House of Representatives Washington, DC 20515

Dear Mr. Schilling:


Application Process







REL 00813



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Rob Woodall U.S. House of Representatives Washington, DC 20515

Dear Mr. Woodall:


Application Process





• Applications that need orily minor additional required information in the file in order to approve the application;


REL 00814



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Aaron Schock U.S. House of Representatives Washington, DC 20515

Dear Mr. Schock:


Application Process







REL 00815



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Sandy Adams U.S. House of Representatives Washington, DC 20515

Dear Ms. Adams:


Application Process







REL 00816



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Jeff Miller U. S. House of Representatives Washington, DC 20515

Dear Mr. Miller:


Application Process







REL 00817

DEPARTMENT OF THE TREASURY NTERNAL REVENUE SERVICE


DEPUTY COMMISSIONER

June 15,2012

The Honorable Connie Mack U.S. House of Representatives Washington, DC 20515

Dear Mr. Mack:


Application Process







REL 00818

----------- - -- ----------------

~ DEPARTMENT OF THE TREASUR INTERNAL REVENUE SERVICE

~ WASHINGTON D.C. 202.24

DEPUTY COMMISSIONER June 15,2012

The Honorable Michele Bachmann U.S. House of Representatives Washington, DC 20515

Dear Ms. Bachmann:


Application Process







REL 00819


WASHINGTON, DC 20224

D -PUTY COMMISSIONER June 15, 2012

The Honorable Richard Nugent U.S. House of Representatives Washington, DC 20515

Dear Mr. Nugent:


Application Process







REL 00820



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Scott Desjarlais U.S. House of Representatives Washington, DC 20515

Dear Mr. Desjarlais:


Application Process







REL 00821



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Bob Goodlatte U.S. House of Representatives Washington, DC 20515

Dear Mr. Goodlatte:


Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4) , the organization must file Form 990 annual information' returns.






REL 00822



DEPUTY COMMISSIONER

June 15, 2012

The Honorable K. Michael Conaway U.S. House of Representatives Washington, DC 20515

Dear Mr. Conaway:

I am responding to the letter from you and your colleagues to Commissioner Shulman dated April 23, 2012, requesting information about the tax-exempt sector. In palticular, your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process







REL 00823



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Jack Kingston U.S. House of Representatives Washington, DC 20515

Dear Mr. Kingston:


Application Process







REL 00824


WASHINGTON, D,C. 20224


The Honorable Tom McClintock U.S. House of Representatives Washington, DC 20515

Dear Mr. McClintock:


Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations (liED") Determinations office in Cincinnati, Ohio for initial technical screening.





REL 00825



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Jim Renacci U.S. House of Representatives Washington, DC 20515

Dear Mr. Renacci:


Application Process






• .Applications that do not contain the information needed to be considered substantially complete; and

REL 00826



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Tim Huelskamp U.S. House of Representatives Washington, DC 20515

Dear Mr. Huelskamp:


.your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process







REL 00827



DEPUTY COMMISSIONER

June 15,2012

The Honorable Jeff Duncan U.S. House of Representatives Washington, DC 20515

Dear Mr. Duncan:


Application Process

The law allows section 501(c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4) , the organization must file Form 990 annual information returns.






REL 00828



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Donald Manzullo U.S. House of Representatives Washington, DC 20515

Dear Mr. Manzullo:


Application Process







REL 00829



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Doug Lamborn U.S. House of Representatives Washington, DC 20515

Dear Mr. Lamborn:


Application Process

The law allows section 501(c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4) , the organization must file Form 990 annual information returns.



• Applications that can be approved immediately based on the completeness of the application and the information submitted; .



REL 00830



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Joe Barton U.S. House of Representatives Washington, DC 20515

Dear Mr. Barton:

I am responding to the letter 'from you and your colleagues to Commissioner Shulman dated April 23, 2012, requesting information about the tax-exempt sector. In particular, your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process







REL 00831

DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERViCE


DEPUTY COMMISSIONER

June 15, 2012

The Honorable Louie Gohmert U.S. House of Representatives Washington, DC 20515

Dear Mr. Gohmert:


Application Process



This technical screening is conducted by experienced revenue agents who review the . applications and, based on that review, separate the applications into the following four categories:




REL 00832



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Joe Walsh U.S. House of Representatives Washington, DC 20515

Dear Mr. Walsh:


. your letter raises concerns regarding the requests by the IRS for additional information from applicants for tax exemption. To assist in responding to your concerns, we are also providing background information about our long-standing system for processing applications for tax-exempt status.

Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4), the organization mustfile Form 990 annual information returns.

All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations ("Eon) Determinations office in Cincinnati, Ohio for initial technical screening.





REL 00833


WASHINGTON, D,C, 20224

DEPUTY COMMISSIONER

June 15, 2012

The Honorable Andy Harris U.S. House of Representatives Washington, DC 20515

Dear Mr. Harris:


Application Process







REL 00834



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Bill Posey U.S. House of Representatives Washington, DC 20515

Dear Mr. Posey:


Application Process







REL 00835



DEPUTY COMMISSIONER

June 15,2012

The Honorable Tim Walberg U.S. House of Representatives Washington, DC 20515

Dear Mr. Walberg:


Application Process







REL 00836



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Walter Jones U.S. House of Representatives Washington, DC 20515

Dear Mr. Jones:


Application Process







REL 00837



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Roscoe Bartlett U. S. House of Representatives Washington, DC 20515

Dear Mr. Bartlett:


Application Process







REL 00838


WASHINGTON, D.C. ZOZZ4

DEPUTY COMMISSIONER

June 15, 2012

The Honorable Bill Johnson U.S. House of Representatives Washington, DC 20515

Dear Mr. Johnson:


Application Process


All applications for tax-exempt status, including applications for status under section 501 (c)(4), are filed with a centralized IRS Submission Processing Center. The application is then sent to the Exempt Organizations (liED") Determinations office in Cincinnati, Ohio for initial technical screening.





REL 00839



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Charles Boustany U.S. House of Representatives Washington, DC 20515

Dear Mr. Boustany:


Application Process

The law allows section 501 (c)(4) organizations to hold themselves out as tax-exempt. Organizations also can apply for IRS recognition as tax-exempt. Whether an organization is self-declared under section 501 (c)(4) or has been determined by the IRS to meet the requirements of section 501 (c)(4), the organization mustfile Form 990 annual information returns.






REL 00840



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Steve Scalise U.S. House of Representatives Washington, DC 20515

Dear Mr. Scalise:


Application Process







REL 00841



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Phil Roe U.S. House of Representatives Washington, DC 20515

Dear Mr. Roe:


Application Process







REL 00842



DEPUTY COMMI SIONER

June 15, 2012

The Honorable Justin Amash U.S. House of Representatives Washington, DC 20515

Dear Mr. Amash:


Application Process







REL 00843



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Thaddeus McCotter U.S. House of Representatives Washington, DC 20515

Dear Mr. McCotter:


Application Process







REL 00844



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Kenny Marchant U.S. House of Representatives Washington, DC 20515

Dear Mr. Marchant:


Application Process







REL 00845



DEPUTY COMMISSIONER

June 15, 2012

The Honorable Robert Latta U.S. House of Representatives Washington, DC 20515

Dear Mr. Latta:


Application Process







REL 00846

(I DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE


DEPUTY COMMISSIONER

June 15, 2012

The Honorable Tim Gowdy U.S. House of Representatives Washington, DC 20515

Dear Mr. Gowdy:


Application Process







REL 00847

2

• Applications that require further development by an agent in order to determine whether the application meets the requirements for tax-exempt status.

Organizations whose applications fall into the fourth category are sent letters informing them that more development of their application is needed, and that they will be contacted once their application has been assigned to a revenue agent. The applications are sent to unassigned inventory, where they are held until a revenue agent with the appropriate level of experience for the issues involved in the matter is available to further develop the case.

Once the case is assigned, the revenue agent notifies the organization and reviews the application. Based upon established precedent and the facts and circumstances set forth in the application, the revenue agent requests additional information and documentation to complete the file pertaining to the exempt status application materials1 (the so-called "administrative record") and makes a determination. Where an application for exemption presents issues that require further development to complete the application record, the revenue agent engages in a back and forth dialogue with the organization in order to obtain the needed information.

The general procedures for requesting additional information to develop an application are included in section 7.20.2 of the Internal Revenue Manual. Although there is a template letter that describes the general information on the case development process, the letter does not, and could not, specify the information to be requested from any particular organization because of the broad range of possible facts. The amount and nature of development necessary to process an application to ensure that the legal requirements of tax-exemption are satisfied depends on several factors, which include the comprehensiveness of the information provided in the application and the issues raised by the application. Consequently, revenue agents prepare individualized questions and requests for documents relevant to the application, which are attached to the above described general template letter.

This back and forth dialogue helps applicants better understand the requirements for exemption and what is needed to meet them, and allows the IRS to obtain all the information relevant to the determination. If an organization believes that the legal requirements can be satisfied without the requested documentation or the organization needs additional time to respond, the organization can discuss an alternative approach or timing with their agent. The IRS will consider whether compliance with the legal requirements can be satisfied in the alternative manner proposed and whether an extension of time is warranted. Once responses are received, the entire application file is evaluated based upon the requirements in the Code and regulations.

Tools are available to promote consistent handling of full development cases. For example, in situations where there are a number of cases involving similar issues (such as credit counseling organizations, down payment assistance organizations, organizations that

1 The application for recognition of tax exempt status, any papers submitted in support of the application, and any letter or other document issued by the IRS with respect to the application. See IRe § 6104(a), (d)(5).

REL 00848

3

were automatically revoked and are seeking retroactive reinstatement, and most recently, advocacy organizations), the IRS will assign cases to designated employees to promote consistency. Additionally, in these cases, EO Technical (an office of higher graded specialists in Exempt Organizations), in consultation with the IRS Office of Chief Counsel, may develop educational materials to assist the revenue agents in issue spotting and crafting questions to develop cases consistently.

It is important to develop a complete administrative record for the application. Because the administrative record must either support exemption or denial, it is important for the record to be complete. If the application is approved, not only is the administrative record made publicly available (with certain limited exceptions outlined below), but organizations that act as described in the administrative record have reliance on the IRS determination. If the application is denied, the organization may seek review from the IRS Office of Appeals. The Appeals Office, which is independent of Exempt Organizations, reviews the complete administrative record and makes its own independent determination of whether the organization meets the requirements for tax-exempt status. It is to the organization's benefit to have all of its materials in the file in the event EO Determinations denies exemption and the organization seeks Appeals review. If, based on the information in the administrative record, the Appeals Office decides the organization meets the requirements for tax-exempt status, the application will be approved. If the Appeals Office agrees that the application should be denied, the organization may challenge its non-exempt status by paying any tax owed as a taxable entity, and seeking a refund in federal court.

In those cases where the application raises issues for which there is no established published precedent or for which non-uniformity may exist, EO Determinations may refer the application to EO Technical. In EO Technical, the applications are reviewed by tax law specialists whose job is to interpret and provide guidance on the law and who work closely with IRS Chief Counsel attorneys on the issues.

Similar to the process in EO Determinations, EO Technical tax law specialists develop cases based on the facts and circumstances of the issues in the specific application. EO Technical staff engages in a back and forth dialogue with the organization in order to obtain the information needed to complete the administrative record. If, upon review of all of the information submitted, it appears that an organization does not meet the requirements for tax-exempt status, a proposed denial explaining the reasons the organization does not meet the requirements is issued. The organization is then entitled to a "conference of right" where it may provide additional information. Following the conference of right, a final determination is issued. If the application is approved, the administrative record is made publicly available, and if the organization acts as described in the application record, it has reliance on the IRS determination. If the application is denied, the applicant may challenge its non-exempt status by paying any tax owed as a taxable entity, and seeking a refund in federal court.

Processing Section 501 (c)(4) Applications

To qualify for exemption as a social welfare organization described in section 501 (c)(4), the organization must be primarily engaged in the promotion of social welfare, not organized or

REL 00849

4

operated for profit, and the net earnings of which do not inure to the benefit of any private shareholder or individual. 2 The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.3 A section 501 (c)(4) social welfare organization can engage in political activities as long as it is primarily engaged in activities that promote social welfare.4

In working a determination application case, the revenue agent must determine whether activities undertaken by the organization primarily further an exempt purpose. If the organization is engaged in some activities that do not promote social welfare, then the agent must review the scope of the activities to determine whether, based on all the facts and circumstances, the organization's exempt activities are the primary activities. If the application is unclear or not su'fficiently detailed as to whether the primary activity conducted by the organization is exempt social welfare activity, the revenue agent will need to follow-up on this issue in a development letter.

The activity that has recently attracted attention relates to processing of determination letter requests of organizations who sought recognition of tax-exempt status by the IRS. As previously discussed, the law does not require section 501 (c)(4) organizations to apply to the IRS for recognition of tax-exempt status, but organizations may do so. Organizations seeking tax-exempt status under section 501 (c)(3) are legally required to apply with the IRS.

As mentioned above, when EO notices an increase in similar cases or activities, steps are taken to coordinate processing of cases to promote consistent treatment of taxpayers. In late 2010, EO noticed an increase in determination application requests from organizations seeking tax exemption under section 501 (c)(3) and section 501 (c)(4) that appeared to be potentially engaged in political advocacy activities. Section 501 (c)(3) organizations are legally prohibited from participating or intervening in a political campaign on behalf of or in opposition to any candidate for public office. Although such activity does not promote social welfare, section 501 (c)(4) organizations are not prohibited from engaging in political campaign activity as long as the organization's primary activities promote social welfare. In working section 501 (c)(4) determination application requests, the IRS must determine what are the primary activities of the organization and whether those activities promote social welfare.

Upon observing an increase in the number of section 501 (c)(3) and section 501 (c)(4) determination applications from organizations that appeared to be potentially engaged in political advocacy activities, EO took steps to coordinate the handling of the cases to ensure consistency. EO determination agents also began working with EO technical tax law experts to develop approaches and materials that could be helpful to the agents working the cases. As sometimes happens, however, coordination efforts resulted in some cases being in inventory for a longer time than expected.

2 1RC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1. 3 Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii). 4 Rev. Rul. 81-95,1981-1 C.B. 332.

REL 00850

5

In early 2012, after development letters were sent to some applicant organizations, issues with respect to these cases were brought to the attention of EO management, who requested a status of the inventory and ensured more timely and consistent handling of the cases. We have made significant progress on these cases to date. Within the last month, a number of approvals have been granted. In many cases, updated information requests have been sent to focus on the specific legal issues in question. Per normal procedures for full development cases, EO staff is in the process of an active back and forth with organizations where there are questions as to whether the legal requirements for tax exemption have been satisfied. We are committed to working these cases in an expeditious manner. However, given the difficult fact intensive work that the law requires for complex cases, additional time may be needed in some instances to make a determination.

I hope this information is helpful. I am sending a similar response to your colleagues. If you have questions, please contact me or have your staff contact Catherine Barre at (202) 622-3720.

Sincerely,

~/~ Steven T. Miller

REL 00851

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REL 00853

of 1

Ortez Cumbuka I

Sent:

From:

Monday, June 18, 2012 11: 11 AM

Williams Catherine M RECEIVED To: Ortez Cumbuka I; Rodriguez Christinne JUN 18 2012 Cc:

Subject:

Grodnitzky Steven; Norton William G Jr; Barre Catherine M

FW: Letter CONG.CORR.BR CL:LA

Attachments: SecureZIP Attachments.zip

Hi Cumbuka and Christinne,

Can one of you enter this correspondence signed by various members as soon as possible? It also came in by way of fax. I will bring you that document if you need it for your file but this is cleaner. Bill is aware that it's here and he will forward a copy to Nikole Flax.

Thank you

Catherine M. Williams Legislative Affairs Division 202 622-4728 phone 202622-4733 fax

From: Baker, Jesse (Finance) [mailto:[email protected]] Sent: IVionday, June 18, 2012 11:01 AM To: Williams Catherine M Subject: Letter

Cathy

Per our conversation, please see the attached documents.

Thank you for your assistance,

Jesse

6/18/2012 REL 00854

ni cd tc

June 18,2012

RECEIVEDHon. D ublas IT. hulm 11 Commis 'joner JUN 18 ;:u;~ internal R venue "'ervlce

1L1 Constitution Av nue. CONG.CORR . BR Washington, D 20230 CL:LA

Dear ('ommi sioner hull11an:

n March J4.2012. e rote to you with a number rque lion r gar ling t11 pro' mes th internGl Re nue S rvicc C"rR' u e. 'vvhen evaluati116 rganiZtlli 11<; that al ply for tax-exem t status W;;: appre iate the th _roughnc four respon e to Oll!' inquiries.

I-It \'V 'er. remain c. nccrned that the II is reque tina th nam\,;. rd .. 1 rand contribLlIN t rganizations tha ap\ly for tax "x rnpt talUS. In cl ing ,the lapp m tt e circumventing the. tatutory pri ae i protecti IlS thal C1ngl'ess has long I rovided d nor:

Prior Congress' have pa's d Lgi lation with bipartisan suppon to ensure the privacy ot donors who give to charitable organizations. Whil.e the annuCllta:. return or cenain charitable

oroanizations have long be n requLred t be made available for public revie . the C) I I COlllIres.

denied the Se r tar at" the reasury the duthority to disclose the names and addrsse:' of

financial contributors from these r turns. I In addition. the 100th C ngrcss created a specifi.

statutory xception for disci sure or names and addresses r finCln ial contributors, \ hen they expanded public insp li 11 ofc-rtain al1nual r turns. reports. and applicati ns tor exemptIOn If c rtain tax e,'empt orgallizations.2 fn lIsing nearly idenlicallegisl;;Ili el, nguugc to creat these

exceptions ii'om dis losurr:. both ongresses made strong legislative pr I Olillcem nt~ that their

goal wa to protect th pri '(ley o[ Jonor informati lI1. In addili n. th 'arne c mmitm nt 0

priv8c is evid nt in the rquir ment that taxpayers e gi en the opportunity to obtain rccla !lon

of identifying information before r lated IRS privat letter ruling,). technical advice rn 'nlonnda.

and Chief C unsel Aclvict: memoranda ar madc public. J Through the e various "xpres IOns.

ongress has made privacy the rule, and n t the exception.

It is important to note the value that is placed on protecting tl e priva . I or indi .i luals an I organizations that choose l donat funds to charitable oru-anizations. ' he privac. int rests of donors is wieldy recogniz and valued. Various public policy initj( tive hav rightl ' encNlraged d nations to social w lfare organizations, and th se efforts ar threatened hen

private information about donors is not adequately J rotected. A list of d nor who have gi Yen

I See HR, [3_70, h Tax Refol'!11 Act of 1969, which became Public Law 1Ilnb<:r 91-17_ C ee !-l.R. 354", Omnibus Budg'l Reconciliation Actor 1987, whicll became Public Law umbel lOO~203 3 1( USC~61l0

REL 00855

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REL 00857

REL 00858



DEPUTY COMMISSIONER

September 11, 2012

The Honorable Orrin G. Hatch United States Senate Washington. D.C. 20510

Dear Senator Hatch:

This letter responds to your June 18. 2012, letter to Commissioner Shulman, requesting additional information about the disclosure requirements of applications for tax-exempt status, and the release of donor information. As you are may be aware, the rules relating to disclosure of taxpayer information are provided by statute in the Internal Revenue Code.

Question 1. What is the specific statutory authority giving the IRS authority to request actual donor names during reviews of applications for recognition of exemption under Section 501 (c)(4)?

The applicable regulations are authorized by Section 7805 of the Internal Revenue Code, which provides general authority to prescribe all needed regulations for the enforcement of tax rules. Section 1.501 (a)-1 (a)(3) of the regulations provides that organizations requesting recognition of tax-exempt status must file the form prescribed by the IRS and include the information required. In addition, section 1.501 (a)-1 (b)(2) provides that the IRS may require additional information deemed necessary for a proper determination of whether a particular organization is tax-exempt.

Question 2. Is it customary for IRS revenue agents to request donor and contributor identifying information during review of applications for tax-exempt status under Section 501(c)(4)? Please provide the number of requests by the IRS for such information for each year from 2002 to 2011 describe.

Not all section 501 (c)(4) organizations applying for exemption are requested to provide donor and qontributor identifying information. Each development letter sent to an applicant is based on the facts and circumstances of the specific application.

REL 00859

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2

To qualify for exemption as a social welfare organization described in section 501 (c)(4), the organization must be primarily engaged in the promotion of social welfare, not organized or operated for profit, and the net earnings of which do not inure to the benefit of any private shareholder or individual. 1

As discussed in more detail in my April 26, 2012 letter to you, in order for the IRS to make a proper determination of an organization's exempt status, the Form 1024 asks applicants to provide detailed information regarding all of its activities-- past, present, and planned, including the purpose of each activity and how it furthers the organization's exempt purpose, when the activity is initiated, and where and by whom the activity will be conducted. If the Form 1024 questions are answered with sufficient detail to make a determination, the applicant will not be asked further questions. If, however, the detail provided is insufficient to make a determination or issues are raised by the application, then the IRS contacts the organization and solicits information to evaluate whether the applicant meets the requirements for tax exemption in the Code and regulations. There may be cases in which donor information would be relevant to determining if the legal requirements for exemption are satisfied.

The IRS automated systems capture the number of applications approved during a given year that were sent development letters seeking additional information, but they do not track the specific questions asked in the requests. Consequently, in order to determine the specific questions asked in those development letters, manual review of each file would be required. IRS staff is available to work with your staff to identify the information that we are able to legally provide that would be relevant to your request.

Question 3. Is the Exempt Organizations technical office involved in all such information requests of exemption applications?

As noted in my April 26, 2012 letter, generally applications for tax-exemption that need further development are assigned to revenue agents in the Exempt Organizations (EO) Determinations office in Cincinnati, Ohio, rather than staff in the EO Technical office. Based on established precedent and the facts and circumstances of the case, an EO Determinations revenue agent will request the information and documentation he/she believes is needed to complete the administrative record and make a determination in the case. As needed, a revenue agent might seek advice from EO Technical staff regarding a particular matter or a case may be referred to EO Technical staff, but the EO Technical office is not involved in all information requests sent to applicants seeking tax-exemption Note that in situations where there are a number of cases involving similar issues, the IRS may assign cases to designated employees to promote quality and consistency. In such cases, agents, either with or without EO Technical, may work together in drafting information requests for similar cases.

•

1 IRe § 501 (c)(4); Treas. Reg. § 1.501(c)(4)-1.

-

REL 00860

3

Question 4. Section 7.21.5 of the Internal Revenue Manual states that Letter 1313 should be used as a first request for additional information for cases received on Form 1024, and that Letter 2382 should be used for second and subsequent requests for information. We have attached redacted copies of an IRS 1313 Letter and 2382 Letter which were reportedly sent to applicant organizations earlier this year. Each of those letters contains passages which specifically request names of donors.

a) Which IRS employees and officials were involved in the drafting of the questions requesting donor names?

By law, the IRS cannot comment with respect to letters sent to specific taxpayers. However, we can discuss our general process. Pursuant to Section 7.20.2.4 of the Internal Revenue Manual (IRM), revenue agents in the EO Determinations office assigned to a case are responsible for contacting the organization to obtain any additional information or amendments necessary to process the application. Pursuant to the IRM, questions asked to organizations seeking tax-exemption under section 501 (c)(4), would be drafted by the revenue agent working the case. As noted above, in situations where there are a number of cases involving similar issues, the IRS may assign cases to designated employees to promote consistency. In such cases, agents may work together in drafting questions for similar cases.

b) Which IRS officials provided authority and approval for the questions requesting donor names?

See response to a), above.

c) Did any IRS personnel definitively review and determine whether there would be any privacy impact by the requests for names of donors which could ultimately be made part of a publically available administrative record? Was the IRS Office of Privacy consulted, and did it playa role in any such determination?

The IRS takes privacy very seriously, and makes an effort to work with organizations to obtain the needed information so that the confidentiality of any potential sensitive or privileged information is taken into account. The IRS Office of Privacy was not consulted regarding the specific questions asked of applicant organizations. However, the IRS advised applicant organizations that if they believed that requested information required to demonstrate eligibility for section 501 (c)(4) status could be provided through alternative information, they could contact the revenue agent assigned to their application and the IRS would consider whether the legal requirements could be satisfied in an alternative manner.

REL 00861

------------------------- --- -----

4

Question 5. What is the total number of IRS 1313 and 2382 letters sent in 2011 and 2012 (to date) which specifically request names of donors?

The IRS automated systems capture the number of applications approved during a given year that were sent development letters seeking additional information, but they do not specifically track whether a 1313 or 2382 letter was sent or the specific questions asked in the letters. To determine the specific questions asked in each development letter sent, manual review of each file would be required. IRS staff is available to work with your staff to identify the information that we are able to legally provide that would be relevant to your request.

Question 6. Does the IRS intend to utilize IRS 1313 and 2382 letters in the future to specifically request names of donors?

Letters 1313 and 2382 are template letters used in all cases seeking additional information that provide general information on the case development process. Individualized questions and requests for documents based on the facts and circumstances set forth in the particular application are prepared by the revenue agent assigned to the case and are attached to the template letter.

There are instances where donor information may be needed for the IRS to make a proper determination of an organization's exempt status, such as when the application presents possible issues of inurement or private benefit. Accordingly there may be future situations where a revenue agent needs to clarify the sources of financial support to an organization by requesting the names of donors.

Nevertheless, the IRS takes privacy very seriously, and makes efforts to work with organizations to obtain the needed information so that the confidentiality of any potential sensitive or privileged information is taken into account. As previously mentioned, we advised applicant organizations that if they believed that requested information required to demonstrate eligibility for section 501 (c)(4) status could be provided through alternative information, they can contact the revenue agent assigned to their application and the IRS would consider whether the legal requirements could be satisfied in the alternative manner.

Question 7. Does the IRS view donor identifying information as being necessary information when reviewing applications for tax-exempt status under Section 501 (c)(4)? If so, how was this finding made and what written standards are utilized by the IRS in evaluating this information? Have any IRS personnel ever recommended that IRS Form 1024 be amended to specifically require that this information be furnished?

The IRS does not believe it is necessary to review donor identifying information in all determination cases involving applications for tax-exempt status under section 501 (c)(4). I am not aware of any recommendation from IRS personnel that the Form 1024 be revised to require such information be furnished in all cases.

REL 00862

5

Question 8. Section 7.20.2.7 of the Internal Revenue Manual (relating to evaluation of organizations applying for tax-exempt status) states that requests for additional information in processing a determination should be thorough and relevant. Would a request (to an organization applying for tax-exempt status under Section 501 (c)(4» for a list of donor names, some who may have given as little as $1, meet the relevancy standard?

The level of development necessary to process an application to ensure the legal requirements of tax-exemption are satisfied varies depending on the facts and circumstances of each application. Revenue agents use sound reasoning based on tax law training and their experience to review applications and identify the additional information needed to make a proper determination of an organization's exempt status. As noted above in question 6, under certain facts and circumstances, such as when the application presents possible issues of inurement or private benefit, donor information may be needed for the IRS to make a proper determination of an organization's exempt status. An applicant who is concerned with burden or relevancy in the process can work with the agent assigned to the case and the agent's manager.

I hope this information is helpful. I am also writing to your colleagues. If you have questions, please contact me or have your staff contact Cathy Barre, Director, Legislative Affairs, at (202) 622-3720.

Sincerel_,

evenT.2~ Deputy Commissioner for

Services and Enforcement

REL 00863



DEPUTY COMMISSIONER

September 11, 2012

The Honorable Bob Corker United States Senate Washington, D.C. 20510

Dear Senator Corker:

This letter responds to your June 18,2012, letter to Commissioner Shulman, requesting additional information about the disclosure requirements of applications for tax-exempt status, and the release of donor information. As you are may be aware, the rules relating to disclosure of taxpayer information are provided by statute in the Internal Revenue Code.


The applicable regulations are authorized by Section 7805 of the Internal Revenue Code, which provides general authority to prescribe all needed regUlations for the enforcement of tax rules. Section 1.501 (a)-1 (a)(3) of the regulations provides that organizations requesting recognition of tax-exempt status rnust file the form prescribed by the IRS and include the information required. In addition, section 1.501 (a)-1 (b)(2) provides that the IRS may require additional information deemed necessary for a proper determination of whether a particular organization is tax-exempt.


Not all section 501 (c)(4) organizations applying for exemption are requested to provide donor and contributor identifying information. Each development letter sent to an applicant is based on the facts and circumstances of the specific application.

REL 00864

I'~~::::),~ DEPARTMENT OF THE TREASURY - 4l.A..4l ..:< U INTERNAL REVENUE SERVICE1~ !: \~ ! WASHINGTON, D.C. 20224 ~( ~eVE>l\li-·/

DEPUTY COMMISSIONER

September 11, 2012

The Honorable John Cornyn United States Senate Washington, D.C. 20510

Dear Senator Cornyn:

This letter responds to your June 18, 2012, letter to Commissioner Shulman, requesting additional information about the disclosure requirements of applications for tax-exempt status, and the release of donor information. As you are may be aware, the rules relating to disclosure of taxpayer information are provided by statute in the Internal Revenue Code.

Question 1. What is the specific statutory authority giving the IRS authority to request actual donor names during reviews of applications for recognition of exemption under Section 501(c)(4)?


Question 2. Is it customary for IRS revenue agents to request donor and contributor identifying information during review of applications for tax-exempt status under Section 501 (c)(4)? Please provide the number of requests by the IRS for such information for each year from 2002 to 2011 describe.


REL 00865



DEPUTY COMMISSIONER

September 11, 2012

The Honorable John Thune United States Senate Washington, D.C. 20510

Dear Senator Thune:






REL 00866



DEPUTY COMMISSIONER

September 11,2012

The Honorable Jon Kyl United States Senate Washington, D.C. 20510

Dear Senator Kyl:






REL 00867



DEPUTY COMMISSIONER

September 11, 2012

The Honorable Kay Bailey Hutchison United States Senate Washington, D.C. 20510

Dear Senator Hutchison:



The applicable regulations are authorized by Section 7805 of the Internal Revenue Code, which provides general authority to prescribe all needed regulations for the enforcement oftax rules. Section 1.501 (a)-1 (a)(3) of the regulations provides that organizations requesting recognition of tax-exempt status must file the form prescribed by the IRS and include the information required. In addition, section 1.501 (a)-1 (b)(2) provides that the IRS may require additional information deemed necessary for a proper determination of whether a particular organization is tax-exempt.



REL 00868



DEPUTY COMMISSIONER

September 11, 2012

The Honorable Michael Enzi United States Senate Washington, D.C. 20510

Dear Senator Enzi:






REL 00869



DEPUTY COMMISSIONER

September 11, 2012

The Honorable Lamar Alexander United States Senate Washington, D.C. 20510

Dear Senator Alexander:



The applicable regulations are authorized by Section 7805 of the Internal Revenue Code, which provides general authority to prescribe all needed regulations for the enforcement of tax rules. Section 1.501 (a)-1 (a)(3) ofthe regulations provides that organizations requesting recognition of tax-exempt status must file the form prescribed by the IRS and include the information required. In addition, section 1.501 (a)-1 (b)(2) provides that the IRS may require additional information deemed necessary for a proper determination of whether a particular organization is tax-exempt.



REL 00870

/l§A~:::J'; DEPARTMENT OF THE TREASURY ~ 4>A4> " z u INTERNAL REVENUE SERVICE ~ r:\n-ol WASHINGTON, D.C. 20224

'.:.~ "evE,,\li>7

EPUTY COMMISSIONER

September 11, 2012

The Honorable Mitch McConnell United States Senate Washington, D.C. 20510

Dear Senator McConnell:



The applicable regulations are authorized by Section 7805 of the Internal Revenue Code, which provides general authority to prescribe all needed regulations for the enforcement of tax rules. Section 1.501(a)-1 (a)(3) of the regulations provides that organizations requesting recognition of tax-exempt status must file the form prescribed by the IRS and include the information required. In addition, section 1.501(a)-1(b)(2) provides that the IRS may require additional information deemed necessary for a proper determination of whether a particular organization is tax-exempt.



REL 00871



DEPUTY COMMISSIONER

September 11, 2012

The Honorable Pat Roberts United States Senate Washington, D.C. 20510

Dear Senator Roberts:



The applicable regulations are authorized by Section 7805 of the Internal Revenue Code, which provides general authority to prescribe all needed regulations for the enforcement of tax rules. Section 1.501 (a)-1 (a)(3) of the regulations provides that organizations requesting recognition of tax-exempt status must file the form prescribed by the IRS and include the information required. In addition, section 1.501(a)-1(b)(2) provides that the IRS may require additional information deemed necessary for a proper determination of whether a particular organization is tax-exempt.



REL 00872



DEPUTY COMMISSIONER September 11, 2012

The Honorable Rand Paul United States Senate Washington, D.C. 20510

Dear Senator Paul:






REL 00873

INTERNAL REVENUE SERVICE DATA BOOK, 2010

Table 25. Tax-Exempt Organizations and Nonexempt Charitable Trusts, Fiscal Years 2007-2010�

TWe' 01 organizailon,� Infernal Revenue Code o;,pctlon�

Tax-exempt organizations and nonexempt charitable trusts, tolal

Section 501 lc) by subsection. total

(1) CorporatlDns orq~nlzed undl'r act of Cong"""

(2) ·lltlf'·llDldlll(] corporMlons

(3) Rcliglou". chmit~ble, .1nd "Imolm organll,ltlon, [1\ (4) Socialwc!fmc ()rgalllll'Hiorl~

(5) t<1bor and agriculture organll;Hlon~

(6) [Ju"me",; 'e"gue,;

(7) Social and recreation c:Iul1s

(8) Fraternal beneficIary societies

(9) Voluntary employees' beneficiary associations

(10) Domestic fraternal beneficiary socielies

(12) Benevolent Ilrf~ Insurance n~sociatlons

113) Cemetery companies�

(14) Staw-chartered credit unions

(15) Mutual insurance compames

(17) Supplemental unemployment benef~ Irusls

(19) War veterans' rJTganilations

(25) Holding companies lor pension, and other entities

Olher 501 ,ubscctions 12J Sectlon~01 (d) Reli!Jious and.a"ostolic associations

Section 501 (e)Coo"erative~osllitaISentlcll()rganizations . . . . . Section 501 (f) Cooperative service organizations 01 operating educational organizations

liection 501 (k) Child ,:"re.()r.ganizations

Section SOl (n)Charitablll risk pools

Nonexempt charitable trusts

2007 2008 2009 2010�

(1) (2) (3) (4)

1,789.554 1,855.067 1.912,&95 1.960,203

1.&48.30& 1,710.567 1,772,229 1,821,824

134 142 152 168�

7.136 7.131 7.170 7.239

1.178.367 1.186.915 1.238.201 1280.739

134.843 135.494 137.276 139.129

60.634 60.291 62.462 63.012

88,071 69.409 90.908 92.331

71.092 73.173 76.243 79.718

64.216 63,194 63.097 63.391

12.128 11.996 11.867 11,749

20.390� 20.964 21.279 18.310

6,793 6.836 6,878 6,996

11.098 11,401 11.720 12.266

3.860 3.532 3,443 3,570

2.073� 2,005 1.915 1,812�

434 434 424 423�

35.702 36,306 37.878 39.709�

1,234 1.239 1.171 1,125�

101 105 135 137�

1&2 164 205 218�

37 J& J5 34�

1 1 1 1�

15 14 14 14�

1 1 1 1�

141,032 144,284 140,210 138,111�

(1)� Includes private foundal'olls. Nol allillterilal Revenue Code s"clion 501 (e) (3) organi7alions nrC reqUired to apply for rcc09mtion of lax exemption. includillg� churc hes, integraled aUXiliaries. subordinate Units. and GOllvent,oflS or associ~liofl, of churches.�

(2)� Includes teachers' retirement funds (section 501 (c)(11»; corporalions to finance crop operations (seellon 501 (<;)(16»; employee-funded pension Iruals (seclion 501 (c) (18»; black lung IruSls (scclion 501 (cl (21»; multicmployer pcflsion plans (SPCtIOIl 501 (c) (22); veterans' associations foufldcd p"or to 1880 (scction 501 (c) (23»;

. Iru5ts described ill section 4049 of the Employee Retircmel11 Income Security Ad 01197.1 (ERISA) (scctlon 501 (c) (24»; State-sponsored higll-risk health insuraflce organizations (scclioll 501 (c) (26)); State-sponsored workers' compenSation reinsurance orqaniZ3t10llS (section 501 (c) (27»; and the Naliunal Railroad RelilCment Investment frust (sec lion 501 (c) (28». Ta<-exernpt status lor I('gal service" organizations (,ection 501 (c) (20n w~" r('voked effectIVe June 20. 1992.

SOURCE: Ta< Exempt and Government Elltlties.

56

REL 00874

TE/GE Budget

2008· 2011 •. ~

~ .'<...... ~_ '...-.--'o--,......~.:.. .•~~~' ..~.. ... " . - ....o!. -'" .... :-- \. ......-.. ,.' \. ";:<-,, .. ~ ......- . - ~1 ..... _

Funds Center .Functional.&tea . .N ~:635+--r:y-~~~53f _F.Y_ 2~~~OOO FY 2011

T001 DIVISION HEADQUARTER· Taxpayer Comm & EducatiOn - _. __.• -_.

1C $12,400- 2A Filing &Acct Svcs Mgmt $1,117,899'. .

- - 28 SubmissiOn Processing '. $11,567,003 $12,250,0001 $6,137,500 $5,229,8101 2C Acd Mgmt &.Asslst.,.EVCOr $116,913 4M I Shared Sup. Non-....M .."'.1' ide $69,542 $70,5561 $90,539 $84,808

-.. 4R Research $1,131,888 $1,086,216 $1,294,522 $1,182,742

7A Comoflal1Ce Serviees Mgmt $14,338,076 $20,121,798 $18,898,484 $16,343,839 7G .' · Tax Report Compliance-Ad $708,920 $974,739: $677,632 $300,063 8C Tax Law Interpretation an i $1,082! $2,355

. 8E RUlings & A~ments $1,258,101 $1,179,6261 $1,047,469 $598,657 9R' . Business Systems DeVelop $574,6081 I,

------- - -{-- ----_.. -----------_._ 9S !=nte~s~J:~pe~i~.!!s. $174,050 , i

f----.

Result $31,066,635 $35,705,970 $28,150,137 $23,754,674 . T1trr -OrR 8W' 1Yt:t:PLANS 1C.

• '-.; "j. . Comifl' &"Education' $3,281,408 $3,598,697: $3,810,094 $3,453,642 ! 7A· COmpliance Ser'llcesMgmt $2,166,707 $1,772.903: $1,679,574 $1,670,440

7G Tax Report Camptiance-Fld' $63,924,296, $66,571,90°1 $67,506,551 $65,991,790 7Q International Exams,_ $~~ $01 $806,586 $6,603 8C Tax Law I tatioi'lan $2,845,862'. .' $1,894.786 $2,199,478 $2,684,053 BE .RUlings &Agreemet1ts $29,237,027 $30,830,570 $32,594,601 $33,979,130

_____________._.______.____-L9R B_':Jsin~!,~~ms ~op $10,000 i-_.. Result $100,514,224 $104,973,548 $109,081,460 $107,947,467

"T201 DlR ORGANIZAT' 1C ' - '''U1rilm &l:d ~ CO .~ •

$1,487,421 $1,910,757 $1,769,802 $2,106,922 7A · Compliance SEnIces Mamt $1,881,163 $1,723,909 $1,780,913 $2,140,161 7G Tax Report COmpiiance-Fld, . $51,395,370 $54.755,6861 $60,340,062 $61,454,343 7Q .' Internatiolial Exams $641,048 $120,854 8C . Tax Law In\~~retatlonatt , $1,990,805 $2,299,671 1 $2,676,915 $3,040,695 8E RUlinqs_& A~nts $31,726,064 $33,586,875 $34,037.785 $33,300,069 Result $88,480,823 $94,276,898 $101,246,525 $102,163,044

1301 "OIRG I t:Nln ~1C .:, I . 'COmm .... - $2,107,539 $2,316,812 $3,802,701 $3,709,357- .

: " ·7A , .. -. Compliance setviC:es.Mgmt $1,305,017 $1.728,907 $2,928,083 $1,991,163 7G ·Tax Rej:)Ort Comptiance-Ad 26,949,183 35,512,442 $32.554,904 36,965,197

...._---+ -- -_._----_._-------_.. - .... 7Q' '. , International Exams $174,763 $11,513 ---_._~._-_.-. ---

$30,361,739 1 $39,558,1~_L__~~~60,452 $42,677,230 I I Result

REL 00875

EO's September 30th On-Roll Employees

Note: These totals are revised since last year's work plan.

REL 00876

6

Table 13. Returns of Tax-Exempt Organizations, Employee Plans, Government Entities, and Tax-Exempt Bonds Examined, by Type of Return, Fiscal Year 2010

Type of return Number of retums

Tax-exempt organization. employee plan. government entity. al1d taJ(-exe'!'lJtbond retllmsex!mlned In Fiscal Year 2010, total

Tax-exempt organizations: Tax-exempt organization returns processed In Calendar Year 2009 [i) 776.300 Tax-exempt organizations and related taxable returns examined in Fiscal Year 2010, total 11,449

Tax-exempt organization returns. total 3,925 Forms 990 and 99O-EZ 3,596

Forms 990--PF, 1041-A, 1120, and 522712J 323

Form 1120--POl

Related taxable returns, total 7,524 Employment tax returns 13) 5,276

Form 990--T (4) 971

Form 4720 [5) 334

Forms 1040, 1065, and 1120 adjusted [61 285

Forms 11-e and730 (7J 658 Employee plans:

Employee plan returns processed In Calendar Year 2009 [8) 820.407 Employee plan and related taxable returns examined In Fiscal Year 2010, total (9) 11,159

Employee plan returns, total 8,748 Form 5500 7.607

Defined benefit 800 Defined contribution 6,807

Form 550o-EZ 1.135 Defined benefit 387 Defined contribution 748

Form 5500-SF 6 Defined benefit d Defined contribution d

Related taxable returns, total 1,528 Form 5330 [10] 1,233

Form 990--T [4J 11

FC)..nn.s .1 Q~9L~ ~~~. al1.d..!.~.?Q.aIi!':I;;~~.l~t . .._ . . 284 , _",~,.'_·~,.,,_._··~W"

Government entity and tax-exempt bonds:

GoYernment entity and tax-exempt bond returns examined In Fiscal Year 2010. total 4,202 Tax-exempt bond returns, total [11] 1,560 GoYernment entity returns, total [12] 2.642

Employment tax returns [3) 2,469 Forms 1040, 1065, and 1120 adjusted [6) 80 Forms 11-e and 730 (7) 93

d-Not shown to avoid disclosure of information about specific taxpayers. However, the data are included in the appropriate totals.

[1J Includes Forms 990 (tax-exempt organization except private foundation retum); 99O-EZ (tax-exempt organization except private foundation retum, short form); 99O-PF (private foundation return); 1041-A (retum of charitable contribution deductions by certain trusts); Form 1120--POl (income tax return for certain political or9anlzations); and 5227 (spill-interest trust Information return). Excludes related tax returns and 254,864 Forms 99Q-N (electronic notice (e-postcard)).

[2J Includes Form 1120 (corporation Income tax return) of revoked private foundations.

[3J Includes Forms 940 (employer's Federal unemployment tax return); 941 (employer's tax return for income and Social Security taxes withheld for other than household and agricultural employees); 943 (employer's tax return for agricultural employees): 944 (employer's tax return): 945 (tax return of withheld income tax from nonpayroll distributions); and 1042 (tax return of withheld income tax on U.S.-source Income of foreign persons).

[4J Form 990--T is the tax-exempt organization unrelated business income tax return.

[5J Form 4720 is used to report excise taxes on exempt organizations and related individuals.

[6] Related individual (Form 1040 series), partnership (Form 1065). or corporation (Form 1120 series) returns adjusted as a result of examination of a tax-exempt organization, employee plan, or government entity.

(7J Form 11-e reports the occupational tax for wagering, and Form 730 reports the excise tax on wagering.

[8] Includes Forms 5500 (employee benefit plan retum); 55Oo-EZ (one-participant retirement plan return); and 550O-SF (short form return of small employee benefit plan). A fUnding reduction for EFAST (an electronic filing system for Forms 5500 and 5500-SF) and a programming error in 2009 resulted in a processing delay (until 201 O) of approximately 100,000 returns that will be reported in the 2011 IRS Data Book, Excludes related taxable

returns and welfare benefit and fringe benefit plans. which are not subject to examination by the IRS.

REL 00877

Table 13. Returns of Tax-Exempt Organizations, Employee Plans, Government Entities, and TaxExempt Bonds Examined, by Type of Return, Fiscal Year 2009

Type of retum Number of retums

Tax-exempt organization. employee plan, government entity, and tax-exempt bond returns examined In Fiscal Year 2009, total 22.729 Tax-exempt-ol'ganlzatlons: ...

Tax-exempt organization returns processed In Calendar Year 2008 (1) 823.087 Tax-exempt organizations and related taxable returns examined In Fiscal Year 2009, total 10,187

Tax-exempt organization returns. total 3,767

Forms 990 and 990-EZ 3,445

Forms 990-PF, 5227, 1041-A, and 1120 [2] 314

Form 1120-POL 8 Related taxable returns, total 6."20

Employment tax retums [3] 4.582

Form 990-T [4] 962

Form 4720 (5] 370

Forms 1040, 1065, and 1120 adjusted [6] 159

Forms 11.~C and.nO [71. 347

Employee plans: Employee plan returns processed In Calendar Year 2008 (8) 977"'52 Employee plan and related taxable returns examined In Fiscal Year 2009, total (9) 8.3"3

Employee plan returns, total 5.647 Form 5500 4,344

Defined benefit 582

Defined contributon 3,762

Form 55OO-EZ 1,303

Defined benefit 321

Deflned contribution 982 Related taxabla returns. total 1.289

Form 5330 [10] 1,010 Form 990-T [4] 22

_ •.FElrn:'lS 1()40~.1~5:~ncj..11_~O~~iust~J6] 257 Government entity and tax-exempt bonds:

Government entity and tax-exempt bond returns examined In Fiscal Yaar 2009. total ".199

Tax-exempt bond returns, total (11) 581 Government entity returns. total (12): 3,618

Employment tax retums [3] 3,162 Forms 1040. 1065, and 1120 adjusted [6] 16 Forms 11-C and 730 (7] 440

(1] Includes Forms 990 (tax-exempt organ/zaton except private foundation retum); 990-EZ (tax-exempt organizaton except private foundation retumshort form); 990-PF (private foundaton retum); 5227 (split-interest trust information retum); 1041-A (retum of charitable contribution deductions by certain trusts); and Form 1120-POL (Income tax retum for certain political organizations). Excludes related tax raturns.

[2] Includes Form 1120 (corporation income lax retum) of revoked private foundations.

[3J Includes Forms 940 (employer's Federal unemployment tax return); 941 (employers tax retum for income and Social Security taxes withheld for other than household and agricultural employees); 943 (employers tax return for agriCUltural employees); 944 (employers tax return); 945 (tax return of withheld income tax from nonpayroll distributions); and 1042 (tax return of withheld income taxon U.S.-source income offoreign persons).

(4) Form 990-T is the tax-exempt organization "unrelated business income" tax retum.

[5] Form 4720 is used to report the excise tax on exempt organizations and related individuals.

[6] Related individual (Form 1040 series), partnership (Form 1065). or corporation (Fonn 1120 series) retums adjusted as a result of examination of a ta~-exempt organization, employee plan, or government entity.

[7] Form ll-C reports the occupational tax for wagering, and Fonn 730 reports the excise tax on wagering,

[8] Includes Forms 5500 (employee benefit plan retum) and 5500-EZ (one-parucipant retirement plan return). ExclUdes related taxable returns and welfare benefit and fringe benefit plans, which are not subject to ex:aminauon by the IRS.

[9] Includes 1,407 examinations of plans that were not reQuired to file a retum and are, therefore, not categorized by fonn type.

[1 OJ Form 5330 is used to report InWal excise taxes related to employee plans.

REL 00878

Table 13. Returns of Tax-Exempt Organizations, Employee Plans, and Government Entities Examined, by Type of Return, Fiscal Year 2008

Type of return Number of retums

Tax-exempt organization, employee plan. govemment entity.� and tax-exempt bond retums examined In FIICBI Year 2008. tota' 19,383�

Tax-exempt organization retu~ns !3roc8ll~ In Calendar Year 2007 [1) 888,412

Tax-exempt organizations and related taxable retums examined In Fiscal Year 2008, total 7,861-. --,,~

Tax-exempt organization re~urns. t0ta' 2,946

Forms 990 and 990-EZ 2,669

Fo".'!'~ ~~-~F ~ 52~7~_'041 ~A.~. and 1120 [2) 263�

Form 1120-POL 14�

Rela!l!Ci taxll.~le ret~r.l1s. total 4,915

Ef!lplo)l1Tle!Jt .tax,.~tu_,!,~. (3) 2,552�

Form 990-T (4) 1,430�

437�FOrm_47_~QJ5L _ .. __ . «_

FOrms~0~.10~5~ andl.~~Q.adiu~!~(6) 134�

_F0rrTl~! 1 ~ an~_!~o 0. _ 362�

Emplo~ plan retl!rnsll.rClC:8!S~I.'l_C.a'lI."'dllr Vear.200? [8J 1.048.952

Employee plans and related taxable returns examined In Fiscal Year 2008. total [9J 8.233

Empl~~'pI_~ return!,_t~ta'. __ . _ 6.298� Form 5500 5.353�-,- _. ~,_._ ~'"._.,-".,.~ .. _~'.,,' " __•• "",_,__ ... ·A_•• ,, _~'" ~,

Deflned benefit 334 . '-~ . ,",-- , .. ~ -,., - "~'--"-"-"".-

Defined contribution 5,019 ~.~, '-",-'-,,< _.' _..".-~. ~--~ ...~"

Form 5500-EZ 945 ..",.~ "O"~'Vvv ,~,,,

Defined benefit 201 '~"~''',~ .~,,,._,_ ".~e, , __---.- ~-" -,. ,-, ~"'~'-'",. ~ -

Deflned contribution 744

1,068~elllted t.IllClI~I!!!t~~l1s,.t0ta! ...._- ..---.--.-....,_..----·..·goa'·Form 5330.1'0)� Form 990-T (4) t 1�

F?".'!'~ 1040,l_Q6~'~_nd1.12i>.~d.j~Si!d16J 149

Government entity and tax-exempt bond returns examined In Flacal Year 2008. total 3.289�

Tax':'xe~Pt bond returns [11] 529�

_~~~~mi~!~I!i.!:~lII"_I1~~!~t8I_ (12j~ 2,760�

Emplo~ent taxretums [3J 2.538�

___.i=_0~_s_1_Q4Q.1P.t'~~~~1_~2.:0~~llJS!~_@:. ... __ 38

Forms "-C and 730 [7J 184

(1) Includes Forms 990 (tax-exempt organization except private foundation return); 990-EZ (tax-exempt organization except private foundation return-short form); 990-PF (private foundation return); 5227 (split-interest trust Information return): 1041-A (Information return of trust accumulations of certain charitable amounts); and Form 1120-POL (return flied by political organlzalions and certain tax-exempt organizations to report political organization taxable income and tax). Excludes related taxable returns.

(2) Includes Form 1120 (corporation Income tax return) of revoked private foundations.

(3) Includes Forms 940 (employer's Federal unemployment tax return); 941 (employe~s tax return for Income and Social Security taxes withheld for other than household and agricultural employees); 943 (employer's tax return for agricultural employees); 944 (employe~s tax return); 945 (tax return of withheld income tax trom nonpayroll distributions): and 1042 (tax return of withheld income tax on U.S.-source Income of foreign persons).

(4) Form 990-T is the tax-exempt organization unrelated business Income tax retum.

(5) Form 4720 reports the excise tax on exempt organizations and related individuals.

[6J Related individual (Form 1040 series). partnership (Form 1065), or corporation (Form 1120 series) retums adjusted as a result of examination of a tax-exempt organization. employee plan. or governrnent entity,

(7) Form 1'-C reports the occupational tax for wagering, and Form 730 reports \he excise tax on wagering,

(8) Includes Forms 5500 (employee benefit plan return) and 55OO-EZ (one-participant retirement plan retum). Excludes related taxable returns and welfare benefit and fringe benefit plans. which are not subject to examination by IRS.

[9] Includes 867 examinations of plans that were not required to file a return and are, therefore, not categorized by form type.

(10) Form 5330 reports initial excise taxes related to employee plans.

(11) Includes Forms 8038 (information return of tax-exempt private activity bond issues); 8038-G (Information return of government-purpose tax-exempt bond issues): 8038-GC (information return for consolidated small tax-exempt government bond issues); 8038-T (arbitrage rebates); and 8328 (carryforward election of unused private activity bond volume cap).

(12) Includes returns of Federal. State, local, and Indian Tribal governments. Although these entities do not have an income tax return filing requirement. they are SUbject to excise and employment taxes. .

NOTE; In general, examination activity for afiscal year may be associated with relums filed in the previous calendar year.

SOURCES: Tax Exempt and Government Entitles. Exempt Organiutions SE:T:EO; Employee Plans SE:T:EP; and Govemment Entities SE:T:GE

REL 00879

REL 00880

--~-

-----_._--_.-. . --- --'--"- --_. -_._---_.

- '. ~;li:lli~·g:~i;F~~:i!-=-- ---------:- :--=--i---~--=-~ii~- .~. -~~-t~~ ..... __-~-t=_~=_ ----=-.� .··=-f~f=~~-~-=-=~_~=~ _~~~ _~~:~~,;~~t-=~?~-~~J-- ~

NOTE: Totals do not include incidents that have been redacted for disclosure reasons. t

REL 00881


Table 24. Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section, Fiscal Year 2010

Applicalions for lDx-exempt ,>tJtus III Type of orgar1l7auon

IIlH~rnill Revenue CocJc ~c.:C110n lowl /\pproved f)1'>vpproved Other [21

ill (2) (3) (~)

Tax·exempt organizations and other entities, total [31 65,590 53,693 517 11,380-,-_. Section 501 (c) by subsection, total 65,5~8 53,668 517 11,363

(1) CorporRilon'> org<lnlzcd ullocr an aCI uf Cungr!],>s 6 d a d

(2) 'f ille-iloldll1g corporation'; 155 117 a 30

(3j Rvhglou~, cllariwble, <lnd similar orgunWJlil1l1' 141 59.9115 ~8,934 ~OO 10.511

(4) Soc,"1 wl'lfare organllations 1,741 1,447 3 291

(5) Labor <Ino iJgrrcullurc organiz,1Iron, 310 273 a 37

(6) BLlsinr'S'> leagues 1.695 1,509 G 180

(7) Social ,lnd recreiltion clubs 884 710 d d

(8) Fraternal beneficiary SOCieties 16 11 a (9) Voluntary employees' beneficiary associations 162 133 0 0

(10) Domeslic fralernal beneficiary socrelies 37 18 d d

(121 Bcnr.volenllife insurance assoclDtlons n 66 0 11

(13) Cemetery cornpilnie5 155 H8 0 7

(14) Stillc-chartcred credil un'Oll, d d 0 0

(1 5) Mutuc.llln~ur(lnce compnnic~ 16 8 4

(17) Supplemental unemployment benefit trusts S 0 0 d

(19) Wdr veterAns' organizations 164 135 0 29

(25) Holdlllg comp~I""s for pcn,;ion, and otiler enliliw; 177 151 a 26

(26) SWlc:,ponsored higt'. risk "?~lth Insurante organiL~tions 0 a a d

Section 501 (d) Religious and apostolic associations 14 d 0 d

Section 521..Farmers' co"peratives 23 d 0 d

Nonexempt charitable trusts 5 0 0 5

d-Not shown to avoid disclosure of speclfrc taxpayer data. However, dala are Included ,n Ihe approprrate lolals, when possible.

[1}� Reflects all case closures for the Exempt Organizations Determmallons function. These include not only Initial applications for tax-exempt status, but also other ucter,nmilliol1~. such a~ public C.hDrity nnd private founuation ~liHu~i dctenllllni1tl0n~), rldviJnce aprroval of ~chQliJrship grant proccdurc~, cHld group determinatIons of ti::lx-(')(pmpt stotus.

12]� Includcs applications wi1l1drawn by Ihe orgilniziltion: iJppliCillions th,ll drr] nOI provlOc tile reqUired iniormililon: incomplelp. appliCiJIions; IRS refusills to rule on applications; applicalions forwarded to olher than the Washington. DC office, IRS correcllon disposals, and others.

13]� No applications were filed for teachers' reillement funds (section 501 (c)(11)); corporations to lmance crop operations (section 501 (c)(16)): employee-funded pension tru~ts (st'Uion 501 (c)(18)); black lung IruSl, (seclloll 501 (c)(21)); mullit~mpl(Jynr pel1~;IOn pi,),,, (section 501 (c)(22)): veterans' as,oci~tions foullded pllor 10 1880 beclion 501 (c)(23)); trusts dcswbed In section 4049 ollhe Empioyee I<Clirerncmlncomc Secrmty /\CI of 1974 (I: RISA) (secllon 501 (c)(24)): State-sponsored workers' comp<;ns~lionreinsur~llcp. org~nizmions (section 501 (c)(2 7)): and the N~tlonili RilllrOild [<ctiremol1t Inve5lmenl rrust (scCllon 501 (c)(28)). Tax-exempt stntus for legal svrviccs orgaOlZ~llons (secllon 501 (c)(20)) was revoked dfeclive Jurle 20, 1992.

14J� Includes private foul1dntiol1s. Not allll1lernill R8venuc Code section 501 (c)(3) orqnnlzntlons ~re required 10 apply for recognition of tax exemption, inr.ludillg churches, intcgriJWd uuxih~rie~, ~ubordlnaW units, and convcnlions or ils5aciHIians of churches.

SOUI<C l' 1ax bcmpl and Govcrnmcnl Entitle:s, ~_xcmpl Organiz""ons.

55

REL 00882


Table 24. Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section, Fiscal Year 2009 (Revised March 2011)

Applicalions for tax-exem~t status 11)

Type of orgClnililtlon, IrHernal Revenue Code ,;ecllon

10tal Approved Other [21

(1) (2) 13) (1)

Tax-exemJ:'t organizations an~ other entities, t'?tal [3) 77,305 62,459 480 14,366

Sec lion 501 (c) by SUbsection, total 77,221 62,392 480 14.349

(1) Corporations organized under an act of Congre's (; o o 6

(2) Title,holding corpomllon" 13'/ 112 o 2S

(3) 1,,,119'OUS, chMitalJle, and 'ilrnilar organizations [41 70,624 56,943 4n 13.209

('\1 Social we!lf;Jre organizations 1,922 1,50'/ 3 412

(5) Labor "nd agriCUlture orgJrllzations 601 543 o 58

(G) BUSiness Ip<lgues 1,960 1,742 d d

(7) Social ',md rr,cre,ltlon clubs 1,115 818 tf d

(8) Fraternal beneficiary societies 1G o 11

(9) Voluntary employees' beneficiary associations 257 210 d d

(10) Domestic fraternal beneficiary societies 25 o 20

(12) (lenevolentlife insurance ilSSOcI8tions 7G 56 o 20

(13) Cemetery companies 209 191 o 15

(14) State,chartered credit unions cI d o o (15) Mutual insurance! compilnics 6 3 d d

(17) Supplemental unemployment benefit trusts 6 d o d

(19) War veterans' organizations 175 142 o 33

(25) Holding companies for pensions end other entitic~ 62 57 o 5

(271 State,~onsorco~r~~' compcnsa~n rc!~,surancc ~gall~alions cI o o d -~'-"_.~-

50~ (d) ,Religious and apostol,ic~ssociations 59 55 o 4

Section 521 Farmers' cooperatives 13 7 o 6

Nonexempt charitable trusts 12 5 o 7

d-Not shown to avoid disclosure of specific taxpayer data, However, data are incluoed in the appropriale lotals when poSSible,

[1]� Renects all case closures for the Exempt Organizalions Determinations (uncllon, These Include not only inilial applications for tax-exempt status, but also other delerminatl0n~. such (IS puhllc Ch<Hity tlnd private foundation Slfllu<.; delerminal,on~. f.ldv(Hlce approval of sr.llolarship grant procedures. (Ind group determinations of taxexempt status.

[2\� Includes apphcatrons wni'ldrawn IJy the organization; applications lI,at 010 nol provloe Ihrc reqUircel information, incolTIpl,'te applications; IRS refusals to rule 011

apphcations; applications forwarded to other than the Washington, DC office, IRS correction disposals; and others.

13]� No apphcatlons were filed lor teachers' retirement funds (section 501(c)(11»), corporations 10 finance crop operations (section 501(c)(16)); employee-funded pension IrU~IS (section 501 (e)( 18)); blacy. lung trllslS ('"clion 501 (c)(21 )); nnlllti8mploycr pension plans (SGCIIOI' 501 (c)(22)); VGtefilns' associalJon" founded prior 10 1880 (section 501(c)(23»), trusts described in section 4049 of lhe Employee Secunty Act of 1974 (ERISf\) (section 501(c)(24)); and State-sponsored high-risk health Insurance organizations (section 501(c)(26), Tax-exempt status for legal service organizations (section501(c)(20)) was revoked effective June 20,1992

(4]� Includes private foundations, Not all Internal Revenue Code section 50Hc)(3) organizations are reqUlfed fo apply for recognition of tax exemption, inclUding churches, Integrated auxiliaries, subordinate units, and conventions or assocjations of churches,

NOTE; Revised March 2011 to correct errors attributed to a Iransltlon In reporMg systems,

SOURCE' Tax Exempt and Government Entitles, Exempt Organizations,

55

REL 00883

Internal Revenue Service Data Book, 2008

Table 24. Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section, Fiscal Year 2008 (Revised March 2011)

Type of organizallon. Internal Revenue Code section

Tax-exerl1pt. organizations and other entities.tota![3j

Section 501 (c) by subsection, total

(2) Tllle-holdlll9 corpora !Ions

(3 Rch~,ous, chantable. ami simll~r orgal1llallOns [41

(4) So<;,al welfare organization,

(5) Labor ami agriculture organlzatiQI1\i

(O) BusIness leaqu8s�

t7) Social and receahol1 clubs�

(8) Fraternal beneficiary societIes

(9) Voluntary employees' benefiaary associations

(10) Domestic fraternal benefiCJary sOCJetles

(12) Benevolenilife Insurance associations

(13) Cemetery companies

(14) State-cha ered credit unlOIlS

(15) Mutual insurance companies

(17) Supplemental unemployment benefit Irusts

(19) War veterans' organIzatIons

..F~) .':'.0ld1ng companies for pensions and other entities

Section 521 Farmers' cooperatives _ ••• __'m' _ •••••••• _ ••• _.

Nonexempt charitable trusts

Applications for tax-exempt status [1J

Total Approved Disapproved Oliler 12J

(1) (2)

84,220 69,957

84,180 69,943

1H 93

7'J.1IJ7 65.761

1,492 1.202

269 235

'1,477 1.2%

.. ~ I i8"4

20 11

2~9 197

JO 18

g1 60

155 148

8 5

26 15

4 4

128 101

106 100 ..._- _.. ~..26 d -14 d

(3) (4)

1,242 13,021

1,240 12.,997

0 21

1,221 12125

d d

0 34

6 175

0 d

d d

4 48

d d

0 25

d d

0 3

d d

0 0

0 27

0 6 .d d_.

'--" 0 d

d-Not shown to avoid disclosure of specific taxpayer data. However, data are Included in the appropriate totals.

[1J� Reflects all case closures for the Exempl Organizations DeterminatIons function. These include nol only Initial applicattons tor tax-exempt status but also other oeterminilliolls, such as puhl,c chanty and private foundation slatus determl/latlons. advance approval ot scl,olarship grant procedures, and group determinations of tax-exempt status.

[21� Includes applications Withdrawn by the organization; applications that did not provide the required ",Iormaliol1; incomplete applications: IRS refusals to rule on applications; applications forwarded to other than Ihe Washington. DC office. IRS correction disposals, and others.

[3)� No applications were filed for corporations organized under an act of Congress (section 501(c)(1». teachers' retirement funds (section' 501(cJ(11)1: corporatIOns to finance crop operations (section 501(C)(16»): employee-funded pension trusts (section 501(c)(18»: black lung trusls (section 501(c)(21); muilleinployer pension plans (section 501 (c)(22»): veterans' aSSOCiations founded prior to 1880 (section 501(C)(23)), trusts described In section 4049 of the Employee Security Act of 1974 (ERISA) (section 501 (c)(24); State-sponsored high-risk health insurance organizations (section 501(c)(26)1: State-sponsored workers' compensation reinsurance organizations (section 501(c)(27»), and religious and apostolic associations (section 501(d)). Tax-exempt status for legal services organizations (section 501(c)(20)) was revoked effective June 20, 1992.

[4]� Includes private foundations. Not all Internal Revenue Code section 501tc)(3) organizations are reqUired to apply for recognition of tax exempllon. including churches. Integrated auxillanes, subordinate uMs, and conventions or associations of churches.

NOTE: ReVised March 2011 to correct errors allributed to a tranSition In reporting systems.

SOURCE Tex Exempt and Government Entities, Exempt Organlzalions.

55

REL 00884

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Page 1 of 72 of Publication 557 16:17 - 29-NOV-2010

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Publication 557 Contents(Rev. October 2010)Reminders . . . . . . . . . . . . . . . . . . . . . . 2Department Cat. No. 46573C

of the Introduction . . . . . . . . . . . . . . . . . . . . . 2Treasury

Chapter 1. Application, Approval,Internal and Appeal Procedures . . . . . . . . . . 3Tax-ExemptRevenue Application Procedures . . . . . . . . . . . . 3Service Forms Required . . . . . . . . . . . . . . 3

Required Inclusions . . . . . . . . . . . 4Status for YourMiscellaneous Procedures . . . . . . . 4

Rulings and DeterminationLetters . . . . . . . . . . . . . . . . . . . 5OrganizationEffective Date of Exemption . . . . . . 5Revocation or Modification of

Exemption . . . . . . . . . . . . . . 5Appeal Procedures . . . . . . . . . . . . . . . 6

Appeals Office Consideration . . . . . 6EO Technical Consideration . . . . . . 6Administrative Remedies . . . . . . . . 6Appeal to Courts . . . . . . . . . . . . . 6

Group Exemption Letter . . . . . . . . . . . 7Central Organization

Application Procedure . . . . . . 7Keeping the Group

Exemption Letter inForce . . . . . . . . . . . . . . . . . 8

Events Causing Loss ofGroup Exemption . . . . . . . . . 8

Chapter 2. Filing Requirementsand Required Disclosures . . . . . . . . 8Annual Information Returns . . . . . . . . . 9Unrelated Business Income Tax

Return . . . . . . . . . . . . . . . . . . . 11Employment Tax Returns . . . . . . . . . 11Political Organization Income Tax

Return . . . . . . . . . . . . . . . . . . . 12Reporting Requirements for a

Political Organization . . . . . . . . . 12Donee Information Return . . . . . . . . . 14Information Provided to Donors . . . . . 14Report of Cash Received . . . . . . . . . . 16Public Inspection of Exemption

Applications, Annual Returns,and Political OrganizationReporting Forms . . . . . . . . . . . . 16

Required Disclosures . . . . . . . . . . . . 18Solicitation of Nondeductible

Contributions . . . . . . . . . . . . 18Sales of Information or

Services Available FreeFrom Government . . . . . . . . 19

Dues Used for Lobbying orPolitical Activities . . . . . . . . . 19

Miscellaneous Rules . . . . . . . . . . . . . 19

Chapter 3. Section 501(c)(3)Organizations . . . . . . . . . . . . . . . . 20Contributions to 501(c)(3)

Organizations . . . . . . . . . . . . . . 20Application for Recognition of

Exemption . . . . . . . . . . . . . . . . . 21Articles of Organization . . . . . . . . . . . 23Educational Organizations and

Private Schools . . . . . . . . . . . . . 24Organizations Providing

Insurance . . . . . . . . . . . . . . . . . 26Get forms and other informationOther Section 501(c)(3)faster and easier by: Organizations . . . . . . . . . . . . . . 26Private Foundations and PublicInternet IRS.gov Charities . . . . . . . . . . . . . . . . . . 28Lobbying Expenditures . . . . . . . . . . . 44

Nov 29, 2010 REL 00885

www.IRS.gov

of 72 of Publication 557 16:17 - 29-NOV-2010


Chapter 4. Other Section 501(c) determining whether small insurance com-Organizations . . . . . . . . . . . . . . . . 45 panies qualify as tax-exempt under sec-

tion 501(c)(15) has changed. See Notice501(c)(4) - Civic Leagues and2006-42, 2006-19 I.R.B. 878.What’s NewSocial Welfare Organizations . . . . 45

501(c)(5) - Labor, Agricultural, • Prohibited tax shelter transactions.and Horticultural New excise taxes are imposed under sec-• New penalty provisions for nonfiling.Organizations . . . . . . . . . . . . . . 46 tion 4965 on certain tax-exempt organiza-For annual tax periods beginning after

tions entering into prohibited tax shelter2006, the law requires most tax-exempt501(c)(6) - Business Leagues,transactions.organizations, other than churches, to fileetc. . . . . . . . . . . . . . . . . . . . . . 47

an annual Form 990, 990-EZ, or 990-PF501(c)(7) - Social and Recreation • Pension Protection Act of 2006 taxwith the Internal Revenue Service (IRS),Clubs . . . . . . . . . . . . . . . . . . . . 48 changes. The Pension Protection Act ofor to submit an annual electronic notice, 2006 made numerous changes to the tax501(c)(8) and 501(c)(10) - Form 990-N (e-Postcard), to the IRS. If an law provisions affecting tax-exempt orga-Fraternal Beneficiary organization fails to file an annual return or nizations. Unless otherwise noted, most ofSocieties and Domestic submit an annual notice as required for 3

the changes became effective on AugustFraternal Societies . . . . . . . . . . . 49 consecutive years, it will automatically17, 2006.501(c)(4), 501(c)(9), and lose its tax-exempt status.

501(c)(17) - Employees’ • Section 501(c)(3) organizations must• Redesigned Form 990 and Instructions.Associations . . . . . . . . . . . . . . . 49 make their Form 990-T open for public in-The Form 990 has been redesigned forspection for a period of 3 years from the501(c)(12) - Local Benevolent 2008 and future years. The new form con-date the Form 990-T is required to be filedLife Insurance Associations, sists of an 11-page, 11-part core form that(determined with regard to any extensionMutual Irrigation and is required to be completed by all organi-of time for filing) or is actually filed, which-Telephone Companies, and zations that file Form 990. It also consistsever is later.Like Organizations . . . . . . . . . . . 51 of 16 schedules to be completed by those

501(c)(13) - Cemetery organizations that satisfy the applicable • Increase in excise taxes relating to publicCompanies . . . . . . . . . . . . . . . . 52 requirements for each schedule. charities, social welfare organizations, and

501(c)(14) - Credit Unions and private foundations.• Elimination of the advance public char-Other Mutual Financial ity status. New regulations eliminate the • Additional standards for credit counselingOrganizations . . . . . . . . . . . . . . 53 advance ruling process for a section organizations.

501(c)(19) - Veterans’ 501(c)(3) organization. Under the new reg- • Definition of convention or association ofOrganizations . . . . . . . . . . . . . . 54 ulations, a new section 501(c)(3) organiza-churches has been modified.tion will be classified as a publicly501(c)(20) - Group Legal

supported organization and not a privateServices Plan Organizations . . . . . 55 • Entities not required to file Form 990 orfoundation if it can show when it applies 990-EZ must file new Form 990-N, Elec-501(c)(21) - Black Lung Benefitfor tax-exempt status that it reasonably tronic Notice (e-Postcard) for Tax-ExemptTrusts . . . . . . . . . . . . . . . . . . . . 55can be expected to be publicly supported. Organizations Not Required to File Form501(c)(2) - Title-Holding The new rules no longer require the or- 990 or 990-EZ.Corporations for Single ganization to file Form 8734 after complet-

Parents . . . . . . . . . . . . . . . . . . 55 • Requirements of disclosure to state offi-ing its first 5 tax years. The new rulescials relating to exempt organizations has501(c)(25) - Title-Holding apply to organizations with advance rul-been modified.Corporations or Trusts for ings expiring on or after June 9, 2008.

Multiple Parents . . . . . . . . . . . . . 56 • Excise taxes imposed on excess benefit• Report significant new or changed pro-501(c)(26) - State-Sponsored transactions involving donor advised fundsgram services and changes to organi-

High-Risk Health Coverage and sponsoring organizations.zational documents. An organizationOrganizations . . . . . . . . . . . . . . 56 should report new significant program • New excise taxes on Prohibited Tax Shel-

501(c)(27) - State-Sponsored services or significant changes in how it ter Transactions.Workers’ Compensation conducts program services, and significantReinsurance Organizations . . . . . 56 changes to its organizational documents,

on its Form 990 rather than in a letter toChapter 5. Excise Taxes . . . . . . . . . 57the IRS Exempt Organizations Determina-Prohibited Tax Shelter Introductiontions (EO Determinations). EO Determina-Transactions . . . . . . . . . . . . . . . 57tions no longer issues letters confirming This publication discusses the rules and proce-Excess Benefit Transactions . . . . . . . 58the tax-exempt status of organizations that dures for organizations that seek recognition ofExcess Business Holdings . . . . . . . . . 61 report new services or significant changes, exemption from federal income tax under sec-

Taxable Distributions of or changes to organizational documents. tion 501(a) of the Internal Revenue Code (theSponsoring Organizations . . . . . . 61

Code). It explains the procedures you must fol-Taxes on Prohibited Benefits low to obtain an appropriate ruling or determina-

Distributed From Donor tion letter recognizing your organization’sAdvised Funds . . . . . . . . . . . . . . 62 exemption, as well as certain other informationReminders

Excise Taxes On Private that applies generally to all exempt organiza-Foundations . . . . . . . . . . . . . . . 62 tions. To qualify for exemption under the Code,• Electronic filing requirement for large your organization must be organized for one orExcise Taxes on Black Lung organizations. For tax years ending on or more of the purposes specifically designated inBenefit Trusts . . . . . . . . . . . . . . 62 after December 31, 2006, only organiza- the Code. Organizations that are exempt underChapter 6. How To Get Tax tions that file 250 returns during the calen- section 501(a) include those organizations de-Help . . . . . . . . . . . . . . . . . . . . 63 dar year and that have total assets of $10 scribed in section 501(c). Section 501(c) organi-

million or more are required to file FormOrganization Reference Chart . . . . . 65 zations are covered in this publication.990 electronically.Index . . . . . . . . . . . . . . . . . . . . . . . 67 Chapter 1 provides general information

about the procedures for obtaining recognitionAppendix. Sample Articles of • Section 501(c)(15) gross receipts. Theof tax-exempt status.Organization . . . . . . . . . . . . . . 69 definition of gross receipts for purposes of

Page 2 Publication 557 (October 2010)REL 00886



Chapter 2 contains information about annual if you indicate in your correspondence the ap-filing requirements and other matters that may propriate Code section. Check the IRS website, Applicationaffect your organization’s tax-exempt status. IRS.gov, for the latest updates.

Chapter 3 contains detailed information on ProceduresComments and suggestions. We welcomevarious matters affecting section 501(c)(3) orga-your comments about this publication and yournizations, including a section on the determina- Oral requests for recognition of exemption willsuggestions for future editions.tion of private foundation status. not be considered by the IRS. Your application

Chapter 4 includes separate sections for You can e-mail us while visiting our website for tax-exempt status must be in writing usingspecific types of organizations described in sec- at IRS.gov. the appropriate forms as discussed below.tion 501(c). You can write to us at the following address:

Chapter 5 provides information on when ex- Forms RequiredInternal Revenue Servicecise taxes may be imposed.TEGE and Specialty Forms and

Most organizations seeking recognition of ex-Publications BranchOrganizations not discussed in this publica-emption from federal income tax must use spe-SE:W:CAR:MP:T:Ttion. Certain organizations that may qualify forcific application forms prescribed by the IRS.1111 Constitution Ave. NW, IR-6526exemption are not discussed in this publication,Two forms currently required by the IRS areWashington, DC 20224although they are included in the OrganizationForm 1023, Application for Recognition of Ex-Reference Chart. These organizations (and theemption Under Section 501(c)(3) of the InternalCode sections that apply to them) are as follows. We respond to many letters by telephone. Revenue Code, including Notice 1382, Changes

Therefore, it would be helpful if you would infor Form 1023, and Form 1024, Application forCorporations organized under Acts clude your daytime phone number, including the Recognition of Exemption Under Sectionof Congress . . . . . . . . . . . . . . . . 501(c)(1)area code, in your correspondence. 501(a). For information about how to obtain theTeachers’ retirement fund

If you wish telephone assistance, please callassociations . . . . . . . . . . . . . . . . 501(c)(11) latest revision, see chapter 6.1-877-829-5500. This toll-free telephone serviceMutual insurance companies . . . . . 501(c)(15) Forms 1023 and 1024 contain instructionsis available Monday through Friday.Corporations organized to finance and checklists to help you provide the informa-

crop operations . . . . . . . . . . . . . . 501(c)(16) tion required to process your application. Incom-Employee funded pension trusts plete applications may not be processed. See(created before June 25, 1959) . . . 501(c)(18) Incomplete application later, under Miscellane-Withdrawal liability payment fund . . 501(c)(22)

ous Procedures.Veterans’ organizations (createdSome organizations do not have to use spe-before 1880) . . . . . . . . . . . . . . . . 501(c)(23)

cific application forms. The application your or-National Railroad Retirement 1.ganization must use is specified in the chapter inInvestment Trust . . . . . . . . . . . . . 501(c)(28)this publication dealing with your kind of organi-Religious and apostolic associations 501(d)zation. It is also shown in the Organization Ref-Cooperative hospital service

organizations . . . . . . . . . . . . . . . 501(e) erence Chart..Application,Cooperative service organizations of When no specific application form is pre-operating educational organizations 501(f) scribed for your organization, application for ex-Approval, and emption is by letter to the IRS. Send theSection 501(c)(24) organizations (section

application to the appropriate address shown on4049 ERISA trusts) are neither discussed in theForm 8718, User Fee for Exempt Organizationtext nor listed in the Organization Reference AppealDetermination Letter Request. The letter mustChart.be signed by an authorized individual such as anLikewise, farmers’ cooperative associations Procedures officer of the organization or a person authorizedthat qualify for exemption under section 521,by a power of attorney. (See Power of attorneyqualified state tuition programs described in sec-under Miscellaneous Procedures, later.) Sendtion 529, and pension, profit-sharing, and stockthe power of attorney with the application letterbonus plans described in section 401(a) are not Introduction when you file it. The letter should also containdiscussed in this publication. If you think your

If your organization is one of the organizations the name and telephone number of the personorganization falls within one of these categories,described in this publication and is seeking rec- to contact. The information described belowcontact the IRS for any additional informationognition of tax-exempt status from the IRS, you under Required Inclusions must be sent with theyou need. For telephone assistance, callshould follow the procedures described in this letter.1-877-829-5500.chapter and the instructions that accompany theCheck the Table of Contents at the begin-appropriate application forms.ning of this publication to determine whether Exemption for terrorist organizations. An

your organization is described in this publica- For information on section 501(c)(3) organi- organization that is identified or designated as ation. If it is, read the chapter (or section) that zations, see Section 501(c)(3) Organization- terrorist organization within the meaning of sec-applies to your type of organization for the spe- schapter 3. If your organization is seeking tion 501(p)(2) is not eligible to apply for recogni-cific information you must give when applying for exemption under one of the other paragraphs of tion of exemption.recognition of exemption. section 501(c), see chapter 4.

User fee. The law requires the payment of aOrganization Reference Chart. This chart Topics user fee for determination letter requests suchenables you to locate at a glance the section of as your application for recognition of tax-exemptThis chapter discusses:the Code under which your organization might status. If you are not required to use Form 1023,qualify for exemption. It also shows the required you should use Form 8718 to figure the amount• Application procedures that generally ap-application form and, if your organization meets of your fee and to pay it. If you are using Formply to all organizations discussed in thisthe exemption requirements, the annual return 1023, user fee information is included in Part XI.publication, including the applicationto be filed (if any), and whether or not a contribu- Your payment must accompany your request.forms;tion to your organization will be deductible by a The IRS will not process a request unless thedonor. It also describes each type of qualifying • Rulings and determination letters (approv- fee has been paid.organization and the general nature of its activi- als/disapprovals);

To find the correct amounts for userties. • Appeal procedures available if an adverse fees and the length of time to process aYou may use this chart to determine thedetermination letter is proposed; and request, call 1-877-829-5500 or checkCode section that you think applies to your or-

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the IRS website, IRS.gov, key word User fee forganization. Any correspondence with the IRS (in • Group exemption letters.assistance.requesting forms or otherwise) will be expedited

Chapter 1 Application, Approval, and Appeal Procedures Page 3REL 00887



Description of activities. Your application date. In that case, if the original submission wasRequired Inclusionsmust include a full description of the proposed timely, the application will be considered timelyactivities of your organization, including each of filed as discussed in chapter 3, under Applica-Employer identification number (EIN).the fundraising activities of a section 501(c)(3) tion for Recognition of Exemption.Every exempt organization must have an EIN,organization and a narrative description of antic-

whether or not it has any employees. An EIN isipated receipts and contemplated expenditures. Application made under wrong paragraph ofrequired before an exemption application is sub-When describing the activities in which your section 501(c). Occasionally, an organizationmitted. An EIN can be applied for: organization expects to engage, you must in- appears to qualify for exemption under a para-clude the standards, criteria, procedures, or• Online—Click on the Employer ID Num- graph of section 501(c) that is different from theother means that your organization adopted orbers (EINs) link at www.IRS.gov/busi- one for which the organization applied. If theplanned for carrying out those activities.nesses/small. The EIN is issued application was made on Form 1024, which ap-

To determine the information you need toimmediately once the application informa- plies to more than one paragraph of sectionprovide, you should study the part of this publi-tion is validated. 501(c), the organization can be recognized ascation that applies to your organization. The exempt under any paragraph to which the form• By telephone at 1-800-829-4933 from 7:00 appropriate chapter will describe the purposes applies if the organization has agreed to have itsa.m. to 10:00 p.m. in the organization’s and activities that your organization must pur- application considered under that paragraph. Itlocal time zone. sue, engage in, and include in your application in must also supply any additional information re-order to achieve exempt status.• By mailing or faxing Form SS-4, Applica- quired for the application under the new para-

Often your organization’s articles of organi-tion for Employer Identification Number. graph.zation (or other organizing instruments) contain

Different application form needed. If a dif-descriptions of your organization’s purposesUse only one method for each entity so you doferent application form is required for your or-and activities.not receive more than one EIN for an entity.ganization, the IRS will so advise yourYour application should describe completelyIf you previously applied for an EIN and have organization and will provide the appropriateand in detail your past, present, and plannednot yet received it, or you are unsure whether application form for your convenience in reapp-activities.you have an EIN, please call our toll-free cus- lying under that paragraph, if you wish to do so.

t o m e r a c c o u n t s e r v i c e s n u m b e r , Financial data. You must include in your ap- Although supporting information previously fur-1-877-829-5500, for assistance. plication financial statements showing your re- nished need not be duplicated, you must provide

ceipts and expenditures and a balance sheet for any necessary additional information requiredOrganizing documents. Each application for the current year and the 3 preceding years (or for the application. If your reply is not receivedexemption must be accompanied by a con- for the number of years your organization was in within a limited time, your application will beformed copy of your organization’s Articles of existence, if less than 4 years). For each ac- processed only for the paragraph under whichIncorporation (and the Certificate of Incorpora- counting period, you must describe the sources you originally applied.tion, if available), Articles of Association, Trust of your receipts and the nature of your expendi- When a specific application form is neededIndenture, Constitution, or other enabling docu- tures. for the paragraph under which your organizationment. If the organization does not have an or- If you have not yet begun operations, or have qualifies, that form is required before a letterganizing document, it will not qualify for operated for less than 1 year, a proposed budget recognizing exemption can be issued. This in-exemption. for 2 full accounting periods and a current state- cludes cases in which a determination letter is

ment of assets and liabilities will be acceptable. modified to recognize an organization’s exemptBylaws. Bylaws alone are not organizingstatus under a paragraph other than the para-documents. However, if your organization has Other information. The IRS may require yougraph under which it originally established ex-adopted bylaws, include a current copy. The to provide additional information necessary toemption.bylaws need not be signed if submitted as an clarify the nature of your organization. Some

attachment. examples are:IRS responses. Organizations that submit aIf your organization’s name has been offi- • Representative copies of advertising complete application will receive an acknowl-cially changed by an amendment to your or- placed; edgment from the IRS. Others will receive aganizing instruments, you should also attach aletter requesting more information or returning• Copies of publications, such asconformed copy of that amendment to your ap-an incomplete application. Applicants also willmagazines;plication.be notified if the application is forwarded to EO• Distributed written material used for ex-Bylaws may be considered an organiz- Technical Office for consideration. These letters

pressing views on proposed legislation;ing document only if they are properly will be sent out as soon as possible after receiptandstructured (includes name, purpose, of the organization’s application.

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signatures, and intent to form an organization). • Copies of leases, contracts, or agree-Withdrawal of application. An applicationments into which your organization hasConformed copy. A conformed copy is amay be withdrawn at any time before the issu-entered.copy that agrees with the original and all amend-ance of a ruling or determination letter upon thements to it. If the original document required awritten request of a principal officer or author-signature, the copy should either be signed by a Miscellaneous Procedures ized representative of your organization. How-principal officer or, if not signed, be accompa-ever, the withdrawal will not prevent thenied by a written declaration signed by an au- To help in processing your application, be sure information contained in the application fromthorized officer of the organization. With either to attach all schedules, statements, and other being used by the IRS in any subsequent exami-option, the officer must certify that the document documents required by the application form. If nation of your organization’s returns. The infor-is a complete and accurate copy of the original. you do not attach them, you may have to resub- mation forwarded with an application will not beA certificate of incorporation should be approved mit your application or you may otherwise en- returned to your organization and, generally,and dated by an appropriate state official. counter a delay in processing your application. when an application is withdrawn, the user feepaid will not be refunded.Incomplete application. If the applicationAttachments. When submitting attachments,

does not contain the required information, it mayevery attachment should show your organiza- Requests for withholding of informationbe returned with a letter of explanation withouttion’s name and EIN. It should also state that it is from the public. The law requires many ex-being considered on its merits. Alternatively, ifan attachment to your application form and iden-empt organizations and private foundations tothe application is substantially complete, the IRStify the part and line item number to which itmake their application forms and annual infor-may retain the application and request addi-applies.mation returns available for public inspection.tional information as needed. If the completed

Original documents. Do not submit origi- The law also requires the IRS to make availableapplication is resubmitted within the time periodnal documents because they become part of the for public inspection, in accordance with sectionindicated in the letter from the IRS, it will beIRS file and cannot be returned. 6104 and the related regulations, your approvedconsidered received on the original submission

Page 4 Chapter 1 Application, Approval, and Appeal Procedures REL 00888

http://www.irs.gov/businesses/small




application for recognition of exemption (includ- Power of attorney. If your organization ex- exemption under section 501(c)(3).) Upon ob-pects to be represented by an agent or attorney, taining recognition of exemption, the organiza-ing any papers submitted in support of the appli-whether in person or by correspondence, you tion can file a claim for a refund of income taxescation) and the ruling or determination lettermust file a power of attorney with your exemp- paid for the period for which its exempt status is(discussed later, under Rulings and Determina-tion application specifically authorizing the recognized.tion Letters).agent or attorney to represent your organization. If an organization is required to alter its activi-Any information submitted in the applicationForm 2848, Power of Attorney and Declaration ties or substantially amend its charter to qualify,or in support of it that relates to any trade secret,of Representative, can be used for this purpose. the ruling or determination letter recognizing ex-patent, process, style of work, or apparatus,

emption will be effective as of the date speci-upon request, can be withheld from public in-Reminder. The law requires payment of a fied in the letter. If a nonsubstantivespection if the IRS determines that the disclo-

user fee for determination letter requests. Use amendment is made, such as correction of asure of such information would adversely affectForm 8718 or Form 1023 to figure the amount clerical error in the enabling instrument or thethe organization. Your request must:and pay the fee. Payment must accompany addition of a dissolution clause, exemption will

1. Identify the material to be withheld (the each request. ordinarily be recognized as of the date of forma-document, page, paragraph, and line) by tion if the activities of the organization before theclearly marking it, “Not Subject To Public ruling or determination are consistent with theInspection.” exemption requirements.

A ruling or determination letter recognizingRulings and2. Include the reasons for your organization’sexemption cannot be relied on if there is a mate-position that the information is of the typerial change, inconsistent with exemption, in theDetermination Lettersthat can be withheld from public inspec-character, the purpose, or the method of opera-

tion.tion of the organization. Also, a ruling or determi-A ruling or determination letter will be issued to

3. Be filed with the office where your organi- nation letter cannot be relied on if it is based onyour organization if its application and support-any inaccurate material factual representations.zation files the documents in which the ing documents establish that it meets the partic-

material to be withheld is contained. ular requirements of the section under which it isclaiming exemption. However, the IRS will not Revocation or Modificationordinarily issue rulings or determination lettersWhere to file. Your application for recognition of Exemptionrecognizing exemption if an issue involving theof tax-exempt status must be filed with the IRSorganization’s exempt status is pending in litiga- A ruling or determination letter recognizing ex-at the address shown on Form 8718 or Formtion or is under consideration within the IRS. emption may be revoked or modified by:1023.

Your application will be considered by EO Advance ruling. A ruling or determination let- 1. A notice to the organization to which theDeterminations, who will either issue a favorable ter may be issued in advance of operations if ruling or determination letter originally wasdetermination letter to your organization, issue your organization can describe its proposed op- issued,an adverse determination letter denying the ex- erations in enough detail to permit a conclusion

2. Enactment of legislation or ratification of aempt status claimed in the application, or refer that it will clearly meet the particular require-tax treaty,the case to the Exempt Organizations Technical ments of the section under which it is claiming

Office (EO Technical). exemption. A restatement of the organization’s 3. A decision of the United States Supremepurpose or a statement that it will be operated in Court,Requests other than applications.furtherance of that purpose will not satisfy thisRequests other than applications for 4. Issuance of temporary or final regulations,requirement. The organization must describerecognition of exemption (for example, orfully the activities in which it expects to engage.requests for rulings involving feeder organiza-This includes standards, procedures, or other 5. Issuance of a revenue ruling, a revenuetions, application of excise taxes to activities ofmeans adopted or planned by the organization procedure, or other statement published inprivate foundations, taxation of unrelated busi-for carrying out its activities, expected sources the Internal Revenue Bulletin or Cumula-ness income, etc.) should be sent to:of funds, and the nature of its contemplated tive Bulletin.Internal Revenue Service, Attention: EOexpenses.Technical, P.O. Box 27720, McPherson

When an organization does not supply theStation, Washington, DC 20038 When revocation takes effect. If the organi-information previously mentioned under Appli- zation omitted or misstated a material fact, oper-cation Procedures, or fails to furnish a suffi- ated in a manner materially different from thatThese requests, like applications for ciently detailed description of its proposed originally represented, or, with regard to organi-recognition of exemption, must be activities to permit a conclusion that it will clearly zations to which section 503 applies, engaged inaccompanied by the appropriate user fee. be exempt, a proposed adverse determination a prohibited transaction (such as divertingletter or ruling may be issued. corpus or income from its exempt purpose), the

Referral to EO Technical. EO Determina- revocation or modification may be retroactive.tions will refer to EO Technical any exempt or- Adverse determination. A proposed adverseganization issue concerning qualification for ruling or determination letter will be issued to an Material change in organization. If there is aexemption or foundation status for which there is organization that has not provided sufficiently material change, inconsistent with exemption, inno published precedent or for which there is detailed information to establish that it qualifies the character, purpose, or method of operationreason to believe that nonuniformity exists. EO for exemption or if the information provided es- of the organization, revocation or modificationDeterminations can request technical advice on tablishes that it does not qualify for exemption. will ordinarily take effect as of the date of thatany technical or procedural question that cannot An organization can appeal a proposed adverse material change.be resolved on the basis of law, regulations, or a ruling or determination letter. See Appeals Pro-

Relief from retroactivity. If a ruling or de-clearly applicable revenue ruling or other pub- cedures, later.termination letter was issued in error or is nolished precedent. An organization can requestlonger in accord with the holding of the IRS, andthat an issue be referred to EO Technical for Effective Date of Exemption if section 7805(b) relief is granted, retroactivitytechnical advice if it feels that a lack of uniformityof the revocation or modification ordinarily willexists as to the disposition of the issue or if an A ruling or determination letter recognizing ex-be limited to a date not earlier than that on whichissue is so unusual or complex as to warrant emption is usually effective as of the date ofthe original ruling or determination letter wasconsideration by EO Technical. If a determina- formation of an organization if, during the pe-modified or revoked. For more information ontion letter is issued based on technical advice riod before the date of the ruling or determina-requesting section 7805(b) relief, see Revenuefrom EO Technical regarding qualification for tion letter, its purposes and activities were thoseProcedure 2010-4, sec. 13 (or later update).exemption or foundation status, no further ad- required by the law. (See Application for Recog-

ministrative appeal is available on the issue that nition of Exemption in chapter 3 for the special Foundations. The determination of the ef-was the subject of technical advice. rule for organizations applying for recognition of fective date is the same for the revocation or




modification of foundation status or operating 3. A copy of the letter showing the determina- Administrative Remediesfoundation status unless the effective date is tion you disagree with, or the date andexpressly covered by statute or regulations. symbols on the determination letter. In the case of an application under section

501(c)(3), all of the following actions, called ad-4. A statement of facts supporting the organi-ministrative remedies, must be completed byWritten notice. If an EO area manager con- zation’s position in any contested factual your organization before an unfavorable rulingcludes, as a result of examining an information issue. or determination letter from the IRS can be ap-return or considering information from any otherpealed to the courts.5. A statement outlining the law or other au-source, that a ruling or determination letter

thority the organization is relying on.should be revoked or modified, the organization1. The filing of a substantially completed ap-

will be advised in writing of the proposed action 6. A statement as to whether a conference at plication Form 1023 or group exemptionand the reasons for it. the Appeals Office is desired. request under section 501(c)(3) (described

The organization will also be advised of its earlier in this chapter) or the filing of aThe statement of facts (item 4) must be de-right to protest the proposed action by request- request for a determination of foundationclared true under penalties of perjury. This maying Appeals Office consideration. The appeal status (see Private Foundations and Publicbe done by adding to the protest the followingprocedures are discussed next. Charities in chapter 3).signed declaration:2. In the case of a late-filed application, re-

“Under penalties of perjury, I declare questing relief under section 301.9100 ofthat I have examined the statement of the Income Tax Regulations regarding ap-Appeal Procedures facts presented in this protest and in plications for extensions of time for makingany accompanying schedules and an election or application for relief from tax

If an organization applies for tax-exempt status statements and, to the best of my (see Application for Recognition of Exemp-knowledge and belief, it is true, correct,and receives adverse rulings issued by EO tion in chapter 3).and complete.”Technical, the organization will be advised of its

3. The timely submission of all additional in-right to protest the determination by requestingSignature. formation requested to perfect an exemp-Appeals Office consideration (this process does

tion application or request fornot apply to adverse determinations issued byIf the organization’s representative submits the determination of private foundation status.EO Technical). The organization must submit aappeal, a substitute declaration must be in-

statement of its views fully explaining its reason- 4. Exhaustion of all administrative appealscluded, stating:ing. The statement must be submitted within 30 available within the IRS, including protestdays from the date of the adverse determination of an adverse ruling issued by EO Techni-1. That the representative prepared the ap-letter and must state whether it wishes Appeals cal in an exemption application.peal and accompanying documents, andOffice consideration.

The actions just described will not be consid-2. Whether the representative knows person-ered completed until the IRS has had a reasona-ally that the statements of fact contained inRepresentation. A principal officer or trustee ble time to act upon the appeal or protest, as thethe appeal and accompanying documentscan represent an organization at any level of case may be.are true and correct.appeal within the IRS. Or an attorney, certified

An organization will not be considered topublic accountant, or individual enrolled to prac- Be sure the appeal contains all of the infor-have exhausted its administrative remediestice before the IRS can represent the organiza- mation requested. Incomplete appeals will bebefore the earlier of:

tion. returned for completion.If the organization’s representative attends a If a conference is requested, it will be held at 1. The completion of the steps just listed and

conference without a principal officer or trustee, the Appeals Office, unless the organization re- the sending by certified or registered mailthe representative must file a proper power of of a notice of final determination, orquests that the meeting be held at a field officeattorney or a tax information authorization convenient to both parties. 2. The expiration of the 270-day period inbefore receiving or inspecting confidential infor- The Appeals Office, after considering the which the IRS has not issued a notice ofmation. Form 2848, or Form 8821, Tax Informa- organization’s appeal as well as information final determination and the organizationtion Authorization, as appropriate (or any other presented in any conference held, will notify the has taken, in a timely manner, all reasona-properly written power of attorney or authoriza- organization of its decision and issue an appro- ble steps to secure a ruling or determina-tion), can be used for this purpose. These forms priate determination letter. An adverse decision tion.can be obtained from the IRS. For more informa- can be appealed to the courts (discussed later).tion, see Publication 947, Practice Before the The Appeals Office must request technical 270-day period. The 270-day period will beIRS and Power of Attorney. advice from EO Technical on any exempt organ- considered by the IRS to begin on the date a

ization issue concerning qualification for exemp- substantially completed Form 1023 or group ex-Appeals Office tion or foundation status for which there is no emption request is sent to the IRS. See Applica-published precedent or for which there is reasonConsideration tion Procedures, earlier, for information neededto believe that nonuniformity exists. If an organi- to complete Form 1023.

EO Determinations will consider the statement zation believes that its case involves such anIf the application does not contain all of theprotesting and appealing (hereinafter appealing) issue, it should ask the Appeals Office to request required items, it will not be further processedthe adverse determination and decide if the in- technical advice from EO Technical. and may be returned to the applicant for comple-

formation affects its determination. If the appeal Any determination letter issued on the basis tion. The 270-day period, in this event, will notdoes not provide a basis to reconsider its ad- of technical advice from EO Technical cannot be be considered as starting until the date the appli-verse determination, it will forward the appeal appealed to the Appeals Office for those issues cation is remailed to the IRS with the requestedand case file to the Appeals Office. For more that were the subject of the technical advice information, or, if a postmark is not evident, oninformation about the role of the Appeals Office, from EO Technical. the date the IRS receives a substantially com-see Publication 892, Exempt Organization Ap- pleted application.peal Procedures for Unagreed Issues. The ap- EO Technical Considerationpeal should include the following information. Appeal to Courts

If an application is referred to EO Technical for1. The organization’s name, address, day- issuance of a ruling and an adverse ruling is If the IRS issues an unfavorable determinationtime telephone number, and employer issued, the organization will be informed of the letter or ruling to your organization and you haveidentification number. basis for the conclusion, its right to file a protest exhausted all the administrative remedies just2. A statement that the organization wants to within 30 days, and its right to have a conference discussed, your organization can seek judicial

protest the determination. at Headquarters. remedies.

Page 6 Chapter 1 Application, Approval, and Appeal Procedures REL 00890



For example, if your organization has paid under section 501(c) of subordinate organiza- central organization must submit information fortions on whose behalf the central organizationthe tax resulting from the adverse determination those subordinates to be included in the grouphas applied for recognition of exemption.and met all other statutory prerequisites, it can exemption letter. The information should be for-

A central organization is an organization thatfile suit for a refund in a U.S. District Court or the warded in a letter signed by a principal officer ofhas one or more subordinates under its generalU.S. Court of Federal Claims. Or, if your organi- the central organization setting forth or includingsupervision or control.zation elected not to pay the tax deficiency re- as attachments the following.

A subordinate organization is a chapter, lo-sulting from the adverse determination and met1. Information verifying that the subordinates:cal, post, or unit of a central organization. Aall other statutory prerequisites, it can file suit for

central organization may be a subordinate itself,a redetermination of the tax deficiencies in the a. Are affiliated with the central organiza-such as a state organization that hasUnited States Tax Court. For more information tion;subordinate units and is itself affiliated with aon these types of suits, get Publication 556,national (central) organization. b. Are subject to its general supervision orExamination of Returns, Appeal Rights, and

A subordinate organization may or may not control;Claims for Refund.be incorporated, but it must have an organizingIn certain situations, your organization can c. Are all eligible to qualify for exemptiondocument. A subordinate that is organized andfile suit for a declaratory judgment in the U.S. under the same paragraph of sectionoperated in a foreign country cannot be includedDistrict Court for the District of Columbia, the 501(c), though not necessarily the para-in a group exemption letter. A subordinate de-U.S. Court of Federal Claims, or the U.S. Tax graph under which the central organiza-scribed in section 501(c)(3) cannot be included

Court. This remedy is available if your organization is exempt;in a group exemption letter if it is a privatetion received an adverse notice of final determi- foundation described in section 509(a). d. Are not private foundations if the appli-nation, or if the IRS failed to make a timely If your organization is a subordinate one con- cation for a group exemption letter in-determination on your initial or continuing qualifi- trolled by a central organization (for example, a volves section 501(c)(3);cation or classification as an exempt organiza- church, the Boy Scouts, or a fraternal organiza-tion. However, your exempt status claim must e. Are all on the same accounting periodtion), you should check with the central organi-be as: as the central organization if they are tozation to see if it has been issued a group

be included in group returns; andexemption letter that covers your organization. If• An organization qualifying under sectionit has, you do not have to file a separate applica-501(c)(3), f. Are organizations that have beention unless your organization no longer wants to formed within the 15-month period pre-• An organization to which a deduction for a be included in the group exemption letter. ceding the date of submission of thecontribution is allowed under section If the group exemption letter does not cover

group exemption application if they are170(c)(2), your organization, ask your central organizationclaiming section 501(c)(3) status andabout being included in the next annual group• An organization that is a private founda- are subject to the requirements of sec-ruling update that it submits to the IRS.tion under section 509(a), tion 508(a) and wish to be recognizedas exempt from their dates of creation• A private operating foundation under sec- Central Organization (a group exemption letter may be is-tion 4942(j)(3), or

Application Procedure sued covering subordinates, one or• A cooperative organization that is exemptmore of which have not been organizedfrom tax under section 521. If your organization is a central organization with within the 15-month period preceding

affiliated subordinates under its control, it can the date of submission, if all subordi-apply for a group exemption letter for its subordi-Adverse notice of final determination. The nates are willing to be recognized asnates, provided it has obtained recognition of itsadverse notice of final determination referred to exempt only from the date of applica-own exemption before or concurrently with theabove is a ruling or determination letter sent by tion).group exemption. You should make the applica-certified or registered mail holding that your or-tion for such subordinates by letter instead ofganization: 2. A detailed description of the purposes andsubmitting either Form 1023 or 1024. This pro-

activities of the subordinates, including the• Is not described in section 501(c)(3) or cedure relieves each of the subordinates cov-sources of receipts and the nature of ex-section 170(c)(2), ered by a group exemption letter from filing itspenditures.own application. A central organization obtains• Is a private foundation as defined in sec-

its own recognition of exemption by sending its 3. A sample copy of a uniform governing in-tion 4942(j)(3), orapplication to the IRS address shown on Form strument (such as a charter or articles of

• Is a public charity described in a part of 8718 or Form 1023. association) adopted by the subordinates,section 509(a) or section 170(b)(1)(A) If the central organization has previously ob- or, in its absence, copies of representativeother than the part under which your or- tained recognition of its own exemption, it must instruments.ganization requested classification. indicate its employer identification number and

4. An affirmation to the effect that, to the bestthe date of the letter recognizing its exemption. Itof the officer’s knowledge, the purposesneed not forward documents already submitted.Favorable court rulings - IRS procedure. If and activities of the subordinates are asHowever, if it has not already done so, the cen-a suit results in a final determination that your stated in (2) and (3), above.tral organization must submit a copy of anyorganization is exempt from tax, the IRS will

amendment to its governing instruments or in- 5. A statement that each subordinate to beissue a favorable ruling or determination letter,ternal regulations as well as any information included in the group exemption letter hasprovided your organization has filed an applica-about changes in its character, purposes, or given written authorization to that effect,tion for exemption and submitted a statementmethod of operation. signed by an authorized officer of thethat the underlying facts and applicable law are

the same as in the period considered by the subordinate, to the central organizationEmployer identification number. The cen-court. (see also New 501(c)(3) organizations thattral organization must have an employer identifi-

want to be included, later in this section).cation number (EIN) before it submits acompleted exemption application. Each 6. A list of subordinates to be included in thesubordinate must have its own EIN, even if it has group exemption letter to which the IRSGroup Exemption no employees. The central organization must has issued an outstanding ruling or deter-send with the group exemption application an mination letter relating to exemption.Letter EIN for each subordinate organization.

7. If the application for a group exemptionletter involves section 501(c)(3) and is sub-A group exemption letter is a ruling or determi- Information required for subordinate organi-ject to the provisions of the Code requiringnation letter issued to a central organization zations. In addition to the information required

recognizing on a group basis the exemption to obtain recognition of its own exemption, the that it give timely notice that it is not a




private foundation (see Private Founda- 2. The central organization notifies the IRS,Information Required Annuallyby its annual submission or otherwise, thattions in chapter 3), an affirmation to the

To maintain a group exemption letter, the central any of its subordinates will no longer fulfilleffect that, to the best of the officer’sorganization must submit annually, at least 90 the conditions for continued effectiveness,knowledge and belief, no subordinate to bedays before the close of its annual accounting explained earlier, orincluded in the group exemption letter is aperiod, all of the following information. private foundation as defined in section 3. The IRS notifies the central organization or

509(a). 1. Information about all changes in the pur- the affected subordinate that the group ex-poses, character, or method of operation emption letter will no longer have effect for8. For each subordinate that is a schoolof the subordinates included in the group some or all of the group because the con-claiming exemption under sectionexemption letter. ditions for continued effectiveness of a501(c)(3), the information required by Rev-

group exemption letter have not been ful-enue Ruling 71-447, 1971-2 C.B. 230 and 2. A separate list (that includes the names,filled.Revenue Procedure 75-50, 1975-2 C.B. mailing addresses, actual addresses if dif-

587 (these requirements are fully de- ferent, and EINs of the affected subordi- When notice is given under any of these threescribed in chapter 3, under Private nates) for each of the three following conditions, the IRS will no longer recognize theSchools; see also Schedule B, Form categories. exempt status of the affected subordinates until1023). they file separate applications on their own be-a. Subordinates that have changed their

half or the central organization files complete9. For any school affiliated with a church, the names or addresses during the year.supporting information for their reinclusion in theinformation to show that the provisions of

b. Subordinates no longer to be included group exemption at the time of its annual sub-Revenue Ruling 75-231 have been met.in the group exemption letter because mission. However, when the notice is given by

10. A list of the names, mailing addresses, ac- they no longer exist or have disaffiliated the IRS and the withdrawal of recognition istual addresses if different, and EINs of from or withdrawn their authorization to based on the failure of the organization to com-subordinates to be included in the group the central organization. ply with the requirements for recognition ofexemption letter. A current directory of tax-exempt status under the particular subsec-c. Subordinates to be added to the groupsubordinates may be furnished instead of tion of section 501(c), the revocation will ordinar-exemption letter because they arethe list if it includes the required informa- ily take effect as of the date of that failure. Thenewly organized or affiliated or becausetion and if the subordinates not to be in- notice, however, will be given only after thethey have recently authorized the cen-cluded in the group exemption letter are appeal procedures described earlier in thistral organization to include them.identified. chapter are completed.

An annotated directory of subordinates willnot be accepted for this purpose. If there

New 501(c)(3) organizations that want to be were none of the above changes, the centralincluded. A new organization, described in organization must submit a statement to thatsection 501(c)(3), that wants to be included in a effect.group exemption letter must submit its authori-

3. The information required to be submittedzation (as explained in item number 5, earlier,by a central organization on behalf of sub- 2.under Information required for subordinate orga-ordinates to be included in the group ex-nizations) to the central organization before theemption letter is required for subordinatesend of the 15th month after it was formed into be added to the letter. (This informationorder to satisfy the requirement of sectionis listed in items 1 through 9, under Infor- Filing508(a). The central organization must also in-mation required for subordinate organiza-clude this subordinate in its next annual submis-tions, earlier. However, if the informationsion of information, as discussed later, under Requirementsupon which the group exemption letter wasInformation Required Annually.based applies in all material respects tothese subordinates, a statement to this ef- and RequiredKeeping the Group fect may be submitted instead of the infor-

Exemption Letter in Force mation required by items 1 through 4 ofthat list.) Disclosures

Continued effectiveness of a group exemptionletter is based on the following conditions. The organization should send this in-

formation to:1. The continued existence of the central or- Introduction

ganization. Ogden Service Center Most exempt organizations (including privateMail Stop 62712. The continued qualification of the central foundations) must file various returns and re-Ogden, UT 84404-4749organization for exemption under section ports at some time during (or following the close

501(c). of) their accounting period.Submitting the required information an-3. The submission by the central organization nually does not relieve the central or-

Topicsof the information required annually (de- ganization or any of its subordinates ofCAUTION!

This chapter discusses:scribed below under Information Required the duty to submit any other information thatmay be required by an EO area manager toAnnually).

• Annual information returnsdetermine whether the conditions for continued4. The annual filing of an information return exemption are being met. • Unrelated business income tax return(Form 990, for example) by the central or-

ganization if required. • Employment tax returnsEvents CausingThe continued effectiveness of a group exemp- • Political organization income tax returnLoss of Group Exemptiontion letter as to a particular subordinate is based

• Reporting requirements for a political or-on these four conditions, as well as on the con- A group exemption letter no longer has effect, ganizationtinued conformity by the subordinate to the re- for either a particular subordinate or the groupquirements for inclusion in a group exemption • Donee information returnas a whole, when: letter, the authorization for inclusion, and the • Information provided to donorsannual filing of any required information return 1. The central organization notifies the IRSfor the subordinate. that it is going out of existence, • Report of cash received

Page 8 Chapter 2 Filing Requirements and Required Disclosures REL 00892



• Public inspection of exemption applica- ❏ Schedule O (Form 990) Supplemental See chapter 6 for information about gettingthese publications and forms.tions, annual returns, and political organi- Information to Form 990

zations reporting forms❏ Schedule R (Form 990) Related

• Required disclosures Organizations and UnrelatedPartnerships• Miscellaneous rules Annual Information

❏ 990-PF Return of Private Foundation orSection 4947(a)(1) Nonexempt ReturnsUseful ItemsCharitable Trust Treated as a

You may want to see: Every organization exempt from federal incomePrivate Foundationtax under section 501(a) must file an annual

❏ 990-BL Information and Initial Excise TaxPublication information return except:Return for Black Lung Benefit

❏ 15 Circular E, Employer’s Tax Guide Trusts and Certain Related Persons 1. A church, an interchurch organization oflocal units of a church, a convention or❏ 15-A Employer’s Supplemental Tax ❏ 990-T Exempt Organization Businessassociation of churches, or an integratedGuide Income Tax Returnauxiliary of a church (as defined later

❏ 15-B Employer’s Tax Guide to Fringe ❏ 990-W Estimated Tax on Unrelated under Religious Organizations in chapterBenefits 3);Business Taxable Income for

Tax-Exempt Organizations❏ 598 Tax on Unrelated Business Income 2. A church-affiliated organization that is ex-of Exempt Organizations clusively engaged in managing funds or❏ 1120-POL U.S. Income Tax Return for

maintaining retirement programs;Certain Political OrganizationsForm (and Instructions)

3. A school below college level affiliated with❏ 4720 Return of Certain Excise Taxes❏ 941 Employer’s Quarterly Federal Tax a church or operated by a religious order,Under Chapters 41 and 42 of the

Return even though it is not an integrated auxiliaryInternal Revenue Codeof a church;

❏ 990 Return of Organization Exempt ❏ 5768 Election/Revocation of Election byFrom Income Tax 4. A mission society sponsored by or affili-an Eligible Section 501(c)(3)

ated with one or more churches or churchOrganization To Make Expenditures❏ 990-EZ Short Form Return ofdenominations, more than half of the soci-To Influence LegislationOrganization Exempt From Incomeety’s activities are conducted in, or di-

Tax ❏ 6069 Return of Excise Tax on Excess rected at, persons in foreign countries;Contributions to Black Lung Benefit❏ Schedule A (Form 990 or 990-EZ) 5. An exclusively religious activity of any re-Trust Under Section 4953 andPublic Charity Status and Public ligious order;Computation of Section 192SupportDeduction 6. A state institution, the income of which is

❏ Schedule B (Form 990, 990-EZ, or excluded from gross income under section❏ 7004 Application for Automatic Extension990-PF) Schedule of Contributors 115;

of Time to File Certain Business❏ Schedule C (Form 990 or 990-EZ) 7. A corporation described in sectionIncome Tax, Information, and Other

Political Campaign and Lobbying 501(c)(1) (a corporation that is organizedReturnsActivities under an Act of Congress and is:❏ 8274 Certification by Churches and

❏ Schedule D (Form 990) SupplementalQualified Church-Controlled a. an instrumentality of the United States,Financial StatementsOrganizations Electing Exemption and

❏ Schedule E (Form 990 or 990-EZ) from Employer Social Security andb. exempt from federal income taxes);Schools Medicare Taxes

❏ Schedule F (Form 990) Statement of 8. A black lung benefit trust described in sec-❏ 8282 Donee Information ReturnActivities Outside the United States tion 501(c)(21) (required to file Form

❏ 8300 Report of Cash Payments Over 990-BL, Information and Initial Excise Tax❏ Schedule G (Form 990 or 990-EZ) $10,000 Received in a Trade or Return for Black Lung Benefit Trusts andSupplemental Information Business Certain Related Persons. See chapter 4Regarding Fundraising or Gamingfor more information);❏ 8453-X Political Organization DeclarationActivities

for Electronic Filing of Notice of 9. A stock bonus, pension, or profit-sharing❏ Schedule H (Form 990) Hospitals Section 527 Status trust that qualifies under section 401 (re-❏ Schedule I (Form 990) Grants and Other quired to file Form 5500, Annual Return/❏ 8868 Application for Extension of Time to

Assistance to Organizations, Report of Employee Benefit Plan);File an Exempt Organization ReturnGovernments, and Individuals in the

10. A religious or apostolic organization de-❏ 8870 Information Return for TransfersUnited Statesscribed in section 501(d) (required to fileAssociated with Certain Personal

❏ Schedule J (Form 990) Compensation Form 1065, U.S. Return of Partnership In-Benefits ContractsInformation come);

❏ 8871 Political Organization Notice of❏ Schedule K (Form 990) Supplemental 11. A foreign organization described in sectionSection 527 Status

Information on Tax-Exempt Bonds 501(a) (other than a private foundation)❏ 8872 Political Organization Report of that normally does not have more than

❏ Schedule L (Form 990 or 990-EZ) Contributions and Expenditures $25,000 in annual gross receipts fromTransactions With Interestedsources within the United States and has❏ 8886-T Disclosure by Tax-Exempt EntityPersonsno significant activity in the United States.Regarding Prohibited Tax Shelter

❏ Schedule M (Form 990) Noncash For further information, see Revenue Pro-TransactionContributions cedure 94-17, 1994-1 C.B. 579;

❏ 8899 Notice of Income from Donated❏ Schedule N (Form 990 or 990-EZ) 12. A governmental unit or an affiliate of a gov-Intellectual Property

Liquidation, Termination, ernmental unit that meets the requirements❏ 8921 Applicable Insurance ContractsDissolution, or Significant of Revenue Procedure 95-48, 1995-2 C.B.

Disposition of Assets Information Return 418;

Chapter 2 Filing Requirements and Required Disclosures Page 9REL 00893



13. An exempt organization (other than a pri- • Any name under which it operates and An organization can file Form 990-EZ in-stead of Form 990 if its gross receipts and totalvate foundation, discussed in chapter 3) does business;assets are below certain amounts. For tax yearshaving gross receipts in each tax year that • Its Internet website address (if any);beginning in 2009, an organization with annualnormally are not more than $25,000. (See

• Its taxpayer identification number; gross receipts less than $500,000 and total as-the instructions for Form 990 for moresets less than $1,250,000 at the end of the taxinformation about what constitutes annual • The name and address of a principal of-year can choose to file Form 990 or 990-EZ. (Forgross receipts that are normally not more ficer;2008, these amounts were less than $1,000,000than $25,000.);

• Organization’s annual tax period; in gross receipts and $2,500,000 in total assets.)14. A private foundation exempt under section Beginning in tax year 2010, an organization• Verification that the organization’s annual501(c)(3) and described in section 509(a). can file either Form 990 or 990-EZ if it meets the

gross receipts are normally $25,000 or(Required to file Form 990-PF); or following:less; and

15. A U.S. possession organization described1. Its gross receipts during the year are less• Notification if the organization has termi-in section 501(a) (other than a private

than $200,000.nated.foundation) that normally does not havemore than $25,000 in annual gross re- 2. Its total assets (line 25, column (B) of Form

Form 990-N is due by the 15th day of the fifthceipts from sources within the United 990-EZ) at the end of the year are lessmonth after the close of the tax year. For taxStates and has no significant activity in the than $500,000.years beginning after December 31, 2006, anyUnited States. For further information, see

If your organization does not meet either oforganization that fails to meet its annual report-Rev. Proc. 2003-21, 2003-6 I.R.B. 448.these conditions, you cannot file Form 990-EZ.ing requirement for 3 consecutive years will au-Instead you must file Form 990.tomatically lose its tax-exempt status. To regain

its exempt status an organization will have to Group return. A group return on Form 990reapply for recognition as a tax-exempt organi- may be filed by a central, parent, or like organi-zation. zation for two or more local organizations, noneSupporting Organization Annual

of which is a private foundation. This return is inInformation Return Exceptions. This filing requirement doesaddition to the central organization’s separatenot apply to:

For tax years ending after August 17, 2006, all annual return if it must file a return. It cannot be• Churches, their integrated auxiliaries, andsection 509(a)(3) supporting organizations are included in the group return. See the instructions

conventions or associations of churches,required to file Form 990 or 990-EZ with the IRS for Form 990 for the conditions under which thisregardless of the organization’s gross receipts, procedure may be used.• Organizations that are included in a groupunless it qualifies as one of the following: return; In any year that an organization is

properly included as a subordinate or-1. An integrated auxiliary of a church; • Private foundations required to file Formganization on a group return, it should

TIP990-PF; and2. The exclusively religious activities of a re- not file its own Form 990.

ligious order; or • Section 509(a)(3) supporting organizationsSchedule A (Form 990 or 990-EZ). Organiza-required to file Form 990 or Form 990-EZ.3. An organization, the gross receipts oftions, other than private foundations, that arewhich are normally not more than $5,000,described in section 501(c)(3) and that are oth-that supports a section 509(a)(3) religious Forms 990 and 990-EZ erwise required to file Form 990 or 990-EZ mustorder.also complete Schedule A of that form.Exempt organizations, other than private foun-If the organization is described in item (3)

dations, must file their annual information re- Schedule B (Form 990, Form 990-EZ, orabove, then it must submit Form 990-Nturns on Form 990 or 990-EZ, unless excepted 990-PF). Organizations that file Form 990 or(e-Postcard) unless it voluntarily files Form 990from filing or allowed to submit Form 990-N, 990-EZ use this schedule to provide requiredor 990-EZ.described earlier. information regarding their contributors.On its annual information return, at Part I,

Generally, political organizations with grossSchedule A (Form 990 or 990-EZ) a supporting Schedule O (Form 990). Organizations thatreceipts of $25,000 ($100,000 for a qualifiedorganization must: file Form 990 must use this schedule to providestate or local political organization (QSLPO)) orrequired additional information or if additional• List the section 509(f)(3) organizations more for the tax year are required to file Formspace is needed.with respect to which it provides support, 990 or 990-EZ unless specifically excepted from

Other schedules may be required to be filedfiling the annual return. The following political• Indicate whether it is a Type I, Type II, or with Form 990 or 990-EZ. See the instructionsorganizations are not required to file Form 990Type III supporting organization, and for Form 990 or the instructions for Form 990-EZor Form 990-EZ.for more information.• Certify that the organization is not con- • A state or local committee of a politicaltrolled directly or indirectly by disqualified

party.persons (other than by foundation manag- Form 990-PFers and other than one or more publicly • A political committee of a state or localsupported organizations). candidate. All private foundations exempt under section

501(c)(3) must file Form 990-PF. These organi-• A caucus or association of state or localzations are discussed in chapter 3.officials.Annual Electronic Filing

Requirement for Small Tax-Exempt • A political organization that is required toOrganizations report as a political committee under the Electronic Filing

Federal Election Campaign Act.Most small tax-exempt organizations with an-You may be required to file Form 990, Form

nual gross receipts normally $25,000 or less • A 501(c) organization that has expendi- 990-EZ, or Form 990-PF, and related forms,now must submit Form 990-N, Electronic Notice tures for influencing or attempting to influ- schedules, and attachments electronically.(e-Postcard) for Tax-Exempt Organizations Not ence the selection, nomination, election, If an organization is required to file a returnRequired to File Form 990 or 990-EZ, with the or appointment of any individual for a fed- electronically but does not, the organization isIRS annually, if they choose not to file a Form eral, state, or local public office. considered to have not filed its return. See Reg-990 or 990-EZ. Form 990-N requires the follow-

ulations section 301.6033-4 for more informa-ing information: Form 990-EZ. This is a shortened version of tion.

• The organization’s legal name, and mail- Form 990. It is designed for use by small exempt The IRS may waive the requirement to fileing address; organizations and nonexempt charitable trusts. electronically in cases of undue hardship. For




information on filing a waiver, see Notice Maximum penalty. The maximum penalty a travel tour is developed, promoted, and oper-2010-13, 2010-4 I.R.B. 327, available at www. for any one return is the smaller of $10,000 or ated.IRS.gov/irb/2010-4_IRB/ar14.html. 5% of the organization’s gross receipts for the

Example. ABC, a university alumni associa-year.Form 990. An organization is required to file tion, is tax exempt as an educational organiza-Organization with gross receipts over $1Form 990 electronically if it files at least 250 tion under section 501(c)(3). As part of itsmillion. For an organization that has grossreturns during the calendar year and has total activities, ABC operates a travel tour program.receipts of over $1 million for the year, the pen-assets of $10 million or more at the end of the The program is open to all current members ofalty is $100 a day up to a maximum of $50,000.tax year. ABC and their guests. ABC works with travel

Managers. If the organization is subject to agents to schedule approximately ten tours an-Form 990-PF. An organization is required tothis penalty, the IRS may specify a date by nually to various destinations around the world.file Form 990-PF electronically if it files at leastwhich the return or correct information must be Members of ABC pay $1,000 to XYZ Travel250 returns during the calendar year.supplied by the organization. Failure to comply Agency to participate in a tour. XYZ pays ABC awith this demand will result in a penalty imposed per person fee for each participant. Although the

Due Date upon the manager of the organization, or upon literature advertising the tours encourages ABCany other person responsible for filing a correct members to continue their lifelong learning by

Forms 990, 990-EZ, or 990-PF must be filed by return. The penalty is $10 a day for each day joining the tours, and a faculty member of ABC’sthe 15th day of the fifth month after the end of that a return is not filed after the period given for related university frequently joins the tour as ayour organization’s accounting period. Thus, for filing. The maximum penalty imposed on all per- guest of the alumni association, none of thea calendar year taxpayer, Forms 990, 990-EZ, sons with respect to any one return is $5,000. tours include any scheduled instruction or curric-or 990-PF is due May 15 of the following year. ulum related to the destinations being visited.Exception for reasonable cause. No pen-

The travel tours made available to ABC’s mem-alty will be imposed if reasonable cause forExtension of time to file. Use Form 8868 to bers do not contribute importantly to the accom-failure to file timely can be shown.request an automatic 3-month extension of time plishment of ABC’s educational purpose.to file Forms 990, 990-EZ, or 990-PF and also to Rather, ABC’s program is designed to generateAutomatic revocation penalty. If the organi-apply for an additional (not automatic) 3-month revenues for ABC by regularly offering its mem-zation fails to file a Form 990, 990-EZ, orextension if needed. bers travel services. Therefore, ABC’s tour pro-990-PF, or fails to submit a Form 990-N, asDo not apply for both the automatic 3-month gram is an unrelated trade or business.required for 3 consecutive years, it will automati-extension and the additional 3-month extension

For additional information on unrelated busi-cally lose its tax-exempt status. Beginning inat the same time. For more information, seeness income, see Publication 598 and the In-2010, automatic revocations will start for organi-Form 8868 and its instructions.structions for Form 990-T.zations not filing for the third consecutive year.When filing Form 8868 for an automatic

Organizations that lose their tax-exempt status3-month extension, neither a signature, nor anmust file income tax returns and pay incomeexplanation is required. However, when filingtaxes. Check the IRS website, www.IRS.gov/eo,Form 8868 for an additional 3-month extension, Employmentfor updates.both a signature and an explanation are re-

quired. Tax ReturnsApplication for exemption pending. An or-

Every employer, including an organization ex-ganization that claims to be exempt under sec- Unrelated Business empt from federal income tax, who pays wagestion 501(a) but has not established its exemptto employees is responsible for withholding, de-status by the due date for filing an information Income Tax Returnpositing, paying, and reporting federal incomereturn should complete and file Form 990 ortax, social security and Medicare (FICA) taxes,990-EZ (or Form 990-PF if it considers itself a Even though an organization is recognized asand federal unemployment tax (FUTA), unlessprivate foundation). If the organization’s applica- tax exempt, it still may be liable for tax on itsthat employer is specifically excepted by lawtion is pending with the IRS, it must so indicate unrelated business income. Unrelated businessfrom those requirements or if the taxes clearlyon Forms 990, 990-EZ, or 990-PF (whichever income is income from a trade or business,do not apply.applies) by checking the application pending regularly carried on, that is not substantially re-

For more information, obtain a copy of Publi-block at the top of page 1 of the return. For more lated to the charitable, educational, or other pur-cation 15, which summarizes the responsibilitiesinformation on the filing requirements, see the pose that is the basis for the organization’sof an employer, Publication 15-A, PublicationInstructions for Forms 990, 990-EZ, and exemption. An exempt organization that has15-B, and Form 941.990-PF. $1,000 or more of gross income from an unre-

lated business must file Form 990-T.Trust fund recovery penalty. If any personState reporting requirements. Copies of The obligation to file Form 990-T is in addi- required to collect, truthfully account for, andForms 990, 990-EZ, or 990-PF may be used to tion to the obligation to file an annual information pay over any of these taxes willfully fails tosatisfy state reporting requirements. See the return such as the Form 990, 990-EZ, or satisfy any of these requirements or willfully triesinstructions for those forms. 990-PF. in any way to evade or defeat any of them, that

Form 8870. Organizations that filed a Form person will be subject to a penalty. The penaltyEstimated tax. Exempt organizations must990, 990-EZ, or 990-PF, and paid premiums or is equal to the tax evaded, not collected, or notmake quarterly payments of estimated tax onreceived transfers on certain life insurance, an- accounted for and paid over. The term personunrelated business income. An organizationnuity, and endowment contracts (personal ben- includes:must make estimated tax payments if it expectsefit contracts), must file Form 8870. For more its tax for the year to be $500 or more. Use Form • An officer or employee of a corporation, orinformation, see Form 8870 and the instructions 990-W to figure the organization’s estimated taxfor that form. • A member or employee of a partnership.payments.

Travel tour programs. Travel tour activities Exception. The penalty is not imposed onPenalties that are a trade or business are an unrelated any unpaid volunteer director or member of a

trade or business if the activities are not sub- board of trustees of an exempt organization ifstantially related to the purpose to which tax the unpaid volunteer serves solely in an honor-Penalties for failure to file. Generally, an ex-exemption was granted to the organization. ary capacity, does not participate in theempt organization that fails to file a required

day-to-day or financial operations of the organi-return must pay a penalty of $20 a day for each Whether travel tour activities conducted byzation, and does not have actual knowledge ofday the failure continues. The same penalty will an organization are substantially related to thethe failure on which the penalty is imposed.apply if the organization does not give all the organization’s tax exempt purpose is deter-

information required on the return or does not mined by looking at all the relevant facts and This exception does not apply if it results ingive the correct information. circumstances, including, but not limited to, how no one being liable for the penalty.


http://www.IRS.gov/irb/2010-4_IRB/ar14.htrnl

http://www.IRS.gov/irb/2010-4_IRB/ar14.htrnl

www.IRS.gov/eo



FICA and FUTA tax exceptions. Payments Schedule SE (Form 1040), Self-Employment 1. The total amount of its exempt functionTax, should be attached to the employee’s inexpenditures, orfor services performed by a minister of a churchcome tax return.in the exercise of the ministry, or a member of a 2. The organization’s net investment income.

religious order performing duties required by theorder, are generally not subject to FICA or FUTA Separate fund. A section 501(c) organiza-taxes. tion can set up a separate segregated fund thatPolitical Organization will be treated as an independent political organ-FUTA tax exception. Payments for serv-

ization. The earnings and expenditures made byices performed by an employee of a religious, Income Tax Return the separate fund will not be attributed to thecharitable, educational, or other organizationsection 501(c) organization.described in section 501(c)(3) that are generally Generally, a political organization is treated as

subject to FICA taxes if the payments are $100 Section 501(c)(3) organizations arean organization exempt from tax. Certain politi-or more for the year, are not subject to FUTA precluded from, and may suffer loss ofcal organizations, however, must file an annualtaxes. exemption for, engaging in any politicalincome tax return, Form 1120-POL, for any year CAUTION

!campaign on behalf of, or in opposition to, anythey have political organization taxable incomeFICA tax exemption election. Churchescandidate for public office.in excess of the $100 specific deduction allowedand qualified church-controlled organizations

under section 527.can elect exemption from employer FICA taxesDue date. Form 1120-POL is due by the 15thby filing Form 8274. A political organization that hasday of the 3rd month after the end of the tax$25,000 ($100,000 for a qualified stateTo elect the exemption, Form 8274 must beyear. Thus, for a calendar year taxpayer, Formor local political organization) or morefiled before the first date on which a quarterly

TIP

1120-POL is due on March 15 of the followingin gross receipts for the tax year must file Formemployment tax return would otherwise be dueyear. If any due date falls on a Saturday, Sun-990 or Form 990-EZ (and Schedule B of thefrom the electing organization. The organization day, or legal holiday, the organization can fileform), unless excepted. See Forms 990 andcan make the election only if it is opposed for the return on the next business day.990-EZ, earlier.religious reasons to the payment of FICA taxes.

Form 1120-POL is not required of anThe election applies to payments for serv- Political organization. A political organiza- exempt organization that makes ex-ices of current and future employees other than tion is a party, committee, association, fund, or penditures for political purposes if itsTIP

services performed in an unrelated trade or other organization (whether or not incorporated) gross income does not exceed its directly con-business. organized and operated primarily for the pur- nected deductions by more than $100 for the taxpose of directly or indirectly accepting contribu-Revoking the election. The election can be year.tions or making expenditures, or both, for anrevoked by the IRS if the organization fails to fileexempt function.Form W-2, Wage and Tax Statement, for 2 years Extension of time to file. Use Form 7004 to

and fails to furnish certain information upon re- Exempt function. An exempt function request an automatic 6-month extension of timequest by the IRS. Such revocation will apply means influencing or attempting to influence the to file Form 1120-POL. The extension will beretroactively to the beginning of the 2-year pe- selection, nomination, election, or appointment granted if you complete Form 7004 properly,riod. of any individual to any federal, state, local pub- make a proper estimate of the tax (if applicable),

lic office or office in a political organization, or file Form 1120-POL by the due date of and payDefinitions. For purposes of this election,the election of the Presidential or Vice Presiden- any tax that is due.the term church means a church, a conventiontial electors, whether or not such individual oror association of churches, or an elementary or Failure to file. A political organization thatelectors are selected, nominated, elected, orsecondary school that is controlled, operated, or fails to file Form 1120-POL is subject to a pen-appointed. It also includes certain office ex-principally supported by a church or by a con- alty equal to 5% of the tax due for each monthpenses of a holder of public office or an office invention or association of churches. (or partial month) the return is late up to a maxi-a political organization.

mum of 25% of the tax due, unless the organiza-The term qualified church-controlled organi-Certain political organizations are re- tion shows the failure was due to reasonablezation means any church-controlled sectionquired to notify the IRS that they are cause.501(c)(3) tax-exempt organization, other thansection 527 organizations. These orga-an organization that both: For more information about filing FormCAUTION

!nizations must use Form 8871. Some of these 1120-POL, refer to the instructions accompany-

1. Offers goods, services, or facilities for sale, section 527 organizations must use Form 8872 ing the form.other than on an incidental basis, to the to file periodic reports with the IRS disclosing

Failure to pay on time. An organizationgeneral public at other than a nominal their contributions and expenditures. For a dis-that does not pay the tax when due generallycharge that is substantially less than the cussion on these forms, see Reporting Require-may have to pay a penalty of 1/2 of 1% of thecost of providing such goods, services, or ments for a Political Organization, later.unpaid tax for each month or part of a month thefacilities, and

Political organization taxable income. tax is not paid, up to a maximum of 25% of the2. Normally receives more than 25% of its Political organization taxable income is the ex- unpaid tax. The penalty will not be imposed if the

support from the sum of governmental cess of: organization can show that the failure to pay onsources and receipts from admissions, time was due to reasonable cause.

1. Gross income for the tax year (excludingsales of merchandise, performance ofexempt function income) minusservices, or furnishing of facilities, in activi-

ties that are not unrelated trades or busi- 2. Deductions directly connected with thenesses. earning of gross income. Reporting

To figure taxable income, allow for a $100 spe-Effect on employees. If a church or quali- Requirements for acific deduction, but do not allow for the net oper-fied church-controlled organization has made anating loss deduction, the dividends-receivedelection, payment for services performed for that Political Organizationdeduction, and other special deductions for cor-church or organization, other than in an unre-porations.lated trade or business, will not be subject to Certain political organizations are required to

FICA taxes. However, the employee, unless oth- Exempt organization not a political organiza- notify the IRS that the organization is to beerw ise exempt , w i l l be sub jec t to tion. An organization exempt under section treated as a section 527 political organization.self-employment tax on the income. The tax 501(c) that spends any amount for an exempt The organization is also required to periodicallyapplies to income of $108.28 or more for the tax function must file Form 1120-POL for any year report certain contributions received and expen-year from that church or organization, and no which it has political taxable income. These or- ditures made by the organization. To notify thedeductions for trade or business expenses are ganizations must include in gross income the IRS of section 527 treatment, an organizationallowed against this self-employment income. lesser of: must file Form 8871. To report contributions and




expenditures, certain tax-exempt political orga- How to file. An organization must file Form All other tax-exempt section 527 organizationsnizations must file Form 8872. 8871 electronically via the IRS Internet website that accept contributions or make expenditures

at www.IRS.gov/polorgs (Keyword: political for an exempt function are required to file Formorgs). 8872.Form 8871

Qualified state or local political organiza-Form 8453-X. After electronically submittingA political organization must electronically file tion. A state or local political organization mayForm 8871, the political organization must print,Form 8871 to notify the IRS that it is to be treated be a QSLPO if:sign, and mail Form 8453-X to the IRS. Uponas a section 527 organization. However, an or- receipt of the Form 8453-X, the IRS will send theganization is not required to file Form 8871 if: 1. All of its political activities relate solely toorganization a username and password that

state or local public office (or office in amust be used to file an amended or final Form• It reasonably expects its annual gross re-state or local political organization).8871 or to electronically file Form 8872.ceipts to always be less than $25,000.

2. It is subject to a state law that requires it to• It is a political committee required to reportreport (and it does report) to a stateunder the Federal Election Campaign Act Penalties agency information about contributionsof 1971 (FECA) (2 U.S.C. 431(4)).and expenditures that is similar to the in-

Failure to file. An organization that is re-• It is a state or local candidate committee. formation that the organization would oth-quired to file Form 8871, but fails to do so on a erwise be required to report to the IRS.• It is a state or local committee of a political timely basis, will not be treated as a tax-exempt

party. 3. The state agency and the organizationsection 527 organization for any period beforemake the reports publicly available.the date Form 8871 is filed. Also, the taxable• It is a section 501(c) organization that has

income of the organization for that period willmade an “exempt function expenditure.” 4. No federal candidate or office holder:include its exempt function income (including

All other political organizations are required to contributions received, membership dues, and a. Controls or materially participates in thefile Form 8871. political fundraising receipts) minus any deduc- direction of the organization,

tions directly connected with the production ofAn organization must provide on Form 8871: b. Solicits contributions for the organiza-that income.tion, orFailure to file an amended Form 8871 will1. Its name and address (including any busi-

cause the organization not to be treated as aness address, if different) and its electronic c. Directs the disbursements of the organi-tax-exempt section 527 organization. If an or-mailing address; zation.ganization is treated as not being a tax-exempt

2. Its purpose; section 527 organization, the taxable income ofInformation required on Form 8872. If anthe organization will be determined by consider-3. The names and addresses of its officers,organization pays an individual $500 or more foring any exempt function income and deductionshighly compensated employees, contactthe calendar year, the organization is required toduring the period beginning on the date of theperson, custodian of records, and mem-disclose the individual’s name, address, occu-material change and ending on the date that thebers of its Board of Directors;pation, employer, amount of the expense, theamended Form 8871 is filed.

4. The name and address of, and relationship date the expense was paid, and the purpose of The tax is computed by multiplying the or-to, any related entities (within the meaning the expense on Form 8872.ganization’s taxable income by the highest cor-of section 168(h)(4)); and If an organization receives contributions ofporate tax rate.

$200 or more from one contributor for the calen-5. Whether it intends to claim an exemption Fraudulent returns. Any individual or cor- dar year, the organization must disclose thefrom filing Form 8872, Form 990, or Form poration that willfully delivers or discloses to the donor’s name, address, occupation, employer,990-EZ. IRS any list, return, account, statement or other and the date the contributions were made.document known to be fraudulent or false as to For additional information that is required,Employer identification number. Before any material matter will be fined not more than see Form 8872.filing Form 8871, the political organization must $10,000 ($50,000 in the case of a corporation)

have its own EIN even if it has no employees. If or imprisoned for not more than 1 year or both. Due dates. The due dates for filing Form 8872your organization needs an EIN, you can applyvary depending on whether the form is due for aWaiver of penalties. The IRS may waivefor one:reporting period that occurs during a calendarany additional tax assessed on an organization• Online—Click on the Employer ID Num- year in which a regularly scheduled election isfor failure to file Form 8871 if the failure was due

bers (EINs) link at www.IRS.gov/busi- held, or any other calendar year (a nonelectionto reasonable cause and not willful neglect.nesses/small. year).

Additional information. For more information If the due date falls on a Saturday, Sunday,• By telephone at 1-800-829-4933 from 7:00 on Form 8871, see the form and its instructions. or legal holiday, the organization can file on theam to 10:00 pm in the organization’s local For a discussion on the public inspection re- next business day.time zone. quirements for the form, see Public Inspection ofExemption Applications, Annual Returns, and Election year filing. In election years, Form• By mailing or faxing Form SS-4.Political Organ, later. 8872 must be filed on either a quarterly or a

monthly basis. Both a pre-election report and aIf you previously applied for an EIN and havepost-election report are also required to be filednot yet received it, or you are unsure whether Form 8872in an election year. An election year is any yearyou have an EIN, please call our toll-free cus-in which a regularly scheduled general electiont o m e r a c c o u n t s e r v i c e s n u m b e r , Every tax-exempt section 527 political organiza-for federal office is held (an even-numbered1-877-829-5500, for assistance. tion that accepts a contribution or makes anyear).expenditure, for an exempt function during theDue dates. The initial Form 8871 must be filed

calendar year, must file Form 8872 except:within 24 hours of the date on which the organi- Nonelection year filing. In nonelectionzation was established. If there is a material • A political organization that is not required years, the form must be filed on a semiannual orchange an amended Form 8871 must be filed to file Form 8871 (discussed earlier). monthly basis. A complete listing of these filingwithin 30 days of the material change. When the periods are in the Form 8872 Instructions. A• A political organization that is subject toorganization terminates its existence, it must file nonelection year is any odd-numbered year.tax on its income because it did not file ora final Form 8871 within 30 days of termination.

amend Form 8871.If the due date falls on a Saturday, Sunday, How to file. Form 8872 can be filed either

or legal holiday, the organization can file on the • A qualified state or local political organiza- electronically or by mail; however, organizationsnext business day. tion (QSLPO), discussed below. that have, or expect to have, contributions or


http://www.irs.gov/charities/political/article/0,,id=109644,00.html





expenditures of $50,000 or more for the year otherwise disposes of the property, the organi- also indicates knowledge of the information re-porting requirements on dispositions, as previ-zation must file Form 8282, Donee Informationmust file electronically.ously discussed. A copy of Form 8283 must beReturn. However, an organization is not re-

To file by mail, send Form 8872 to the: given to the donee.quired to file Form 8282 if:

• The property is valued at $500 or less, orDepartment of the Treasury • The property is consumed or distributedInternal Revenue Service Center for charitable purposes. Information ProvidedOgden, UT 84201-0027

Form 8282 must be filed with the IRS within to DonorsElectronic filing. File electronically via the125 days after the disposition. Additionally, aIRS internet website at www.IRS.gov/polorgs.

In some situations, a donor must obtain certaincopy of Form 8282 must be given to the previousYou will need a user ID and password to elec-information from a donee organization to obtaindonor. If the organization fails to file the requiredtronically file Form 8872. Organizations thata deduction for a charitable contribution. In otherinformation return, penalties may apply.have completed the electronic filing of Formsituations, the donee organization is required to

8871 and submitted a completed and signed Charitable deduction property. This is provide information to the donor. For example, aForm 8453-X will receive a username and pass- any property (other than money or publicly charitable organization must give a donor a dis-

traded securities) for which the donee organiza-word in the mail. closure statement for a quid pro quo contributiontion signed an appraisal summary or Form 8283,Organizations that have completed the elec- over $75. A donor cannot deduct a charitableNoncash Charitable Contributions.tronic filing of Form 8871, but have not received contribution of $250 or more unless the donor

their user ID and password can request one by has a written acknowledgment from the charita-Publicly traded securities. These are se-writing to the following address: ble organization.curities for which market quotations are readily

In certain circumstances, an organizationavailable on an established securities market asInternal Revenue Servicemay be able to meet both of these requirementsof the date of the contribution.Attn: Request for 8872 Passwordwith the same written document.Mail Stop 6273

Appraisal summary. If the value of theOgden, UT 84201donated property exceeds $5,000, the donor Disclosure ofmust get a qualified appraisal for contributions of Quid Pro Quo ContributionsLost username and password. If you have property, see the Exceptions. below.

forgotten or misplaced the username and pass- A charitable organization must provide a writtenExceptions. A written appraisal is notword issued to your organization after you filed disclosure statement to donors of a quid pro quoneeded if the property is:your initial Form 8871, send a letter requesting a contribution over $75.• Nonpublicly traded stock of $10,000 ornew username and password to the address

Quid pro quo contribution. This is a pay-less,under Electronic filing. You can also fax yourment a donor makes to a charity partly as arequest to (801) 620-3249. It may take 3-6 • A vehicle (including a car, boat, or air- contribution and partly for goods or services. Forweeks for your new username and password to plane) donated after 2004 if your deduc- example, if a donor gives a charity $100 andarrive, as they will be mailed to the organization. tion for the vehicle is limited to the gross receives a concert ticket valued at $40, the do-

proceeds from its sale, nor has made a quid pro quo contribution. In thisexample, the charitable contribution part of the• Intellectual property donated after June 3,Penaltypayment is $60. Even though the deductible part2004,

A penalty will be imposed if the organization is of the payment is not more than $75, a disclo-• Certain securities considered to have mar-required to file Form 8872 and it: sure statement must be filed because the do-ket quotations readily available (see Regu- nor’s payment (quid pro quo contribution) is• Fails to file the form by the due date, or lations section 1.170A-13(c)(7)(xi)(B)), more than $75.

• Files the form but fails to report all of the • Inventory and other property donated by aDisclosure statement. The required writteninformation required or reports incorrect corporation that are qualified contributionsdisclosure statement must:information. for the care of the ill, the needy, or infants,

within the meaning of section 170(e)(3)(A), 1. Inform the donor that the amount of theThe penalty is 35% of the total amount of or contribution that is deductible for federal

contributions and expenditures to which a failure income tax purposes is limited to the ex-• Any donation of stock in trade, inventory,relates. cess of any money (and the value of anyor property held primarily for sale to cus-property other than money) contributed byFraudulent returns. Any individual or cor- tomers in the ordinary course of your tradethe donor over the fair market value ofor business.poration that willfully delivers or discloses anygoods or services provided by the charity,list, return, account, statement, or other docu-andThe donee organization is not a qualified ap-ment known to be fraudulent or false as to any

praiser for the purpose of valuing the donatedmaterial matter will be fined not more than 2. Provide the donor with a good faith esti-property. For more information, get Publication$10,000 ($50,000 in the case of a corporation), mate of the fair market value of the goods561, Determining the Value of Donated Prop-or imprisoned for not more than 1 year, or both. or services that the donor received.erty.

Waiver of penalties. The IRS may waive The charity must furnish the statement in con-Form 8283. For noncash donations overany additional tax assessed on an organization nection with either the solicitation or the receipt

$5,000, the donor must attach Form 8283 to thefor failure to file Form 8872 if the failure was due of the quid pro quo contribution. If the disclosuretax return to support the charitable deduction.to reasonable cause and not willful neglect. statement is furnished in connection with a par-The donee must sign Part IV of Section B, Form ticular solicitation, it is not necessary for the8283 unless publicly traded securities are organization to provide another statement whendonated. The person who signs for the donee it actually receives the contribution.must be an official authorized to sign the do- No disclosure statement is required if any ofDonee Information nee’s tax or information returns, or a person the following are true.specifically authorized to sign by that official.Return The signature does not represent concurrence 1. The goods or services given to a donorin the appraised value of the contributed prop- have insubstantial value as described in

Dispositions of donated property. If an orerty. A signed acknowledgment represents re- Revenue Procedure 90-12, 1990-1 C.B.ganization receives charitable deduction prop- ceipt of the property described on Form 8283 on 471, and Revenue Procedure 92-49,

the date specified on the form. The signatureerty and within 3 years sells, exchanges, or 1992-1 C.B. 507 (as adjusted for inflation).





2. There is no donative element involved in a conducted by a well-known artist. The artist • A pay stub, Form W-2, or other documentparticular transaction with a charity (for ex- does not provide tours on a commercial basis. showing a contribution to a donee organi-ample, there is generally no donative ele- Tours of the museum normally are free to the zation, together withment involved in a visitor’s purchase from public. A good faith estimate of the FMV of the • A pledge card or other document from thea museum gift shop). evening museum tour is $0 even though it is

donee organization that shows its name.conducted by the artist.3. There is only an intangible religious benefit

provided to the donor. The intangible relig- For contributions of $250 or more, the docu-Penalty for failure to disclose. A penalty isious benefit must be provided to the donor ment must state that the donee organizationimposed on a charity that does not make theby an organization organized exclusively provides no goods or services for any payrollrequired disclosure of a quid pro quo contribu-for religious purposes, and must be of a contributions. The amount withheld from eachtion of more than $75. The penalty is $10 pertype that generally is not sold in a commer- payment of wages to a taxpayer is treated as acontribution, not to exceed $5,000 per fundrais-cial transaction outside the donative con- separate contribution.ing event or mailing. The charity can avoid thetext. For example, a donor who, for apenalty if it can show that the failure was due topayment, is granted admission to a relig- Acknowledgment of Vehiclereasonable cause.ious ceremony for which there is no admis-

Contributionsion charge is provided an intangiblereligious benefit. A donor is not provided Acknowledgment of If an exempt organization receives a contribu-intangible religious benefits for payments Charitable Contributions of tion of a qualified vehicle with a claimed value ofmade for tuition for education leading to a

more than $500, the donee organization is re-$250 or Morerecognized degree, travel services, or con-quired to provide a contemporaneous writtensumer goods.

A donor can deduct a charitable contribution of acknowledgment to the donor. The donee or-4. The donor makes a payment of $75 or less $250 or more only if the donor has a written ganization can use a completed Form 1098-C,

per year and receives only annual mem- acknowledgment from the charitable organiza- Contributions of Motor Vehicles, Boats, and Air-bership benefits that consist of: tion. The donor must get the acknowledgment planes, for the contemporaneous written ac-

by the earlier of: knowledgment. See section 3.03 of Noticea. Any rights or privileges (other than the2005-44 for guidance on the information thatright to purchase tickets for college ath- 1. The date the donor files the original returnmust be included in a contemporaneous writtenletic events) that the taxpayer can exer- for the year the contribution is made, oracknowledgment and the deadline for furnishingcise often during the membership

2. The due date, including extensions, for fil- the acknowledgment to the donor.period, such as free or discounted ad-ing the return.missions or parking or preferred access Any donee organization that provides a con-

to goods or services, or temporaneous written acknowledgment to a do-The donor is responsible for requesting and ob-nor is required to report to the IRS thetaining the written acknowledgment from the do-b. Admission to events that are open onlyinformation contained in the acknowledgment.nee. A charitable organization that receives ato members and the cost per person ofThe report is due by February 28 (March 31 ifpayment made as a contribution is treated as thewhich is within the limits for low-costfiling electronically) of the year following the yeardonee organization for this purpose even if thearticles described in Revenue Proce-in which the donee organization provides theorganization (according to the donor’s instruc-dure 90-12 (as adjusted for inflation).acknowledgment to the donor. The organizationtions or otherwise) distributes the amount re-must file the report on Copy A of Form 1098-C.ceived to one or more charities.Good faith estimate of fair market value

An organization that files Form 1098-C on(FMV). An organization can use any reasona-paper should send it with Form 1096, AnnualQuid pro quo contribution. If the donee pro-ble method to estimate the FMV of goods orSummary and Transmittal of U.S. Informationvides goods or services to the donor in ex-services it provided to a donor, as long as itReturns. See the Instructions for Form 1096 forchange for the contribution (a quid pro quoapplies the method in good faith.the correct filing location.contribution), the acknowledgment must include

The organization can estimate the FMV of a good faith estimate of the value of the goods or An organization that is required to file 250 orgoods or services that generally are not com- services. See Disclosure of Quid Pro Quo Con- more Forms 1098-C during the calendar yearmercially available by using the FMV of similar tributions, earlier. must file the forms electronically or magneti-or comparable goods or services. Goods or cally. Specifications for filing Form 1098-C elec-services may be similar or comparable even if Form of acknowledgment. Although there is tronically or magnetically can be found inthey do not have the unique qualities of the no prescribed format for the written acknowledg- Publication 1220, Specifications for Filing Formsgoods or services being valued. ment, it must provide enough information to sub- 1097-BTC, 1098, 1099, 3921, 3922, 5498,

stantiate the amount of the contribution. For 8935, and W-2G Electronically at www.IRS.gov/Example 1. A charity provides a 1-hour ten-more information, get IRS Publication 1771, pub/irs-pdf/p1220.pdf.nis lesson with a tennis professional for the firstCharitable Contributions – Substantiation and$500 payment it receives. The tennis profes-Disclosure Requirements.sional provides 1-hour lessons on a commercial Acknowledgmentbasis for $100. A good faith estimate of the Cash contributions. To deduct a contribu-

lesson’s FMV is $100. tion of cash, a check, or other monetary giftFor a contribution of a qualified vehicle(regardless of the amount), a donor must main-with a claimed value of $500 or less, doExample 2. For a payment of $50,000, a tain a bank record or a written communicationnot file Form 1098-C. However, youmuseum allows a donor to hold a private event CAUTION

!from the donee organization showing the do-

can use it as the contemporaneous written ac-in a room of the museum. A good faith estimate nee’s name, date, and amount of the contribu-knowledgment under section 170(f)(8) by pro-of the FMV of the right to hold the event in the tion. In the case of a lump-sum contributionviding the donor with Copy C only. See themuseum can be made by using the cost of (rather than a contribution by payroll deduction)

renting a hotel ballroom with a capacity, ameni- Instructions for Form 1098-C.made through the Combined Federal Campaignties, and atmosphere comparable to the mu- Generally, the organization should completeor a similar program such as a United Wayseum room, even though the hotel ballroom Form 1098-C as the written acknowledgment toCampaign, the written communication must in-lacks the unique art displayed in the museum the donor and the IRS. The contents of theclude the name of the donee organization that isroom. If the hotel ballroom rents for $2,500, a the ultimate recipient of the charitable contribu- acknowledgment depend upon whether the or-good faith estimate of the FMV of the right to tion. ganization:hold the event in the museum is $2,500.

Contributions by payroll deduction. An • Sells a qualified vehicle without any signifi-organization may substantiate an employee’s cant intervening use or material improve-Example 3. For a payment of $1,000, acontribution by deduction from its payroll by:charity provides an evening tour of a museum ment,


http://www.irs.gov/pub/irs-pdf/p1220.pdf

http://www.irs.gov/pub/irs-pdf/p1220.pdf



• Intends to make a significant intervening a needy individual without a significant interven- legal life of the qualified intellectual property, oring use or material improvement within 6 months the 10-year period beginning with the date of theuse of or material improvement to a quali-of the date of the contribution. contribution.fied vehicle prior to sale, or

If a charity sells a donated vehicle at auction,• Sells a qualified vehicle to a needy individ- the IRS will not accept as substantiation an Qualified intellectual property. Qualified in-ual at a price significantly below fair mar- acknowledgment from the charity stating that tellectual property is generally any patent, copy-ket value, or a gratuitous transfer to a the vehicle is to be transferred to a needy indi- right, trademark, trade name, trade secret,needy individual in direct furtherance of a vidual for significantly below fair market value. know-how, software or similar property, or appli-charitable purpose of the organization of Vehicles sold at auction are not sold at prices cations or registrations of such property (otherrelieving the poor and distressed or the significantly below fair market value, and the than property contributed to or for the use of aunderprivileged who are in need of a IRS will not treat vehicles sold at auction as private foundation as defined in section 509(a)means of transportation. qualifying for this exception. that is not described in section 170(b)(1)(F)).

The penalty for a false or fraudulent acknowl- See Exceptions below.For more information on the acknowledg- edgment where the donee certifies that the vehi-

Exceptions. The following property is notment, see Notice 2005-44, 2005-25 I.R.B. 1287 cle will not be transferred for money, otherconsidered qualified intellectual property for pur-at www.IRS.gov/pub/irs-irbs/irb05-25.pdf. property, or services before completion of mate-poses of the additional charitable deduction:rial improvements or significant intervening use

Material improvements or significant inter- or the donee certifies that the vehicle is to be 1. Computer software that is readily availabletransferred to a needy individual for significantlyvening use. To constitute significant interven- for purchase by the general public, is sub-below fair market value in furtherance of theing use, the organization must actually use the ject to a nonexclusive license, and has notdonee’s charitable purpose is the larger ofvehicle to substantially further the organization’s been substantially modified.$5,000 or the claimed value of the vehicle multi-regularly conducted activities, and the use must

2. A copyright held by a taxpayer:plied by 39.6%.be significant, not incidental. Factors in deter-The penalty for an acknowledgment relatingmining whether a use is a significant intervening

• Whose personal efforts created the prop-to a qualified vehicle being sold in an arm’suse depend on its nature, extent, frequency, anderty, orlength transaction to an unrelated party is theduration. For this purpose, use includes provid-

larger of the gross proceeds from the sale or theing transportation on a regular basis for a signifi- • In whose hands the basis of the propertysales price stated in the acknowledgment multi-cant period of time or significant use directly is determined, for purposes of determiningplied by 39.6%.related to training in vehicle repair. Use does not gain from a sale or exchange, in whole or

in part by reference to the basis of theinclude the use of a vehicle to provide training inQualified Intellectual property in the hands of a taxpayer whosebusiness skills, such as marketing or sales. Ex-

personal efforts created the property.amples of significant use include: Property• Driving a vehicle every day for 1 year to A taxpayer who contributes qualified intellectual

deliver meals to needy individuals, if deliv- property to a charity may be entitled to a charita-ering meals is an activity regularly con- ble deduction, in addition to any initial deductionducted by the organization. Report of Cashallowed in the year of contribution. The addi-

tional deduction is based on a specified percent-• Driving a vehicle for 10,000 miles over a Receivedage of the qualified donee income with respect1-year period to deliver meals to needyto the qualified intellectual property. To qualifyindividuals, if delivering meals is an activ- An exempt organization that receives, in thefor the additional charitable deduction, the donority regularly conducted by the organiza- course of its activities, more than $10,000 cashmust provide notice to the donee at the time oftion. in one transaction (or two or more related trans-the contribution that the donor intends to treat

actions) that is not a charitable contribution mustthe contribution as qualified intellectual propertyMaterial improvements include major repairs report the transaction to the IRS on Form 8300,contribution for purposes of sections 170(m) andand additions that improve the condition of the Report of Cash Payments Over $10,000 Re-6050L.vehicle in a manner that significantly increases ceived in a Trade or Business.Every donee organization described in sec-the value. To be a material improvement, thetion 170(c) (except private foundation as definedimprovement cannot be funded by an additionalin section 509(a) that is not described in sectionpayment to the organization from the donor of170(b)(1)(F)) that receives or accrues net in-the vehicle. Material improvements do not in-come from a charitable gift of qualified intellec- Public Inspection

clude cleaning, minor repairs, routine mainte- tual property must file Form 8899.nance, painting, removal of dents or scratches, of Exemptioncleaning or repair of upholstery, and installation Form 8899. Form 8899, Notice of Incomeof theft deterrent devices. Applications, AnnualFrom Donated Intellectual Property, is used by a

donee to report net income from qualified intel- Returns, and PoliticalPenalties. Section 6720 imposes penalties on lectual property to the donor of the property andany organization that is required under section to the IRS and is due by the last day of the first Organization Reporting170(f)(12) to furnish an acknowledgment to a full month following the close of the donee’s taxdonor if the organization knowingly: year. This form must be filed for each tax year of Formsthe donee in which the donated property pro-• Furnishes a false or fraudulent acknowl-

duces net income, but only if all or part of that taxedgment, or The following rules apply to private foundationsyear occurs during the 10-year period beginningas well as other tax-exempt organizations. Pri-• Fails to furnish an acknowledgment in the on the date of the contribution and that tax yearvate foundations filing annual returns are sub-manner, at the time, and showing the in- does not begin after the expiration of the legalject to the public disclosure requirements underlife of the donated property.formation required by section 170(f)(12).section 6104(d).

Included in this section is a discussion on theQualified donee income. Qualified donee in-Other penalties may apply. See part O public inspection requirements for political orga-come is any net income received by or accruedin the 2010 General Instructions for nizations filing Forms 8871 and 8872.to the donee that is properly allocable to theCertain Information Returns (FormsCAUTION

!qualified intellectual property for the tax year of

1098, 1099, 3921, 3922, 5498, and W-2G). the donee which ends within or with the tax year Annual Information ReturnAn acknowledgment containing a certifica- of the donor. Income is not treated as allocated

tion will be presumed to be false or fraudulent if An exempt organization must make available forto qualified intellectual property if it is received orthe qualified vehicle is sold to a buyer other than public inspection, upon request and withoutaccrued after the earlier of the expiration of the


http://www.irs.gov/pub/irs-irbs/irb05-25.pdf



charge, a copy of its original and amended an- • Any material that is required to be withheld within a reasonable amount of time after receiv-ing a request for inspection (normally not morefrom public inspection, see Material re-nual information returns. Each information re-than 2 weeks) and at a reasonable time of day.quired to be withheld from public inspec-turn must be made available from the date it isAt its option, it can mail, within 2 weeks of receiv-tion, next;required to be filed (determined with regard toing the request, a copy of its application for taxany extensions), or is actually filed, whichever is • In the case of a tax-exempt organization exemption and annual information returns to thelater. An original return does not have to be other than a private foundation, the names requester in lieu of allowing an inspection. Themade available if more than 3 years have and addresses of contributors to the ororganization can charge the requester for copy-passed from the date the return was required to ganization; or ing and actual postage costs only if the re-

be filed (including any extensions) or was filed,quester consents to the charge.• Any applications filed before July 15,

whichever is later. An amended return does not An organization that has a permanent office,1987, if the organization did not have ahave to be made available if more than 3 years but has no office hours or very limited hourscopy of the application on July 15, 1987.have passed from the date it was filed. during certain times of the year, must make its

documents available during those periods whenAn annual information return includes an ex- If there is no prescribed application form, seeoffice hours are limited or not available asact copy of the return (Forms 990, 990-EZ, Regulations section 301.6104(d)-1(b)(3)(ii) for athough it were an organization without a perma-list of the documents that must be made avail-990-BL, 990-PF, 990-T, or 1065), and amendednent office.able.return if any, and all schedules, attachments,

and supporting documents filed with the IRS. Material required to be withheld from pub- Furnishing copies. An exempt organizationlic inspection. Material that is required to be also must provide a copy of all, or any specificAn annual information return does not in-withheld from public inspection includes: part or schedule, of its three most recent annualclude:

information returns and/or exemption applica-• Trade secrets, patents, processes, styles• Schedule A of Form 990-BL, tion to anyone who requests a copy either inof work, or apparatus for which withhold-person or in writing at its principal, regional, or• Schedule K-1 of Form 1065, or ing was requested and granted;district office during regular business hours. If• Form 1120-POL. • National defense material; the individual made the request in person, thecopy must be provided on the same business• Unfavorable rulings or determination let-In the case of a tax-exempt organization other day the request is made unless there are unu-ters issued in response to applications forthan a private foundation, an annual information sual circumstances. Unusual circumstances aretax exemption;return does not include the names and ad- d e f i n e d i n R e g u l a t i o n s s e c t i o n

dresses of contributors to the organization. • Rulings or determination letters revoking 301.6104(d)-1(d)(1)(ii).or modifying a favorable determination let- The organization must honor a written re-Form 990-T. All section 501(c)(3) or-ter; quest for a copy of documents or specific partsganizations that file Form 990-T must

or schedules of documents that are required tomake the return public, regardless of • Technical advice memoranda relating to aCAUTION!

be disclosed. However, this rule only applies ifwhether the organization is otherwise subject to disapproved application for tax exemptionthe request:the disclosure requirements of section 6104. For or the revocation or modification of a

example, although churches are not required to favorable determination letter; • Is addressed to the exempt organization’sfile Form 1023 or Form 990 with the IRS, they principal, regional, or district office;• Any letter or document filed with or issuedmust file the Form 990-T with the IRS to report by the IRS relating to whether a proposed • Is sent to that address by mail, electronicunrelated business taxable income. Thus, or accomplished transaction is a prohib- mail (e-mail), facsimile (fax), or a privatechurches must disclose Form 990-T to the pub- ited transaction under section 503; delivery service approved by the IRS; andlic.

• Any letter or document filed with or issued • Gives the address to where the copy ofState colleges and universities have beenby the IRS relating to an organization’s the document should be sent.

recognized by the IRS as exempt under section status as an organization described in501(a) as organizations described in section section 509(a) or 4942(j)(3), unless the let- The organization must mail the copy within 30501(c)(3) must disclose Form 990-T to the pub- ter or document relates to the organiza- days from the date it receives the request. Thelic. However, state colleges and universities that tion’s application for tax exemption; and organization can request payment in advanceare subject to tax under section 511(a) solely by and must then provide the copies within 30 days• Any other letter or document filed with orvirtue of section 511(a)(2)(B) and that have not from the date it receives payment.issued by the IRS which, although it re-been recognized by the IRS as exempt under

lates to an organization’s tax-exempt sta- Fees for copies. The organization cansection 501(a) as organizations described intus as an organization described in section charge a reasonable fee for providing copies. It

section 501(c)(3) are not required to make their 501(c) or 501(d), does not relate to that can charge no more for the copies than the perForms 990-T public. organization’s application for tax exemp- page rate the IRS charges for providing copies.

tion. The IRS cannot charge more for copies than thePublic Inspection of fees listed in the Freedom of Information Act

(FOIA) fee schedule. Although the IRS chargesExemption Application Time, place, and manner restrictions. Theno fee for the first 100 pages, the organizationannual returns and exemption application must

An exempt organization must also make avail- can charge a fee for all copies. For noncommer-be made available for inspection, withoutcial requesters, the FOIA schedule currentlyable for public inspection without charge its ap- charge, at the organization’s principal, regional,provides a rate of $.20 per page. The organiza-plication for tax-exempt status. An application and district offices during regular businesstion can also charge the actual postage costs itfor tax exemption includes the application form hours. The organization can have an employeepays to provide the copies.(such as Forms 1023 or 1024), all documents present during inspection, but must allow the

and statements the IRS requires the organiza- individual to take notes freely and to photocopy Regional and district offices. Generally, thetion to file with the form, any statement or other at no charge if the individual provides the photo- same rules regarding public inspection and pro-

copying equipment. Generally, regional and dis-supporting document submitted by an organiza- viding copies of applications and annual infor-trict offices are those that have paid employeestion in support of its application, and any letter or mation returns that apply to a principal office ofwho together are normally paid for at least 120other document issued by the IRS concerning an exempt organization also apply to its regionalhours a week. and district offices. However, a regional or dis-the application.

If the organization does not maintain a per- trict office is not required to make its annualThe application for exemption does not in-manent office, it must make its application for tax information return available for inspection or toclude:exemption and its annual information returns provide copies until 30 days after the date the

• Any application from an organization that available for inspection at a reasonable location return is required to be filed (including any ex-is not yet recognized as exempt; of its choice. It must permit public inspection tensions) or is actually filed, whichever is later.




Local and subordinate organizations. A lo- receiving a request made in person for public copy of these materials available for public in-cal or subordinate organization is an exempt inspection or copies and at a reasonable time of spection during regular business hours at theorganization that did not file its own application day. organization’s principal office and at each of itsfor tax exemption because it is covered by a regional or district offices having at least threeIn lieu of allowing an inspection, the local orgroup exemption letter. Generally, a local or paid employees.subordinate organization can mail a copy of thesubordinate organization of an exempt organi- applicable documents to the person requesting Form 8872. Form 8872 (including Sched-zation must, upon request, make available for inspection within the same time period. In this ules A and B) is open to public inspection. Cop-public inspection, or provide copies of: case, the organization can charge the requester ies of Form 8872 that are required to be filed

for copying and actual postage costs only if the electronically will be made available on the In-1. The application submitted to the IRS by requester consents to the charge. If the local or ternet website, www.IRS.gov/polorgs, within 48the central or parent organization to obtain subordinate organization receives a written re- hours after they have been filed.the group exemption letter, and quest for a copy of its annual information return,In addition, the organization is required toit must fulfill the request by providing a copy of2. Those documents which were submitted make a copy of this form available for publicthe group return in the time and manner speci-by the central or parent organization to in- inspection during regular business hours at thefied earlier. The requester has the option ofclude the local or subordinate organization organization’s principal office and at each of itsrequesting from the central or parent organiza-in the group exemption letter. regional or district offices having at least threetion, at its principal office, inspection or copies of

paid employees.However, if the central or parent organization group returns filed by the central or parent or-submits to the IRS a list or directory of local or ganization. The central or parent organizationsubordinate organizations covered by the group must fulfill such requests in the time and manner Penaltiesexemption letter, the local or subordinate organi- specified earlier.zation is required to provide only the application If an organization fails to comply, it may be The penalty for failure to allow public inspectionfor the group exemption ruling and the pages of liable for a penalty. See Penalties, later. of annual returns is $20 for each day the failurethe list or directory that specifically refer to it.

continues. The maximum penalty on all personsThe local or subordinate organization must Making applications and annual information for failures involving any one return is $10,000.permit public inspection or comply with a re- returns widely available. An exempt organi- The penalty for failure to allow public inspec-quest for copies made in person, within a rea- zation does not have to comply with requests for tion of exemption applications is $20 for eachsonable amount of time (normally not more than copies of its annual information returns or ex- day the failure continues.2 weeks) after receiving a request made in per- emption application if it makes them widelyThe penalty for willful failure to allow publicson for public inspection or copies and at a available. However, making these documents

inspection of a return or exemption application isreasonable time of day. In lieu of allowing an widely available does not relieve the organiza-$5,000 for each return or application. The pen-inspection, the local or subordinate organization tion from making its documents available foralty also applies to a willful failure to providecan mail a copy of the applicable documents to public inspection.copies.the person requesting inspection within the The organization can make its application

The penalty for failure to allow public inspec-same time period. In that case, the organization and annual information returns widely availabletion of a political organization’s section 527 no-can charge the requester for copying and actual by posting the application and annual informa-tice (Form 8871) is $20 for each day the failurepostage costs only if the requester consents to tion returns on the Internet. For the rules tocontinues.the charge. If the local or subordinate organiza- follow so that the Internet posting will be consid-

tion receives a written request for a copy of its The penalty for failure to allow public inspec-ered widely available, see Regulations sectionapplication for exemption, it must fulfill the re- tion of a section 527 organization’s contributions301.6104(d)-2(b).quest in the time and manner specified earlier. and expenditures report (Form 8872) is $20 forIf the organization has made its application

The requester has the option of requesting each day the failure continues. The maximumfor tax exemption and/or annual information re-from the central or parent organization, at its penalty on all persons for failures involving anyturns widely available, it must inform any individ-principal office, inspection or copies of the appli- one report is $10,000.ual requesting a copy where the documents arecation for group exemption and the material sub- available, including the website address on themitted by the central or parent organization to Internet, if applicable. If the request is made ininclude a local or subordinate organization in the person, the notice must be provided immedi-group ruling. If the central or parent organization ately. If the request is made in writing, the notice Required Disclosuressubmits to the IRS a list or directory of local or must be provided within 7 days.subordinate organizations covered by the group Certain exempt organizations must disclose toexemption letter, it must make the list or direc- Harassment campaign. If the tax-exempt or- the IRS or the public certain information abouttory available for public inspection, but it is re- ganization is the subject of a harassment cam- their activities. Generally, an organization dis-quired to provide copies only of those pages of paign, the organization may not have to fulfill closes this information by entering it on the ap-the list or directory that refer to particular local or requests for information. For more information, propriate lines of its annual return. In addition,subordinate organizations specified by the re- see Regulations section 301.6104(d)-3. there are disclosure requirements for:quester. The central or parent organization must

• Solicitation of nondeductible contributions,fulfill such requests in the time and manner Political Organizationspecified earlier. • Sales of information or services that areReporting FormsA local or subordinate organization that does available free from the government,not file its own annual information return (be- Forms 8871 and 8872 (discussed earlier under • Dues paid to the organization that are notcause it is affiliated with a central or parent Reporting Requirements for a Political Organi- deductible because they are used for lob-organization that files a group return) must, on zation) are open to public inspection. bying or political activities, andrequest, make available for public inspection, or

Form 8871. Form 8871 (including any sup-provide copies of, the group returns filed by the • Prohibited tax shelter transactions.porting papers) and any letter or other documentcentral or parent organization. However, if thethe IRS issues with regard to Form 8871 is opengroup return includes separate schedules forto public inspection at the IRS in Washington, Solicitation of Nondeductibleeach local or subordinate organization includedDC.in the group return, the local or subordinate Contributions

organization receiving the request can omit any Copies of Form 8871 that have been filed willschedules relating only to other organizations be made available on the IRS website, www. Solicitations for contributions or other paymentsincluded in the group return. The local or IRS.gov/polorgs, 48 hours after the notice has by certain exempt organizations (including lob-subordinate organization must permit public in- been filed and are considered widely available bying groups and political action committees)spection, or comply with a request for copies as long as the organization provides the IRS must include a statement that payments to thosemade in person, within a reasonable amount of website address to the person making the re- organizations are not deductible as charitabletime (normally not more than 2 weeks) after quest. In addition, the organization must make a contributions for federal income tax purposes.







The statement must be included in the fundrais- be made in a conspicuous and easily recog- 1. Facilitates a prohibited tax shelter transac-ing solicitation and be conspicuous and easily tion by reason of its tax-exempt,nized format when the organization makes anrecognizable. tax-indifferent, or tax-favored status; oroffer or solicitation to sell the information or

service. Organizations affected are those ex- 2. Is identified in published guidance by type,Organizations subject to requirements. An empt under section 501(c) or 501(d) and political class, or role as a party to a prohibited taxorganization must follow these disclosure re- organizations defined in section 527(e). shelter transaction.quirements if it is exempt under section 501(c),other than section 501(c)(1), or under section See Prohibited Tax Shelter TransactionsPenalty. A penalty is provided for failure to501(d), unless the organization is eligible to re- later for further information.comply with this requirement if the failure is dueceive tax deductible charitable contributions

to intentional disregard of the requirement. Theunder section 170(c). These requirements must Disclosure. A single disclosure is made bypenalty is the greater of $1,000 for each day thebe followed by, among others: the organization for each prohibited tax shelterfailure occurred, or 50% of the total cost of all

transaction. The disclosure is made on Formoffers and solicitations that were made by the1. Social welfare organizations (section 8886-T.organization the same day that it fails to meet501(c)(4)), the requirement. Due date. Generally, for exempt organiza-

2. Labor unions (section 501(c)(5)), tions described in 1 above, the disclosure is dueon or before May 15 of the calendar year follow-3. Trade associations (section 501(c)(6)), Dues Used for Lobbyinging the close of the calendar year that the ex-or Political Activities4. Social clubs (section 501(c)(7)), empt organization entered into the prohibited taxshelter transaction. However, the disclosure for5. Fraternal organizations (section 501(c)(8) Certain exempt organizations must notify any-subsequently listed transactions (as defined inand 501(c)(10)) (however, fraternal organi- one paying dues to the organization whethersection 4965(e)(2)) is due on or before May 15zations described in section 170(c)(4) must any part of the dues is not deductible because itof the calendar year following the close of thefollow these requirements only for solicita- is related to lobbying or political activities.calendar year that the transaction was identifiedtions for funds that are to be used for non- An organization must provide the notice if it is by the Secretary as a listed transaction.charitable purposes not described in exempt from tax under section 501(a) and is one The disclosure for exempt organizations de-section 170(c)(4)), of the following. scribed in 2 above is due on or before the date

6. Any political organization described in sec- the first tax return (whether original or amended1. A social welfare organization described intion 527(e), including political campaign return) is filed that reflects a reduction or elimi-section 501(c)(4) that is not a veterans’committees and political action commit- nation of the exempt organization’s liability fororganization.tees, and applicable federal employment, excise, or unre-2. An agricultural or horticultural organization lated business income taxes that is derived di-7. Any organization not eligible to receive

described in section 501(c)(5). rectly or indirectly from tax consequences or taxtax-deductible contributions if the organiza-strategy described in the published guidancetion or a predecessor organization was, at 3. A business league, chamber of commerce,that lists the transaction.any time during the 5-year period ending real estate board, or other organization de-

on the date of the fundraising solicitation, scribed in section 501(c)(6). Penalty. Exempt organizations that fail to filean organization of the type to which thisthe required disclosure are subject to a nondis-However, an organization described in (1), (2),disclosure requirement applies.closure penalty of $100 for each day the failureor (3) does not have to provide the notice if itcontinues with a maximum penalty for any oneestablishes that substantially all the dues paid to

Fundraising solicitation. This disclosure re- disclosure of $50,000.it are not deductible anyway or if certain otherquirement applies to a fundraising solicitation if Also, if the IRS makes a written demand onconditions are met. For more information, seeall of the following are true. any exempt organization subject to this penalty,Revenue Procedure 98-19 in Cumulative Bulle-

giving the organization a reasonable date totin 1998-1 or later update.1. The organization soliciting the funds nor-make the disclosure, and the organization fails If the organization does not provide themally has gross receipts over $100,000to make the disclosure by that date, the organi-required notice, it may have to pay a tax that isper year.zation is subject to a penalty of $100 for eachreported on Form 990-T. But the tax does not

2. The solicitation is part of a coordinated day after the date specified by the IRS untilapply to any amount on which the section 527fundraising campaign that is soliciting disclosure is made (with a maximum penalty fortax has been paid on Form 1120-POL. Seemore than 10 persons during the year. any one disclosure of $10,000).Political Organization Income Tax Return, ear-

lier.3. The solicitation is made in written orprinted form, by television or radio, or by For more information about nondeductibletelephone. dues, see Deduction not allowed for dues used Miscellaneous Rulesfor political or legislative activities under

501(c)(6)–Business Leagues, etc.Penalties. Failure by an organization to makethe required statement will result in a penalty of$1,000 for each day the failure occurred, up to a Prohibited Tax Sheltermaximum penalty of $10,000 for a calendar Transactions Organizational Changes andyear. No penalty will be imposed if it is shown

Exempt Statusthat the failure was due to reasonable cause. If Every exempt organization (as defined in sec-the failure was due to intentional disregard of the tion 4965(c)) that is a party to a prohibited tax If your exempt organization changes its legalrequirements, the penalty may be higher and is shelter transaction is required to disclose to the structure, such as from a trust to a corporation,not subject to a maximum amount. IRS the following information: you must file a new exemption application to

establish that the new legal entity qualifies for• Whether such organization is a party toSales of Information or exemption. If your organization becomes inac-the prohibited tax shelter transaction (asServices Available Free From tive for a period of time but does not cease beingdefined in section 4965(e); and

an entity under the laws of the state in which itGovernment • The identity of any other party to the trans- was formed, its exemption will not be termi-action that is known to the exempt organi-Certain organizations that offer to sell to individ- nated. However, unless you are covered by onezation.uals (or solicit money for) information or routine of the filing exceptions, you will have to continue

services that could be readily obtained free (or to file an annual information return during theParty to a prohibited tax shelter transaction.for a nominal fee) from the Federal Government period of inactivity. If your organization has beenAn exempt organization is a party to a prohibitedmust include a statement that the information or liquidated, dissolved, terminated, or substan-tax shelter transaction if the organization:service can be so obtained. The statement must tially contracted, you should file your annual




return of information by the 15th day of the 5th possesses governmental powers, it does notmonth after the change and follow the applicable qualify for exemption. A state or municipalityinstructions to the form. itself does not qualify for exemption.3.If your organization amends its articles oforganization or its internal regulations (bylaws), Topicsthen follow the instructions to Form 990, Form This chapter discusses:990-EZ, or Form 990-PF for reporting these Sectionchanges. Regardless of whether your organiza- • Contributions to 501(c)(3) organizationstion files an annual information return, you may • Applications for recognition of exemptionalso report these changes to the EO Determina- 501(c)(3)tions office; however, such reporting does not • Articles of Organizationrelieve your organization from reporting the • Educational organizations and privateOrganizationschanges on its annual information return. For

schoolsinformation about informing the IRS of a termi-nation or merger, see Pub. 4779, Facts about • Organizations providing insuranceTerminating or Merging Your Exempt Organiza- Introduction • Other section 501(c)(3) organizationstion.

An organization may qualify for exemption from • Private foundations and public charitiesfederal income tax if it is organized and operated

• Lobbying expendituresexclusively for one or more of the following pur-Change in Accounting Periodposes.

The procedures that an organization must follow • Religious. Useful Itemsto change its accounting period differ for an You may want to see:• Charitable.individual organization and for a central organi-zation that seeks a group change for its • Scientific. Forms (and Instructions)subordinate organizations.

• Testing for public safety. ❏ 1023 Application for Recognition ofIndividual organizations. If an organizationExemption Under Section 501(c)(3)• Literary.is not required to file an annual information re-of the Internal Revenue Codeturn, but files a Form 990-T, it can change its • Educational.

annual accounting period by timely filing theSee chapter 6 for information about getting• Fostering national or international amateurForm 990-T. If neither an information return nor

publications and forms.sports competition (but only if none of itsa Form 990-T is required to be filed, an organi-activities involve providing athletic facilitieszation must notify the IRS by letter that it hasor equipment; however, see Amateur Ath-changed its fiscal period.letic Organizations, later in this chapter).If an organization changed its annual ac- Contributions tocounting period at any time within the previous • The prevention of cruelty to children or

10 years and within that time it had a filing animals. 501(c)(3) Organizationsrequirement, the organization must file a Form1128, Application to Adopt, Change, or Retain a To qualify, the organization must be a corpo- Contributions to domestic organizations de-Tax Year, with its timely filed annual information ration, community chest, fund, or foundation. A scribed in this chapter, except organizationsreturn or Form 990-T, as appropriate, whether or trust is a fund or foundation and will qualify. testing for public safety, are deductible as chari-not the filing of the information return or Form However, an individual or a partnership will not table contributions on the donor’s federal in-990-T would have otherwise been required for qualify. come tax return.that year.

Examples. Qualifying organizations include: Fundraising events. If the donor receivesCentral organizations. A central organizationsomething of value in return for the contribution,can obtain approval for a group change in an • Nonprofit old-age homes,a common occurrence with fundraising efforts,annual accounting period for its subordinate or-

• Parent-teacher associations, part or all of the contribution may not be deducti-ganizations on a group basis only by filing Formble. This may apply to fundraising activities such1128 with the Service Center where it files its • Charitable hospitals or other charitable or-as charity balls, bazaars, banquets, auctions,annual information return. For more information, ganizations,concerts, athletic events, and solicitations forsee Revenue Procedure 76-10, as modified by

• Alumni associations, membership or contributions when merchandiseRevenue Procedure 79-3 or any later updates.or benefits are given in return for payment of a• Schools,Due date. Form 1128 must be filed by the 15th specified minimum contribution.

day of the 5th month following the close of the • Chapters of the Red Cross, If the donor receives or expects to receiveshort period. goods or services in return for a contribution to• Boys’ or Girls’ Clubs, and

your organization, the donor cannot deduct any• Churches. part of the contribution unless the donor intends

to, and does, make a payment greater than theChild care organizations. The term educa- fair market value of the goods or services. If a

tional purposes includes providing for care of deduction is allowed, the donor can deduct onlychildren away from their homes if substantially the part of the contribution, if any, that is moreall the care provided is to enable individuals (the than the fair market value of the goods or serv-parents) to be gainfully employed and the services received. You should determine in advanceices are available to the general public. the fair market value of any goods or services to

be given to contributors and tell them, when youInstrumentalities. A state or municipal instru- publicize the fundraising event or solicit theirmentality may qualify under section 501(c)(3) if it contributions, how much is deductible and howis organized as a separate entity from the gov- much is for the goods or services. See Disclo-ernmental unit that created it and if it otherwise sure of Quid Pro Quo Contributions in chapter 2.meets the organizational and operational testsof section 501(c)(3). Examples of a qualifying Exemption application not filed. Donorsinstrumentality might include state schools, uni- cannot deduct any charitable contribution to anversities, or hospitals. However, if an organiza- organization that is required to apply for recogni-tion is an integral part of the local government or tion of exemption but has not done so.

Page 20 Chapter 3 Section 501(c)(3) Organizations REL 00904



Separate fund—contributions to which are indirect beneficiaries under the contract are or- Whether your organization is participating ordeductible. An organization that is exempt intervening, directly or indirectly, in any politicalganizations.from federal income tax other than as an organi- campaign on behalf of (or in opposition to) anyA charitable organization liable for excisezation described in section 501(c)(3) can, if it candidate for public office depends upon all oftaxes must file Form 4720, Return of Certaindesires, establish a fund, separate and apart the facts and circumstances of each case. Cer-Excise Taxes Under Chapters 41 and 42 of thefrom its other funds, exclusively for religious, tain voter education activities or public forumsInternal Revenue Code. Generally, the due date

conducted in a nonpartisan manner may not becharitable, scientific, literary, or educational pur- for filing Form 4720 occurs on the fifteenth dayprohibited political activity under sectionposes, fostering national or international ama- of the fifth month following the close of the or-501(c)(3), while other so-called voter educationteur sports competition, or for the prevention of ganization’s tax year.activities may be prohibited.cruelty to children or animals.

If the fund is organized and operated exclu-Effective date of exemption. Most organiza-sively for these purposes, it may qualify for ex-tions described in this chapter that were organ-emption as an organization described in section Application for ized after October 9, 1969, will not be treated as501(c)(3), and contributions made to it will betax exempt unless they apply for recognition ofdeductible as provided by section 170. A fund Recognition of exemption by filing Form 1023. These organiza-

with these characteristics must be organized intions will not be treated as tax exempt for any

such a manner as to prohibit the use of its funds Exemption period before they file Form 1023, unless theyupon dissolution, or otherwise, for the general file the form within 15 months from the end of thepurposes of the organization creating it. This discussion describes certain information to month in which they were organized. If the or-

be provided upon application for recognition of ganization files the application within thisPersonal benefit contracts. Generally, no exemption by all organizations created for any of 15-month period, the organization’s exemptioncharitable deduction will be allowed for a trans- the purposes described earlier in this chapter. will be recognized retroactively to the date it wasfer to, or for the use of, a section 501(c)(3) or For example, the application must include a con- organized. Otherwise, exemption will be recog-(c)(4) organization if in connection with the formed copy of the organization’s articles of in- nized only from the date of receipt. The date oftransfer: corporation, as discussed under Articles of receipt is the date of the U.S. postmark on theOrganization, later in this chapter. See the or-• The organization directly or indirectly cover in which an exemption application isganization headings that follow for specific infor-pays, or previously paid, a premium on a mailed or, if no postmark appears on the cover,mation your organization may need to provide.personal benefit contract for the transferor, the date the application is stamped as received

or by the IRS.Form 1023. Your organization must file its ap-• There is an understanding or expectation Private delivery service. If a private deliv-plication for recognition of exemption on Formthat anyone will directly or indirectly pay a ery service designated by the IRS, rather than1023. See chapter 1 and the instructions accom-premium on a personal benefit contract for the U.S. Postal Service, is used to deliver thepanying Form 1023 for the procedures to followthe transferor. application, the date of receipt is the date re-in applying. Some organizations are not recorded or marked by the private delivery serv-quired to file Form 1023. These are discussedA personal benefit contract with respect to the ice. The following private delivery services havelater in this section.transferor is any life insurance, annuity, or en- been designated by the IRS.

Form 1023 and accompanying statementsdowment contract, if any direct or indirect bene- • DHL Express (DHL): DHL “Same Day”must show that all of the following are true.ficiary under the contract is the transferor, anyService.

member of the transferor’s family, or any other1. The organization is organized exclusivelyperson designated by the transferor. • Federal Express (FedEx): FedEx Priority

for, and will be operated exclusively for, Overnight, FedEx Standard Overnight,Certain annuity contracts. If an organiza- one or more of the purposes (religious, FedEx 2Day, FedEx International Priority,tion incurs an obligation to pay a charitable gift charitable, etc.) specified in the introduc- and FedEx International First.annuity, and the organization purchases an an- tion to this chapter.nuity contract to fund the obligation, individuals • United Parcel Service (UPS): UPS Next

2. No part of the organization’s net earningsreceiving payments under the charitable gift an- Day Air, UPS Next Day Air Saver, UPSwill inure to the benefit of private share-nuity will not be treated as indirect beneficiaries 2nd Day Air, UPS 2nd Day Air A.M., UPSholders or individuals. You must establishif the organization owns all of the incidents of Worldwide Express Plus, and UPS World-that your organization will not be organizedownership under the contract, is entitled to all wide Express.or operated for the benefit of private inter-payments under the contract, and the timing andests, such as the creator or the creator’s Amendments to enabling instrument re-amount of the payments are substantially thefamily, shareholders of the organization, quired. If an organization is required to altersame as the timing and amount of payments toother designated individuals, or persons its activities or to make substantive amend-each person under the obligation ( as such obli-controlled directly or indirectly by such pri- ments to its enabling instrument, the ruling orgation is in effect at the time of the transfer).vate interests. determination letter recognizing its exempt sta-

Certain contracts held by a charitable re-tus will be effective as of the date the changes3. The organization will not, as a substantialmainder trust. An individual will not be con-are made. If only a nonsubstantive amendmentpart of its activities, attempt to influencesidered an indirect beneficiary under a lifeis made, exempt status will be effective as of thelegislation (unless it elects to come underinsurance, annuity, or endowment contract helddate it was organized, if the application was filedthe provisions allowing certain lobbying ex-by a charitable remainder annuity trust or a char-within the 15-month period, or the date the appli-penditures) or participate to any extent in aitable remainder unitrust solely by reason ofcation was filed.political campaign for or against any candi-being entitled to the payment if the trust owns all

date for public office. See Political activity,of the incidents of ownership under the contract, Extensions of time for filing. There are twonext, and Lobbying Expenditures, near theand the trust is entitled to all payments under the ways organizations seeking exemption can re-end of this chapter.contract. ceive an extension of time for filing Form 1023.

Political activity. If any of the activitiesExcise tax. If the premiums are paid in con- 1. Automatic 12-month extension. Organiza-(whether or not substantial) of your organizationnection with a transfer for which a deduction is tions will receive an automatic 12-monthconsist of participating in, or intervening in, anynot allowable under the deduction denial rule, extension if they file an application for rec-political campaign on behalf of (or in oppositionwithout regard to when the transfer to the chari- ognition of exemption with the IRS withinto) any candidate for public office, your organi-table organization was made, an excise tax will 12 months of the original deadline. To getzation will not qualify for tax-exempt statusbe applied that is equal to the amount of the this extension, an organization must addunder section 501(c)(3). Such participation orpremiums paid by the organization on any life the following statement at the top of itsintervention includes the publishing or distribut-insurance, annuity, or endowment contract. The application: “Filed Pursuant to Section

excise tax does not apply if all of the direct and ing of statements. 301.9100-2.”

Chapter 3 Section 501(c)(3) Organizations Page 21REL 00905



2. Discretionary extensions. An organization grant of relief on the organization providing the A request for this relief in connection with anthat fails to file a Form 1023 within the application for exemption does not require pay-IRS with a statement from an independent audi-extended 12-month period will be granted ment of an additional user fee. Also, a requesttor certifying that the interests of the Govern-an extension to file if it submits evidence for relief under the automatic 12-month exten-ment are not prejudiced.(including affidavits) to establish that: sion does not require payment of a user fee.

Procedure for requesting extension. ToMore information. For more informationrequest a discretionary extension, an organiza-a. It acted reasonably and in good faith,

about these procedures, see Regulations sec-tion must submit (to the IRS address shown onandtions 301.9100-1, 301.9100-2, 301.9100-3, andForm 1023 and Notice 1382) the following.

b. Granting a discretionary extension will Rev. Proc. 2010-4, section 6.04 and Rev. Proc.• A statement showing the date Form 1023not prejudice the interests of the gov- 2010-8, sec. 6.08.was required to have been filed and theernment.

Notification from IRS. Organizations filingdate it was actually filed.Form 1023 and satisfying all requirements of• Any documents relevant to the application.How to show reasonable action and good section 501(c)(3) will be notified of their exempt

faith. An organization acted reasonably and status in writing.• An affidavit describing in detail the eventsshowed good faith if at least one of the following that led to the failure to apply and to theis true. discovery of that failure. If the organization Organizations Not Required

relied on a tax professional’s advice, the1. The organization requests relief before its To File Form 1023affidavit must describe the engagementfailure to file is discovered by the IRS.and responsibilities of the professional and Some organizations are not required to file Form

2. The organization failed to file because of the extent to which the organization relied 1023. These include:intervening events beyond its control. on him or her.

• Churches, interchurch organizations of lo-3. The organization exercised reasonable dili- • This affidavit must be accompanied by a cal units of a church, conventions or as-

gence (taking into account the complexity dated declaration, signed by an individual sociations of churches, or integratedof the return or issue and the organiza- who has personal knowledge of the facts auxiliaries of a church, such as a men’s ortion’s experience in these matters) but was and circumstances, who is authorized to women’s organization, religious school,not aware of the filing requirement. act for the organization, which states, mission society, or youth group.

“Under penalties of perjury, I declare that I4. The organization reasonably relied upon • Any organization (other than a privatehave examined this request, including ac-the written advice of the IRS. foundation) normally having annual grosscompanying documents, and, to the bestreceipts of not more than $5,000 (see5. The organization reasonably relied upon of my knowledge and belief, the requestGross receipts test, later).the advice of a qualified tax professional contains all the relevant facts relating to

who failed to file or advise the organization the request, and such facts are true, cor-These organizations are exempt automati-to file Form 1023. An organization cannot rect, and complete.”

cally if they meet the requirements of sectionrely on the advice of a tax professional if it• Detailed affidavits from individuals having 501(c)(3).knows or should know that he or she is not

knowledge or information about the eventscompetent to render advice on filing ex- Filing Form 1023 to establish exemption. Ifthat led to the failure to make the applica-emption applications or is not aware of all the organization wants to establish its exemp-tion and to the discovery of that failure.the relevant facts. tion with the IRS and receive a ruling or determi-This includes the organization’s returnnation letter recognizing its exempt status, itpreparer, and any accountant or attorney,Not acting reasonably and in good faith.should file Form 1023. By establishing its ex-knowledgeable in tax matters, who ad-An organization has not acted reasonably and inemption, potential contributors are assured bygood faith under the following circumstances. vised the taxpayer on the application. Thethe IRS that contributions will be deductible. Aaffidavits must describe the engagementsubordinate organization (other than a private1. It seeks to change a return position for and responsibilities of the individual andfoundation) covered by a group exemption letterwhich an accuracy-related penalty has the advice that he or she provided.does not have to submit a Form 1023 for itself.been or could be imposed at the time the

• These affidavits must include the name,relief is requested. Private foundations. See Private Founda-current address, and taxpayer identifica- tions and Public Charities, later in this chapter,2. It was informed of the requirement to file tion number of the individual, and be ac- for more information about the additional noticeand related tax consequences, but chose companied by a dated declaration, signed required from an organization in order for it notnot to file. by the individual, which states: “Under to be presumed to be a private foundation andpenalties of perjury, I declare that I have3. It uses hindsight in requesting relief. The for the additional information required from aexamined this request, including accom-IRS will not ordinarily grant an extension if private foundation claiming to be an operatingpanying documents, and, to the best of myspecific facts have changed since the due foundation.knowledge and belief, the request con-date that makes filing an application ad-

Gross receipts test. For purposes of thetains all the relevant facts relating to thevantageous to an organization.gross receipts test, an organization normallyrequest, and such facts are true, correct,does not have more than $5,000 annually inand complete.”Prejudicing the interest of the Govern-gross receipts if:ment. Prejudice to the interest of the Govern- • The organization must state whether the

ment results if granting an extension of time to returns for the tax year in which the appli- 1. During its first tax year the organizationfile to an organization results in a lower total taxcation should have been filed or any tax received gross receipts of $7,500 or less,liability for the years to which the filing appliesyears that would have been affected by

than would have been the case if the organiza- 2. During its first 2 years the organization hadthe application had it been timely madetion had filed on time. Before granting an exten- a total of $12,000 or less in gross receipts,are being examined by the IRS, an ap-sion, the IRS can require the organization andpeals office, or a federal court. The organi-requesting it to submit a statement from an inde-zation must notify the IRS office 3. In the case of an organization that haspendent auditor certifying that no prejudice willconsidering the request for relief if the IRS been in existence for at least 3 years, theresult if the extension is granted.starts an examination of any such return total gross receipts received by the organi-

The interests of the Government are ordinar-while the organization’s request for relief is zation during the immediately preceding 2

ily prejudiced if the tax year in which the applica-pending. years, plus the current year, are $15,000

tion should have been filed (or any tax year thator less.

would have been affected had the filing been • The organization, if requested, has to sub-timely) are closed by the statute of limitations mit copies of its tax returns, and copies of An organization with gross receipts morebefore relief is granted. The IRS can condition a the returns of other affected taxpayers. than the amounts in the gross receipts test,




unless otherwise exempt from filing Form 1023, Section 501(c)(3) is the provision of law that foster the best interests of the people, or tomust file a Form 1023 within 90 days after the grants exemption to the organizations described further the common welfare and well-being ofend of the period in which the amounts are in this chapter. Therefore, the organizational test the community, without any limitation or provi-exceeded. For example, an organization’s gross may be met if the purposes stated in the articles sion restricting such purposes to accomplish-receipts for its first tax year were less than of organization are limited in some way by refer- ment only in a charitable manner, the purposes$7,500, but at the end of its second tax year its ence to section 501(c)(3). will not be sufficiently limited. Such purposes aregross receipts for the 2-year period were more vague and may be accomplished other than inThe requirement that your organization’sthan $12,000. The organization must file Form an exempt manner.purposes and powers must be limited by the1023 within 90 days after the end of its second

articles of organization is not satisfied if the limittax year. Example 7. A stated purpose to operate ais contained only in the bylaws or other rules orIf the organization had existed for at least 3 hospital does not meet the organizational testregulations. Moreover, the organizational test istax years and had met the gross receipts test for since it is not necessarily charitable. A hospitalnot satisfied by statements of your organiza-all prior tax years but fails to meet the require- may or may not be exempt depending on thetion’s officers that you intend to operate only forment for the current tax year, its tax-exemptmanner in which it is operated.exempt purposes. Also, the test is not satisfiedstatus for the prior years will not be lost even if

by the fact that your actual operations are forForm 1023 is not filed within 90 days after the Example 8. An organization that is ex-exempt purposes.close of the current tax year. However, the or-pressly empowered by its articles to carry on

ganization will not be treated as a section In interpreting an organization’s articles, thesocial activities will not be sufficiently limited as501(c)(3) organization for the period beginning law of the state where the organization wasto its power, even if its articles state that it iswith the current tax year and ending with the created is controlling. If an organization con-organized and will be operated exclusively forfiling of Form 1023. tends that the terms of its articles have a differ-charitable purposes.

ent meaning under state law than their generallyExample. An organization is organized andaccepted meaning, such meaning must be es-operated exclusively for charitable purposes Dedication andtablished by a clear and convincing reference toand is not a private foundation. It was incorpo-

Distribution of Assetsrelevant court decisions, opinions of the staterated on January 1, 2007, and files returns on aattorney general, or other appropriate state au-calendar-year basis. It did not file a Form 1023.

Assets of an organization must be permanentlythorities.The organization’s gross receipts during thededicated to an exempt purpose. This meansyears 2007 through 2010 were as follows: The following are examples illustrating thethat should an organization dissolve, its assetsorganizational test.must be distributed for an exempt purpose de-2007 . . . . . . . . . . . . . . . . . . . . . . $3,600scribed in this chapter, or to the Federal Govern-2008 . . . . . . . . . . . . . . . . . . . . . . 2,900 Example 1. Articles of organization state

2009 . . . . . . . . . . . . . . . . . . . . . . 400 ment or to a state or local government for athat an organization is formed exclusively for2010 . . . . . . . . . . . . . . . . . . . . . . 12,600 public purpose. If the assets could be distributedliterary and scientific purposes within the mean-

to members or private individuals or for anying of section 501(c)(3). These articles appropri-The organization’s total gross receipts forother purpose, the organizational test is not met.2007, 2008, and 2009 were $6,900. Therefore, it ately limit the organization’s purposes. The

did not have to file Form 1023 and is exempt for organization meets the organizational test. Dedication. To establish that your organi-those years. However, for 2008, 2009, and 2010 zation’s assets will be permanently dedicated tothe total gross receipts were $15,900. There- Example 2. An organization, by the terms of an exempt purpose, the articles of organizationfore, the organization must file Form 1023 within its articles, is formed to engage in research should contain a provision ensuring their distri-90 days after the end of its 2010 tax year. If it without any further description or limitation. The bution for an exempt purpose in the event ofdoes not file within this time period, it will not be organization will not be properly limited as to its dissolution. Although reliance can be placedexempt under section 501(c)(3) for the period purposes since all research is not scientific. The upon state law to establish permanent dedica-beginning with tax year 2010 ending when the organization does not meet the organizational tion of assets for exempt purposes, your organi-Form 1023 is received by the IRS. The organiza- test. zation’s application probably can be processedtion, however, will not lose its exempt status for

much more rapidly if its articles of organizationthe tax years ending before January 1, 2010. Example 3. An organization’s articles state include a provision ensuring permanent dedica-The IRS will consider applying the Commis- that its purpose is to receive contributions and tion of assets for exempt purposes.sioner’s discretionary authority to extend the pay them over to organizations that are de-time for filing Form 1023. See the procedures for Distribution. Revenue Procedure 82-2,scribed in section 501(c)(3) and exempt fromthis extension discussed earlier. 1982-1 C.B. 367, identifies the states and cir-taxation under section 501(a). The organization

cumstances in which the IRS will not require anmeets the organizational test.express provision for the distribution of assetsupon dissolution in the articles of organization.Example 4. If a stated purpose in the arti-Articles of The procedure also provides a sample of ancles is the conduct of a school of adult educationacceptable dissolution provision for organiza-and its manner of operation is described in de-Organizationtions required to have one.tail, such a purpose will be satisfactorily limited.

If a named beneficiary is to be the distribu-Your organization must include a conformed Example 5. If the articles state the organiza- tee, it must be one that would qualify and wouldcopy of its articles of organization with the appli-tion is formed for charitable purposes, without be exempt within the meaning of sectioncation for recognition of exemption. This may beany further description, such language ordinarilyits trust instrument, corporate charter, articles of 501(c)(3) at the time the dissolution takes place.will be sufficient since the term charitable has aassociation, or any other written instrument by Since the named beneficiary at the time of disso-generally accepted legal meaning. On the otherwhich it is created. lution may not be qualified, may not be in exis-hand, if the purposes are stated to be charitable, tence, or may be unwilling or unable to acceptphilanthropic, and benevolent, the organiza- the assets of the dissolving organization, a pro-Organizational Testtional requirement will not be met since the vision should be made for distribution of theterms philanthropic and benevolent have noThe articles of organization must limit the organ- assets for one or more of the purposes specifiedgenerally accepted legal meaning and, there-ization’s purposes to one or more of those de- in this chapter in the event of any such contin-fore, the stated purposes may, under the laws ofscribed at the beginning of this chapter and must gency.the state, permit activities that are broader thannot expressly empower it to engage, other thanthose intended by the exemption law.as an insubstantial part of its activities, in activi-

Sample articles of organization. See sam-ties that do not further one or more of thoseExample 6. If the articles state an organiza- ple articles of organization in the Appendix in thepurposes. These conditions for exemption are

tion is formed to promote American ideals, or to back of this publication.referred to as the organizational test.




Qualifying organizations. The following 2. The amount of scholarship and loan funds,if any, awarded to students enrolled andtypes of organizations may qualify as educa-Educationalthe racial composition of students whotional:have received the awards.Organizations

1. An organization, such as a primary or sec-3. A list of the school’s incorporators, foun-ondary school, a college, or a professionaland Private Schools ders, board members, and donors of landor trade school, that has a regularly sched-

or buildings, whether individuals or organi-uled curriculum, a regular faculty, and aIf your organization wants to obtain recognitionzations.regularly enrolled student body in attend-of exemption as an educational organization,

ance at a place where the educational ac-you must submit complete information as to how 4. A statement indicating whether any of thetivities are regularly carried on,your organization carries on or plans to carry on organizations described in item (3) above

its educational activities, such as by conducting have an objective of maintaining segre-2. An organization whose activities consist ofa school, by panels, discussions, lectures, fo- gated public or private school education atconducting public discussion groups, fo-rums, radio and television programs, or through the time the application is filed and, if so,rums, panels, lectures, or other similar pro-various cultural media such as museums, sym- whether any of the individuals described ingrams,phony orchestras, or art exhibits. In each in- item (3) are officers or active members ofstance, you must explain by whom and where 3. An organization that presents a course of those organizations at the time the applica-these activities are or will be conducted and the instruction by correspondence or through tion is filed.amount of admission fees, if any. You must the use of television or radio,

5. The public school district and county insubmit a copy of the pertinent contracts, agree-4. A museum, zoo, planetarium, symphony which the school is located.ments, publications, programs, etc.

orchestra, or other similar organization,If you are organized to conduct a school, youmust submit full information regarding your tui- 5. A nonprofit children’s day-care center, and How to determine racial composition. Thetion charges, number of faculty members, num- racial composition of the student body, faculty,6. A credit counseling organization.ber of full-time and part-time students enrolled, and administrative staff can be an estimatecourses of study and degrees conferred, to- based on the best information readily availableCollege book stores, cafeterias, restau-gether with a copy of your school catalog. See to the school, without requiring student appli-rants, etc. These and other on-campus orga-also Private Schools, discussed later. cants, students, faculty, or administrative staff tonizations should submit information to show that

submit to the school information that the schoolthey are controlled by and operated for the con-Educational Organizations otherwise does not require. Nevertheless, avenience of the faculty and student body or bystatement of the method by which the racialwhom they are controlled and whom they serve.The term educational relates to: composition was determined must be supplied.

Alumni association. An alumni association The identity of individual students or members of1. The instruction or training of individuals forshould establish that it is organized to promote the faculty and administrative staff should not bethe purpose of improving or developing

included with this information.the welfare of the university with which it istheir capabilities, oraffiliated, is subject to the control of the univer- A school that is a state or municipal instru-

2. The instruction of the public on subjects sity as to its policies and destination of funds, mentality (see Instrumentalities, near the begin-useful to individuals and beneficial to the and is operated as an integral part of the univer- ning of this chapter), whether or not it qualifiescommunity. sity or is otherwise organized to promote the for exemption under section 501(c)(3), is not

considered to be a private school for purposes ofwelfare of the college or university. If your asso-the following discussion.ciation does not have these characteristics, itAdvocacy of a position. Advocacy of a par-

may still be exempt as a social club if it meetsticular position or viewpoint may be educationalif there is a sufficiently full and fair exposition of the requirements described in chapter 4, under

Racially Nondiscriminatory Policypertinent facts to permit an individual or the 501(c)(7) - Social and Recreation Clubs.public to form an independent opinion or conclu-

Athletic organization. This type of organi- To qualify as an organization exempt from fed-sion. The mere presentation of unsupportedzation must submit evidence that it is engaged in eral income tax, a private school must include aopinion is not educational.

statement in its charter, bylaws, or other govern-activities such as directing and controlling inter-Method not educational. The method used ing instrument, or in a resolution of its governingscholastic athletic competitions, conducting

by an organization to develop and present its body, that it has a racially nondiscriminatorytournaments, and prescribing eligibility rules forviews is a factor in determining if an organization policy as to students and that it does not discrim-contestants. If it is not so engaged, your organi-qualifies as educational within the meaning of inate against applicants and students on thezation may be exempt as a social club describedsection 501(c)(3). The following factors may in- basis of race, color, or national or ethnic origin.in chapter 4. Raising funds to be used for traveldicate that the method is not educational. Also, the school must circulate information thatand other activities to interview and persuade

clearly states the school’s admission policies. Aprospective students with outstanding athletic1. The presentation of viewpoints unsup- racially nondiscriminatory policy toward stu-ability to attend a particular university does notported by facts is a significant part of the dents means that the school admits the studentsshow an exempt purpose. If your organization isorganization’s communications. of any race to all the rights, privileges, programs,not exempt as an educational organization, see2. The facts that purport to support the view- and activities generally accorded or made avail-Amateur Athletic Organizations, later in this

point are distorted. able to students at that school and that thechapter.school does not discriminate on the basis of race3. The organization’s presentations makein administering its educational policies, admis-substantial use of inflammatory and dispar- Private Schools sion policies, scholarship and loan programs,aging terms and express conclusions moreand athletic and other school-administered pro-on the basis of emotion than of objective Every private school filing an application for rec-grams.evaluations. ognition of tax-exempt status must supply the

The IRS considers discrimination on the ba-IRS (on Schedule B, Form 1023) with the follow-4. The approach used is not aimed at devel- sis of race to include discrimination on the basising information. oping an understanding on the part of the of color or national or ethnic origin.audience because it does not consider 1. The racial composition of the student body, The existence of a racially discriminatory pol-their background or training. and of the faculty and administrative staff, icy with respect to the employment of faculty and

as of the current academic year. (This in- administrative staff is indicative of a racially dis-Exceptional circumstances, however, mayformation also must be projected, so far as criminatory policy as to students. Conversely,exist where an organization’s advocacy may bemay be feasible, for the next academic the absence of racial discrimination in the em-educational even if one or more of the factors

ployment of faculty and administrative staff islisted above are present. year.)




indicative of a racially nondiscriminatory policy Method two. The school can use the broad- basis of the facts and circumstances of eachas to students. case.cast media to publicize its racially nondiscrimi-

A policy of a school that favors racial minority natory policy if this use makes the policy known The IRS recognizes that the failure by agroups with respect to admissions, facilities and to all segments of the general community the school drawing its students from local communi-programs, and financial assistance is not dis- school serves. If the school uses this method, it ties to enroll racial minority group students maycrimination on the basis of race when the pur- must provide documentation showing that the not necessarily indicate the absence of a raciallypose and effect of this policy is to promote nondiscriminatory policy when there are rela-means by which this policy was communicatedestablishing and maintaining the school’s non- tively few or no such students in these communi-to all segments of the general community wasdiscriminatory policy. ties. Actual enrollment is, however, a meaningfulreasonably expected to be effective. In this

A school that selects students on the basis of indication of a racially nondiscriminatory policycase, appropriate documentation would includemembership in a religious denomination or unit in a community in which a public school orcopies of the tapes or scripts used and recordsis not discriminating if membership in the de- schools became subject to a desegregation or-showing that there was an adequate number ofnomination or unit is open to all on a racially der of a federal court or are otherwise expresslyannouncements. The documentation also wouldnondiscriminatory basis. obligated to implement a desegregation planinclude proof that these announcements were

under the terms of any written contract or othermade during hours when they were likely to bePolicy statement. The school must include a commitment to which any federal agency was acommunicated to all segments of the generalstatement of its racially nondiscriminatory policy party.community, that they were long enough to con-in all its brochures and catalogs dealing with The IRS encourages schools to satisfy thevey the message clearly, and that they werestudent admissions, programs, and scholar- publicity requirement by using either of thebroadcast on radio or television stations likely toships. Also, the school must include a reference methods described earlier, even though abe listened to by substantial numbers of mem-to its racially nondiscriminatory policy in other school considers itself to be within one of thebers of all racial segments of the general com-written advertising that it uses to inform prospec- Exceptions. The IRS believes that these public-munity. Announcements must be made duringtive students of its programs. ity requirements are the most effective methodsthe period of the school’s solicitation for stu-

to make known a school’s racially nondiscrimi-dents or, in the absence of a solicitation pro-Publicity requirement. The school mustnatory policy. In this regard, it is each school’sgram, during the school’s registration period.make its racially nondiscriminatory policy knownresponsibility to determine whether either of theto all segments of the general community served Exceptions. The publicity requirements will exceptions applies. Such responsibility will pre-by the school. Selective communication of a not apply in the following situations. pare the school, if it is audited by the IRS, toracially nondiscriminatory policy that a schooldemonstrate that the failure to publish its raciallyprovides solely to leaders of racial groups will First, if for the preceding 3 years the nondiscriminatory policy in accordance with ei-not be considered an effective means of com- enrollment of a parochial or other ther one of the publicity requirements was justi-munication to make the policy known to all seg- church-related school consists of students fied by one of the exceptions. Also, a schoolments of the community. To satisfy this at least 75% of whom are members of the must be prepared to demonstrate that it hasrequirement, the school must use one of the sponsoring religious denomination or unit, publicly disavowed or repudiated any state-following two methods. the school can make known its racially non- ments purported to have been made on its be-

discriminatory policy in whatever newspa-Method one. The school can publish a no- half (after November 6, 1975) that are contrarypers or circulars the religious denominationtice of its racially nondiscriminatory policy in a to its publicity of a racially nondiscriminatoryor unit uses in the communities from whichnewspaper of general circulation that serves all policy as to students, to the extent that thethe students are drawn. These newspapersracial segments of the community. Such publi- school or its principal official was aware of theseand circulars can be distributed by a partic-cation must be repeated at least once annually statements.ular religious denomination or unit or by anduring the period of the school’s solicitation forassociation that represents a number of re-students or, in the absence of a solicitation pro- Facilities and programs. A school must beligious organizations of the same denomi-gram, during the school’s registration period. able to show that all of its programs and facilitiesnation. If, however, the school advertises inWhen more than one community is served by a are operated in a racially nondiscriminatorynewspapers of general circulation in theschool, the school can publish the notice in manner.

those newspapers that are reasonably likely to community or communities from which itsScholarship and loan programs. As a gen-be read by all racial segments in the communi- students are drawn and the second excep-eral rule, all scholarship or other comparableties that the school serves. tion (discussed next) does not apply to thebenefits obtainable at the school must be of-If this method is used, the notice must meet school, then it must comply with either offered on a racially nondiscriminatory basis. Thisthe following printing requirements. the publicity requirements explained earlier.must be known throughout the general commu-

Second, if a school customarily draws a1. It must appear in a section of the newspa- nity being served by the school and should besubstantial percentage of its students na-per likely to be read by prospective stu- referred to in its publicity. Financial assistancetionwide, worldwide, from a large geo-dents and their families. programs, as well as scholarships and loansgraphic section or sections of the United made under financial assistance programs, that2. It must occupy at least 3 column inches. States, or from local communities, and if the favor members of one or more racial minorityschool follows a racially nondiscriminatory3. It must have its title printed in at least 12 groups and that do not significantly detract frompolicy as to its students, the school maypoint bold face type. or are designed to promote a school’s raciallysatisfy the publicity requirement by comply- nondiscriminatory policy will not adversely affect4. It must have the remaining text printed ining with the instructions explained earlier the school’s exempt status.at least 8 point type.under Policy statement.

The following is an acceptable example of Certification. An individual authorized to takethe notice: The school can demonstrate that it follows a official action on behalf of a school that claims to

racially nondiscriminatory policy either by show- be racially nondiscriminatory as to studentsNOTICE OF ing that it currently enrolls students of racial must certify annually, under penalties of perjury,NONDISCRIMINATORY POLICY

minority groups in meaningful numbers or, ex- on Schedule E (Form 990 or 990-EZ) or FormAS TO STUDENTS5578, Annual Certification of Racial Nondiscrim-cept for local community schools, when minorityThe M School admits students of any race, color,

national and ethnic origin to all the rights, ination for a Private School Exempt From Fed-students are not enrolled in meaningful num-privileges, programs, and activities generally eral Income Tax, whichever applies, that to thebers, that its promotional activities and recruitingaccorded or made available to students at the best of his or her knowledge and belief theefforts in each geographic area were reasonablyschool. It does not discriminate on the basis of

school has satisfied all requirements that apply,designed to inform students of all racial seg-race, color, national and ethnic origin inas previously explained.ments in the general communities within theadministration of its educational policies,

admissions policies, scholarship and loan area of the availability of the school. The ques- Failure to comply with the guidelines ordinar-p r o g r a m s , a n d a t h l e t i c a n d o t h e r tion as to whether a school demonstrates such a ily will result in the proposed revocation of theschool-administered programs. policy satisfactorily will be determined on the exempt status of a school.




Recordkeeping requirements. With Some examples of this type of organization arecertain exceptions, given later, each those organized for:Organizationsexempt private school must maintainRECORDS • Relief of the poor, the distressed, or the

the following records for a minimum period of 3 Providing Insurance underprivileged,years, beginning with the year after the year ofcompilation or acquisition. • Advancement of religion,An organization described in sections 501(c)(3)

or 501(c)(4) may be exempt from tax only if no1. Records indicating the racial composition • Advancement of education or science,substantial part of its activities consists of pro-of the student body, faculty, and adminis- • Erection or maintenance of public build-viding commercial-type insurance.trative staff for each academic year.

ings, monuments, or works,However, this rule does not apply to2. Records sufficient to document that schol- state-sponsored organizations described in sec- • Lessening the burdens of government,arship and other financial assistance is tions 501(c)(26) or 501(c)(27), which are dis-

awarded on a racially nondiscriminatory • Lessening of neighborhood tensions,cussed in chapter 4, or to charitable risk pools,basis. discussed next. • Elimination of prejudice and discrimina-

3. Copies of all materials used by or on betion,half of the school to solicit contributions. Charitable Risk Pools • Defense of human and civil rights secured

4. Copies of all brochures, catalogs, and ad- by law, andA charitable risk pool is treated as organized andvertising dealing with student admissions, operated exclusively for charitable purposes if it: • Combating community deterioration andprograms, and scholarships. (Schools ad-

juvenile delinquency.vertising nationally or in a large geographic 1. Is organized and operated only to pool in-segment or segments of the United States The rest of this section contains a description ofsurable risks of its members (not includingneed only maintain a record sufficient to the information to be provided by certain specificrisks related to medical malpractice) and toindicate when and in what publications organizations. This information is in addition toprovide information to its members abouttheir advertisements were placed.) the required inclusions described in chapter 1,loss control and risk management,

and other statements requested on Form 1023.The racial composition of the student body, 2. Consists only of members that are section Each of the following organizations must submitfaculty, and administrative staff can be deter- 501(c)(3) organizations exempt from tax the information described.mined in the same manner as that described at under section 501(a),the beginning of this section. However, a school Charitable organization supporting educa-3. Is organized under state law authorizingcannot discontinue maintaining a system of rec-

tion. Submit information showing how your or-this type of risk pooling,ords that reflect the racial composition of itsganization supports education — for example,students, faculty, and administrative staff used 4. Is exempt from state income tax (or will be contributes to an existing educational institution,on November 6, 1975, unless it substitutes a after qualifying as a section 501(c)(3) or- endows a professorial chair, contributes towarddifferent system that compiles substantially the ganization), paying teachers’ salaries, or contributes to ansame information, without advance approval ofeducational institution to enable it to carry on5. Has obtained at least $1,000,000 in startupthe IRS.research.capital from nonmember charitable organi- The IRS does not require that a school release

zations,any personally identifiable records or personal Scholarships. If the organization awards orinformation except in accordance with the re- plans to award scholarships, complete Sched-6. Is controlled by a board of directorsquirements of the Family Educational Rights ule H of Form 1023. Submit the following also. elected by its members, andand Privacy Act of 1974. Similarly, the IRS does

7. Is organized under documents requiring 1. Criteria used for selecting recipients, in-not require a school to keep records prohibitedthat: cluding the rules of eligibility.under state or federal law.

2. How and by whom the recipients are or willa. Each member be a section 501(c)(3)Exceptions. The school does not have tobe selected.organization exempt from tax underindependently maintain these records for IRS

section 501(a),use if both of the following are true. 3. If awards are or will be made directly toindividuals, whether information is requiredb. Each member that receives a final de-

1. Substantially the same information has assuring that the student remains intermination that it no longer qualifiesbeen included in a report or reports filed school.under section 501(c)(3) notify the poolwith an agency or agencies of federal, immediately, and 4. If awards are or will be made to recipientsstate, or local governments, and this infor-

of a particular class, for example, childrenc. Each insurance policy issued by themation is current within 1 year.of employees of a particular employer—pool provide that it will not cover events

2. The school maintains copies of these re- occurring after a final determination de-ports from which this information is readily a. Whether any preference is or will bescribed in (b).obtainable. accorded an applicant by reason of the

parent’s position, length of employment,If these reports do not include all of the informa-or salary,tion required, as discussed earlier, records pro-

viding such remaining information must be b. Whether as a condition of the award themaintained by the school for IRS use. recipient must upon graduation acceptOther Section 501(c)(3)

employment with the company, andFailure to maintain records. Failure to Organizationsmaintain or to produce the required records and c. Whether the award will be continuedinformation, upon proper request, will create a even if the parent’s employment ends.In addition to the information required for allpresumption that the organization has failed to

organizations, as described earlier, you shouldcomply with these guidelines. 5. A copy of the scholarship application forminclude any other information described in thisand any brochures or literature describingsection.the scholarship program.

Charitable OrganizationsHospital. If you are organized to operate acharitable hospital, complete and attach SectionIf your organization is applying for recognition ofI of Schedule C, Form 1023.exemption as a charitable organization, it must

If your hospital was transferred to you fromshow that it is organized and operated for pur-proprietary ownership, complete and attachposes that are beneficial to the public interest.




Schedule G of Form 1023. You must attach a list poor), such as in the area of protection of the creed are not illegal or contrary to clearlyshowing: environment, you should submit the following defined public policy.

information. Therefore, your group (or organization) may not1. The names of the active and courtesy staffqualify for treatment as an exempt religious or-members of the proprietary hospital, as 1. How the litigation can reasonably be saidganization for tax purposes if its actions, aswell as the names of your medical staff to be representative of a broad public inter-contrasted with its beliefs, are contrary to wellmembers after the transfer to nonprofit est rather than a private one.established and clearly defined public policy. Ifownership, and

2. Whether the organization will accept fees there is a clear showing that the beliefs (or2. The names of any doctors who continued for its services. doctrines) are sincerely held by those professing

to lease office space in the hospital after them, the IRS will not question the religious3. A description of the cases litigated or to beits transfer to nonprofit ownership and the nature of those beliefs.litigated and how they benefit the publicamount of rent paid. Submit also an ap-generally.praisal showing the fair rental value of the

Churches. Although a church, its integratedrented space. 4. Whether the policies and program of the auxiliaries, or a convention or association oforganization are the responsibility of a churches is not required to file Form 1023 to beClinic. If you are organized to operate a clinic, board or committee representative of the exempt from federal income tax or to receive taxattach a statement including: public interest, which is neither controlled deductible contributions, the organization mayby employees or persons who litigate on find it advantageous to obtain recognition of1. A description of the facilities and services,behalf of the organization nor by any or- exemption. In this event, you should submit in-

2. To whom the services are offered, such as ganization that is not itself an organization formation showing that your organization is athe public at large or a specific group, described in this chapter. church, synagogue, association or convention

3. How charges are determined, such as on a of churches, religious order, or religious organi-5. Whether the organization is operated,profit basis, to recover costs, or at less zation that is an integral part of a church, andthrough sharing of office space or other-than cost, that it is engaged in carrying out the function of awise, in a way to create identification or

church.confusion with a particular private law firm.4. By whom administered and controlled,In determining whether an admittedly relig-6. Whether there is an arrangement to pro-5. Whether any of the professional staff (that ious organization is also a church, the IRS doesvide, directly or indirectly, a deduction foris, those who perform or will perform the not accept every assertion that the organizationthe cost of litigation that is for the privateclinical services) also serve or will serve in is a church. Because beliefs and practices varybenefit of the donor.an administrative capacity, and so widely, there is no single definition of the

word church for tax purposes. The IRS consid-6. How compensation paid the professional Acceptance of attorneys’ fees. A nonprofiters the facts and circumstances of each organi-staff is or will be determined. public-interest law firm can accept attorneys’zation applying for church status.fees in public-interest cases if the fees are paid

Home for the aged. If you are organized to directly by its clients and the fees are not more Convention or association of churches.operate a home for the aged, complete and than the actual costs incurred in the case. Upon Any organization that is otherwise a conventionattach Schedule F of Form 1023 and required undertaking a representation, the organization or association of churches will not fail to qualifyattachments. cannot withdraw from the case because the liti- as a church merely because the membership of

gant is unable to pay the fee. the organization includes individuals as well asCommunity nursing bureau. If you provide achurches or because the individuals have votingnursing register or community nursing bureau, Firms can accept fees awarded or approvedrights in the organization.provide information showing that your organiza- by a court or an administrative agency and paid

tion will be operated as a community project and by an opposing party if the firms do not use the Integrated auxiliaries. An organization iswill receive its primary support from public con- likelihood or probability of fee awards as a con- an integrated auxiliary of a church if all the fol-tributions to maintain a nonprofit register of qual- sideration in the selection of cases. All fee lowing are true.ified nursing personnel, including graduate awards must be paid to the organization and notnurses, unregistered nursing school graduates, to its individual staff attorneys. Instead, a pub- 1. The organization is described both in sec-licensed attendants and practical nurses for the lic-interest law firm can reasonably compensate tions 501(c)(3) and 509(a)(1), 509(a)(2), orbenefit of hospitals, health agencies, doctors, its staff attorneys, but only on a straight salary 509(a)(3).and individuals. basis. Private attorneys, whose services are re-

2. It is affiliated with a church or a conventiontained by the firm to assist it in particular cases,Organization providing loans. If you make, or association of churches.can be compensated by the firm, but only on aor will make, loans for charitable and educa-

3. It is internally supported. An organization isfixed fee or salary basis.tional purposes, submit the following informa-internally supported unless both of the fol-The total amount of all attorneys’ fees (courttion. lowing are true.awarded and those received from clients) must

1. An explanation of the circumstances under not be more than 50% of the total cost of opera-a. It offers admissions, goods, services, orwhich such loans are, or will be, made. tions of the organization’s legal functions, calcu-

facilities for sale, other than on an inci-lated over a 5-year period.2. Criteria for selection, including the rules of dental basis, to the general public (ex-

If, in order to carry out its program, an organi-eligibility. cept goods, services, or facilities sold atzation violates applicable canons of ethics, dis- a nominal charge or for a small part of3. How and by whom the recipients are or willrupts the judicial system, or engages in any the cost).be selected.illegal action, the organization will jeopardize its

b. It normally gets more than 50% of its4. Manner of repayment of the loan. exemption.support from a combination of govern-

5. Security required, if any. mental sources, public solicitation ofReligious Organizationscontributions, and receipts from the sale6. Interest charged, if any, and when pay-of admissions, goods, performance ofable. To determine whether an organization meetsservices, or furnishing of facilities in ac-the religious purposes test of section 501(c)(3),7. Copies in duplicate of the loan application tivities that are not unrelated trades orthe IRS maintains two basic guidelines.and any brochures or literature describing businesses.

the loan program. 1. That the particular religious beliefs of theorganization are truly and sincerely held. Special rule. Men’s and women’s organiza-Public-interest law firms. If your organiza-

tions, seminaries, mission societies, and youth2. That the practices and rituals associatedtion was formed to litigate in the public interestgroups that satisfy (1) and (2) shown earlier are(as opposed to providing legal services to the with the organization’s religious belief or




integrated auxiliaries of a church even if they are Only reports of your research activities ornot internally supported. those conducted on your behalf, as distin- Private Foundations

guished from those of your creators orIn order for an organization (including amembers conducted in their individual ca-church and religious organization) to qualify for and Public Charitiespacities, should be submitted.tax exemption, no part of its net earnings can

inure to any individual. It is important that you determine if your organi-zation is a private foundation. Most organiza-Although an individual is entitled to a charita- Literary Organizationstions exempt from income tax (as organizationsble deduction for contributions to a church, thedescribed in section 501(c)(3)) are presumed toassignment or similar transfer of compensation If your organization is established to operate abe private foundations unless they notify the IRSfor personal services to a church generally does book store or engage in publishing activities ofwithin a specified period of time that they meetnot relieve a taxpayer of federal income tax any nature (printing, publication, or distributionthe requirements of section 509(a) to beliability on the compensation, regardless of the of your own material or that printed or publishedtreated as other than a private foundation.motivation behind the transfer. by others and distributed by you), explain fullyThis notice requirement applies to most sectionthe nature of the operations, including whether501(c)(3) organizations regardless of when theysales are or will be made to the general public,Scientific Organizationswere formed.the type of literature involved, and how these

You must show that your organization’s re- activities are related to your stated purposes.search will be carried on in the public interest. Private FoundationsScientific research will be considered to be in the Amateur Athleticpublic interest if the results of the research (in- Every organization that qualifies for tax exemp-Organizationscluding any patents, copyrights, processes, or tion as an organization described in sectionformulas) are made available to the public on a 501(c)(3) is a private foundation unless it fallsThere are two types of amateur athletic organi-nondiscriminatory basis; if the research is per- into one of the categories specifically excludedzations that can qualify for tax-exempt status.formed for the United States or a state, county, from the definition of that term (referred to inThe first type is an organization that fostersor municipal government; or if the research is sections 509(a)(1), 509(a)(2), 509(a)(3), ornational or international amateur sports compe-carried on for one of the following purposes. 509(a)(4)). In effect, the definition divides thesetition but only if none of its activities involve

organizations into two classes, namely privateproviding athletic facilities or equipment. The1. Aiding in the scientific education of college foundations and public charities. Public charitiessecond type is a Qualified amateur sports or-or university students. are discussed later.ganization. (discussed below). The difference is2. Obtaining scientific information that is pub- Organizations that fall into the excluded cat-that a qualified amateur sports organization can

lished in a treatise, thesis, trade publica- egories are generally those that either haveprovide athletic facilities and equipment.tion, or in any other form that is available broad public support or actively function in aDonations to either type of amateur athleticto the interested public. supporting relationship to those organizations.organization are deductible as charitable contri-

Organizations that test for public safety also arebutions on the donor’s federal income tax return.3. Discovering a cure for a disease.excluded.However, no deduction is allowed if there is a

4. Aiding a community or geographical area direct personal benefit to the donor or any otherby attracting new industry to the commu- Notice to IRS. Even if an organization fallsperson other than the organization.nity or area, or by encouraging the devel- within one of the categories excluded from theQualified amateur sports organization. Anopment or retention of an industry in the definition of private foundation, it will be pre-organization will be a qualified amateur sportscommunity or area. sumed to be a private foundation, with someorganization if it is organized and operated:

exceptions, unless it gives timely notice to theScientific research, for exemption purposes,IRS that it is not a private foundation. This notice1. Exclusively to foster national or interna-does not include activities of a type ordinarilyrequirement applies to an organization regard-tional amateur sports competition, andincidental to commercial or industrial operationsless of when it was organized. The only excep-such as the ordinary inspection or testing of 2. Primarily to conduct national or interna- tions to this requirement are those organizationsmaterials or products, or the designing or con- tional competition in sports or to support that are excepted from the requirement of filingstructing of equipment, buildings, etc. and develop amateur athletes for that com- Form 1023 as discussed, earlier, under Organi-If you engage or plan to engage in research, petition. zations Not Required To File Form 1023.submit all of the following.

The organization’s membership can be local or When to file notice. If an organization has1. An explanation of the nature of the re- regional in nature. to file the notice, it must do so within 15 months

search. from the end of the month in which it was organ-Prevention of Cruelty ized.2. A brief description of research projects

completed or presently being engaged in. to Children or Animals If your organization is newly applying for rec-ognition of exemption as an organization de-3. How and by whom research projects are Examples of activities that may qualify this type scribed in this chapter (a section 501(c)(3)determined and selected. of organization for exempt status are: organization) and you wish to establish that your

4. Whether you have contracted or spon- organization is a public charity rather than a1. Preventing children from working in haz-sored research, or contemplated doing so, private foundation, you must complete the appli-ardous trades or occupations,and, if so, names of past sponsors or cable lines of Part X of Form 1023 (however, seegrantors, terms of grants or contracts, to- 2. Promoting high standards of care for labo- Notice 1382 about changes to Part X). An exten-gether with copies of any executed con- ratory animals, and sion of time for filing this application may betracts or grants. granted by the IRS if your request is timely and3. Providing funds to pet owners to have their

you demonstrate that additional time is needed.5. Disposition made or to be made of the pets spayed or neutered to prevent over-See Application for Recognition of Exemption,results of your research, including whether breeding.earlier in this chapter, for more information.preference has been or will be given to any

In determining the date on which a corpora-organization or individual either as to re-tion is organized for purposes of applying forsults or time of release.recognition of section 501(c)(3) status, the IRS

6. Who will retain ownership or control of any looks to the date the corporation came into exis-patents, copyrights, processes, or formulas tence under the law of the state in which it isresulting from your research. incorporated. For example, where state law pro-

vides that existence of a corporation begins on7. A copy of publications or other mediashowing reports of your research activities. the date its articles are filed by a certain state




official in the appropriate state office, the corpo- 5. The corporation will not make any taxable pattern. Thus, in the following discussions, whenexpenditures as defined in section 4945(d) the one-third support test (see Qualifying asration is considered organized on that date.of the Internal Revenue Code, or the corre- Publicly Supported, later) is referred to, it meansLater nonsubstantive amendments to the ena-sponding section of any future federal tax the following fraction normally must equal atbling instrument will not change the date of or-code. least one-third.ganization, for purposes of the notice

requirement.Qualifying support

Notice filed late. An organization that Total supportDraft Bstates it is a private foundation when it files itsapplication for recognition of exemption after the Including items of support in qualifyingAny other provisions of this instrument notwith-15-month period will be treated as a section support (the numerator of the fraction)standing, the trustees shall distribute its income501(c)(3) organization and as a private founda- or excluding items of support from totalfor each tax year at a time and in a manner as CAUTION

!tion only from the date it files its application. support (the denominator of the fraction) maynot to become subject to the tax on undistributed

An organization that states it is a publicly decide whether an organization is excluded fromincome imposed by section 4942 of the Internalsupported charity when it files its application for the definition of a private foundation, and thusRevenue Code, or the corresponding section ofrecognition of exemption after the 15-month pe- from the liability for certain excise taxes. So it isany future federal tax code.riod cannot be treated as a section 501(c)(3) very important to classify items of support cor-Any other provisions of this instrument not-organization before the date it files the applica- rectly.withstanding, the trustees will not engage in anytion. Financial support received before that date act of self-dealing as defined in section 4941(d)cannot be used for purposes of determining of the Internal Revenue Code, or the corre-whether the organization is publicly supported. Section 509(a)(1) Organizationssponding section of any future federal tax code;However, an organization that can reasonably nor retain any excess business holdings as de-be expected to meet the support requirements Section 509(a)(1) organizations include: fined in section 4943(c) of the Internal Revenue(discussed later under Public Charities) when it Code, or the corresponding section of any future 1. A church or a convention or association ofapplies for tax-exempt status will be classified federal tax code; nor make any investments in a churches,as a publicly supported charity and not a private manner as to incur tax liability under sectionfoundation. 2. An educational organization such as a4944 of the Internal Revenue Code, or the corre-

school or college,sponding section of any future federal tax code;Excise taxes on private foundations. There nor make any taxable expenditures as defined in 3. A hospital or medical research organiza-is an excise tax on the net investment income of section 4945 (d) of the Internal Revenue Code, tion operated in conjunction with a hospi-most domestic private foundations. See Chapter or the corresponding section of any future fed- tal,5 for more information on excise taxes. eral tax code.

4. Endowment funds operated for the benefitGoverning instrument. A private foundation Effect of state law. A private foundation’s of certain state and municipal colleges and

governing instrument will be considered to meetcannot be tax exempt nor will contributions to it universities,these charter requirements if valid provisions ofbe deductible as charitable contributions unless

5. A governmental unit, andstate law have been enacted that: its governing instrument contains special provi-sions in addition to those that apply to all organi- 6. A publicly supported organization.

1. Require it to act or refrain from acting sozations described in section 501(c)(3).as not to subject the foundation to the

Sample governing instruments. The fol- Church. The characteristics of a church aretaxes imposed on prohibited transactions,lowing samples of governing instrument provi- discussed earlier in this chapter under Religiousorsions illustrate the special charter requirements Organizations.

2. Treat the required provisions as containedthat apply to private foundations. Draft A is ain the foundation’s governing instrument.sample of provisions in articles of incorporation, Educational organizations. An educational

Draft B, a trust indenture. The IRS has published a list of states with organization is one whose primary function is tothis type of law. The list is in Revenue Ruling present formal instruction that normally main-75-38, 1975-1 C.B. 161 (or later update). tains a regular faculty and curriculum and that

Draft A normally has a regularly enrolled body of pupilsor students in attendance at the place where itPublic Charities

General regularly carries on its educational activities.The term includes institutions such as primary,A private foundation is any organization de-

1. The corporation will distribute its income secondary, preparatory, or high schools, andscribed in section 501(c)(3) , unless it falls intofor each tax year at a time and in a manner colleges and universities. It includes federal,one of the categories specifically excluded fromas not to become subject to the tax on state, and other publicly supported schools thatthe definition of that term in section 509(a),undistributed income imposed by section otherwise come within the definition. It does notwhich lists four basic categories of exclusions.4942 of the Internal Revenue Code, or the include organizations engaged in both educa-These categories are discussed under the Sec-corresponding section of any future federal tional and noneducational activities, unless thetion 509(a) heading that follow this introduction.tax code. latter are merely incidental to the educationalIf your organization falls into one of these

activities. A recognized university that inciden-categories, it is not a private foundation and you2. The corporation will not engage in any acttally operates a museum or sponsors concerts isshould state this in Part X of your application forof self-dealing as defined in sectionan educational organization. However, the oper-recognition of exemption (Form 1023).4941(d) of the Internal Revenue Code, oration of a school by a museum does not neces-If your organization does not fall into one ofthe corresponding section of any futuresarily qualify the museum as an educationalthese categories, it is a private foundation and isfederal tax code.organization.subject to the applicable rules and restrictions

3. The corporation will not retain any excess until it terminates its private foundation status. An exempt organization that operates abusiness holdings as defined in section Some private foundations also qualify as private tutoring service for students on a one-to-one4943(c) of the Internal Revenue Code, or operating foundations; these are discussed near basis in their homes, maintains a small center tothe corresponding section of any future the end of this chapter. test students to determine their need for tutor-federal tax code.Generally speaking, a large class of organi- ing, and employs tutors on a part-time basis is

4. The corporation will not make any invest- zations excluded under section 509(a)(1) and all not an educational organization for these pur-ments in a manner as to subject it to tax organizations excluded under section 509(a)(2) poses. Nor is an exempt organization that con-under section 4944 of the Internal Reve- depend upon a support test. This test is used to ducts an internship program by placing collegenue Code, or the corresponding section of assure a minimum percentage of broad-based and university students with cooperating gov-any future federal tax code. public support in the organization’s total support ernment agencies an educational organization.




Hospitals and medical research organiza- b. An agency or instrumentality of one or Qualifying as Publicly Supportedtions. A hospital is an organization whose more states or political subdivisions.

An organization will qualify as publicly supportedprincipal purpose or function is to provide hospi-if it passes the one-third support test. If it failsThe phrase “expenditures to or for the bene-tal or medical care or either medical education orthat test, it may qualify under the facts andfit of a college or university” includes expendi-medical research. A rehabilitation institution,circumstances test.tures made for any one or more of the normaloutpatient clinic, or community mental health or

functions of a college or university. These ex-drug treatment center may qualify as a hospital ifOne-third support test. An organization willpenditures include those for:its principal purpose or function is providing hos-qualify as publicly supported if it normally re-pital or medical care. If the accommodations ofceives at least one-third of its total support from1. Acquiring and maintaining real propertyan organization qualify as being part of a skilledgovernmental units, from contributions made di-comprising part of the campus area,nursing facility, that organization may qualify asrectly or indirectly by the general public, or from

a hospital if its principal purpose or function is 2. Erecting (or participating in erecting) col- a combination of these sources. For a definitionproviding hospital or medical care. A coopera- lege or university buildings, of support, see Support, later.tive hospital service organization that meets the

3. Acquiring and maintaining equipment and Definition of normally for one-third sup-requirements of section 501(e) will qualify as afurnishings used for, or in conjunction with, port test. An organization will be consideredhospital.normal functions of colleges and universi- as normally meeting the one-third support test

Exceptions. The term hospital does not inties, for its current tax year and the next tax year if, forclude convalescent homes, homes for children the current tax year and the 4 tax years immedi-4. Libraries,or the aged, or institutions whose principal pur- ately before the current tax year, the organiza-pose or function is to train handicapped individu- 5. Scholarships, and tion meets the one-third support test on anals to pursue a vocation. An organization that aggregate basis. See also Special computation6. Student loans.mainly provides medical education or medical period for new organizations, later, in this dis-

The organization must normally receive aresearch will not be considered a hospital, un- cussion.substantial part of its support from the Unitedless it is also actively engaged in providing medi-States or any state or political subdivision, orcal or hospital care to patients on its premises or Facts and circumstances test. The facts andfrom direct or indirect contributions from thein its facilities, on an in-patient or out-patient circumstances test is for organizations failing togeneral public, or from a combination of these meet the one-third support test. If your organiza-basis, as an integral part of its medical educationsources. tion fails to meet the one-third support test, itor medical research functions.

may still be treated as a publicly supported or-Hosp i ta ls pa r t i c ipa t ing in p ro - Support. Support does not include incomeganization if it normally receives a substantialvider-sponsored organizations. An organi- received in the exercise or performance by the part of its support from governmental units, from

zation can be treated as organized and operated organization of its charitable, educational, or direct or indirect contributions from the generalexclusively for a charitable purpose even if it other purpose or function constituting the basis public, or from a combination of these sources.owns and operates a hospital that participates in for exemption. To qualify, an organization must meet thea provider-sponsored organization, whether or In determining the amount of support re- ten-percent-of-support requirement and the at-not the provider-sponsored organization is tax ceived by an organization for a contribution of traction of public support requirement. Theseexempt. For section 501(c)(3) purposes, any property when the value of the contribution by requirements establish, under all the facts andperson with a material financial interest in the the donor is subject to reduction for certain ordi- circumstances, that an organization normally re-provider-sponsored organization is treated as a nary income and capital gain property, the fair ceives a substantial part of its support from gov-private shareholder or individual with respect to market value of the property is taken into ac- ernmental units or from direct or indirectthe hospital. count. contributions from the general public. The or-

ganization also must be in the nature of a pub-Medical research organization. A medical Indirect contribution. An example of an in-licly supported organization, taking into accountresearch organization must be directly engaged direct contribution from the public is the receiptfive different factors. See Additional require-in the continuous active conduct of medical re- by the organization of its share of the proceeds ments (the five public support factors), later.search in conjunction with a hospital, and that of an annual collection campaign of a commu-

activity must be the organization’s principal pur- Ten-percent-of-support requirement.nity chest, community fund, or united fund.pose or function. The percentage of support normally received by

an organization from governmental units, fromGovernmental units. A governmental unit in-Publicly supported. A hospital or medicalcontributions made directly or indirectly by thecludes a state, a possession of the Unitedresearch organization that wants the additionalgeneral public, or from a combination of theseStates, or a political subdivision of either of theclassification of a publicly supported organiza-sources must be substantial. An organizationforegoing, or the United States or the District oftion (described later in this chapter under Quali-will not be treated as normally receiving a sub-Columbia.fying As Publicly Supported) can specificallystantial amount of governmental or public sup-request that classification. The organizationport unless the total amount of governmentalmust establish that it meets the public support Publicly supported organizations. An or-and public support normally received is at least

requirements of section 170(b)(1)(A)(vi). ganization is a publicly supported organization if 10% of the total support normally received byit is one that normally receives a substantial part that organization.of its support from a governmental unit or fromEndowment funds. Organizations operated

Attraction of public support requirement.the general public.for the benefit of certain state and municipalAn organization must be organized and oper-colleges and universities are endowment funds. Types of organizations that generally qualifyated in a manner to attract new and additionalThey are organized and operated exclusively to: are:public or governmental support on a continuous

• Museums of history, art, or science,1. Receive, hold, invest, and administer prop- basis. An organization will meet this requirementerty for a college or university, and if it maintains a continuous and bona fide pro-• Libraries,

gram for solicitation of funds from the general2. Make expenditures to or for the benefit of a • Community centers to promote the arts, public, community, or membership group in-college or university.

volved, or if it carries on activities designed to• Organizations providing facilities for theThe college or university must be: attract support from governmental units or othersupport of an opera, symphony orchestra,

charitable organizations described in sectionballet, or repertory drama, or for some1. An agency or instrumentality of a state or 509(a)(1). In determining whether an organiza-other direct service to the general public,political subdivision, or tion maintains a continuous and bona fide pro-andgram for solicitation of funds from the general2. Owned or operated by:

• Organizations such as the American Red public or community, consideration will be givena. A state or political subdivision, or Cross or the United Way. to whether the scope of its fundraising activities




is reasonable in light of its charitable activities. be considered in determining whether the or- clearance or developing employment op-Consideration also will be given to the fact that ganization is publicly supported. In determining portunities.an organization may, in its early years of exis- what is a representative number of persons,

3. Receiving a significant part of its fundstence, limit the scope of its solicitation to per- consideration will be given to the type of organi-

from a public charity or governmentalsons who would be most likely to provide seed zation involved, the length of time it has existed,agency to which it is in some way heldmoney sufficient to enable it to begin its charita- and whether it limits its activities to a particularaccountable as a condition of the grant,ble activities and expand its solicitation program. community or region or to a special field that cancontract, or contribution.be expected to appeal to a limited number ofDefinition of normally for facts and circum-

persons. Facts pertinent to years before the 4stances test. An organization will normally 5. Additional factors pertinent to member-tax years immediately before the current taxmeet the requirements of the facts and circum- ship organizations. The following are addi-year also may be considered.stances test for its current tax year and the next tional factors in determining whether a

tax year if, for the current tax year and the 4 tax 3. Representative governing body factor. membership organization is publicly supported. years immediately before the current tax year, The fact that an organization has a governing

1. Whether the solicitation for dues-payingt h e o r g a n i z a t i o n m e e t s t h e body that represents the broad interests of themembers is designed to enroll a substan-ten-percent-of-support and the attraction of pub- public rather than the personal or private interesttial number of persons in the community orlic support requirements on an aggregate basis of a limited number of donors will be consideredarea, or in a particular profession or field ofand satisfies a sufficient combination of the fac- in determining whether the organization is pub-special interest (taking into account thetors discussed later. The combination of factors licly supported.size of the area and the nature of the or-that an organization normally must meet does An organization will meet this requirement ifganization’s activities).not have to be the same for each 4-year period it has a governing body composed of:

as long as a sufficient combination of factors 2. Whether membership dues for individual1. Public officials acting in their public capaci-exists to show compliance. (rather than institutional) members have

ties, been fixed at rates designed to makeAdditional requirements (the five publicmembership available to a broad crosssupport factors). In addition to the two re- 2. Individuals selected by public officials act-section of the interested public, rather thanquirements of the facts and circumstances test, ing in their public capacities,to restrict membership to a limited numberthe following five public support factors will be

3. Persons having special knowledge or ex- of persons.considered in determining whether an organiza-pertise in the particular field or discipline intion is publicly supported. However, an organi- 3. Whether the activities of the organizationwhich the organization is operating, andzation generally does not have to satisfy all of

will be likely to appeal to persons havingthe factors. The factors relevant to each case 4. Community leaders, such as elected or ap- some broad common interest or purpose,and the weight accorded to any one of them may pointed officials, members of the clergy, such as educational activities in the casediffer depending upon the nature and purpose of educators, civic leaders, or other such per-

of alumni associations, musical activities inthe organization and the length of time it has sons representing a broad cross-section ofthe case of symphony societies, or civicexisted. The combination of factors that an or- the views and interests of the community.affairs in the case of parent-teacher as-ganization normally must meet does not have to

In a membership organization, the governing sociations.be the same for each 4-year period as long as abody also should include individuals elected bysufficient combination of factors exists to showa broadly based membership according to the Special rule. The fact that an organizationthat the organization is publicly supported.organization’s governing instrument or bylaws. has normally met the one-third support test re-

1. Percentage of financial support factor. quirements for a current tax year, but is unable4. Availability of public facilities or serv-When an organization normally receives at least normally to meet the requirements for a later taxices factor. The fact that an organization gen-10% but less than one-third of its total support year, will not in itself prevent the organizationerally provides facilities or services directly forfrom public or governmental sources, the per- from meeting the requirements of the facts andthe benefit of the general public on a continuingcentage of support received from those sources circumstances test for the later tax year.basis is evidence that the organization is pub-will be considered in determining whether thelicly supported. Examples are:organization is publicly supported. As the per- Example. X is recognized as an organiza-

centage of support from public or governmental • A museum or library that is open to the tion described in section 501(c)(3). On the basissources increases, the burden of establishing public, of support received during tax years 2008, 2009,the publicly supported nature of the organization 2010, 2011, and 2012, it meets the one-third• A symphony orchestra that gives publicthrough other factors decreases, while the lower support test for tax year 2012 (the current taxperformances,the percentage, the greater the burden. year). X also meets the one-third support test for

• A conservation organization that provides 2013, as the immediately succeeding tax year.If the percentage of the organization’s sup-educational services to the public throughport from the general public or governmental In tax years 2009, 2010, 2011, 2012, andthe distribution of educational materials, orsources is low because it receives a high per- 2013, in the aggregate, X does not receive at

centage of its total support from investment in- least one-third of its support from governmental• An old-age home that provides domiciliarycome on its endowment funds, the organization units referred to in section 170(c)(1), from contri-or nursing services for members of thewill be treated as complying with this factor if the butions made directly or indirectly by the generalgeneral public.endowment fund was originally contributed by a public, or from a combination of these sources.

The fact that an educational or research institu-governmental unit or by the general public. How- X still meets the one-third support test for taxtion regularly publishes scholarly studies widelyever, if the endowment funds were originally year 2013 based on the aggregate support re-used by colleges and universities or by mem-contributed by a few individuals or members of ceived for tax years 2008 through 2012.bers of the general public is also evidence thattheir families, this fact will increase the burden In tax years 2010, 2011, 2012, 2013, andthe organization is publicly supported.on the organization of establishing compliance 2014, in the aggregate, X does not receive at

with other factors. Facts pertinent to years Similarly, the following factors are also evi- least one-third of its support from governmentalbefore the 4 tax years immediately before the dence that an organization is publicly supported. units referred to in section 170(c)(1), from contri-current tax year also may be considered. butions made directly or indirectly by the general

1. Participating in, or sponsoring, the pro- public, or from a combination of these sources.2. Sources of support factor. If an organi-grams of the organization by members of X does not meet the one-third support test forzation normally receives at least 10% but lessthe public having special knowledge or ex- tax year 2014.than one-third of its total support from public orpertise, public officials, or civic or commu- Based on the aggregate support and othergovernmental sources, the fact that it receivesnity leaders. factors l isted in Regulations sectionthe support from governmental units or directly

1.170A-9T(f)(3)(iii)(A) through (E) for tax yearsor indirectly from a representative number of 2. Maintaining a definitive program by the or-2009, 2010, 2011, 2012, and 2013, X meets thepersons, rather than receiving almost all of its ganization to accomplish its charitablefacts and circumstances test for tax year 2013support from the members of a single family, will work in the community, such as slum




and for tax year 2014 (as the immediately suc- met the requirements. The IRS may also revoke items included in support) and contribu-ceeding tax year). Therefore, X is still an organi- tions made directly or indirectly by the gen-the section 170(b)(1)(A)(vi) ruling or determina-zation described in section 170(b)(1)(A)(vi) for eral public.tion letter if the organization’s application for atax year 2014, even though X did not meet the ruling or determination contained a material mis-one-third support test for that year. statement of fact. Example. X, an organization described in

section 501(c)(3), is controlled by Thomas Blue,Reliance by grantors or contributors.Computation period for public support. If,its president. X received $500,000 during theGrantors or contributors may rely on a determi-at the time of applying for tax-exempt status, ancurrent tax year and the 4 tax years immediatelynation or ruling letter that an organization isorganization can reasonably be expected tobefore its current tax year under a contract withdescribed in section 170(b)(1)(A)(vi) until noticemeet the one-third support test or the facts andthe Department of Transportation, under whichof change of status of the organization is madecircumstances test during its first 5 tax years, theX engaged in research to improve a particularto the public (such as by publication in the Inter-organization will qualify as publicly supported forvehicle used primarily by the Federal Govern-nal Revenue Bulletin, or Publication 78, Cumu-its first 5 years. The organization will be classi-ment. During the same period, the only otherlative List of Organizations descried in Sectionfied as a public charity for its first 5 years, re-support received by X was $5,000 in small con-170(c) of the Internal Revenue Code of 1986,gardless of the public support actually receivedtributions primarily from X’s employees andeither of which can be searched at IRS.gov).during this period. Beginning with the organiza-business associates. The $500,000 is supportHowever, this will not apply if the grantor ortion’s sixth tax year, the organization will qualifyunder (1) above. Under these circumstances, Xcontributor was responsible for, or aware of, theas publicly supported if it meets the one-thirdmeets the conditions of (1) and (2) above and soact or failure to act that resulted in the organiza-support test or the facts and circumstances testdoes not meet the one-third support test or thetion’s loss of classification as a publicly sup-for its sixth year (based on support received inten-percent-of-support requirement.ported organization.its second through sixth tax years), or as a

For the rules that apply to organizations thatcarryover for its fifth tax year (based on supportfail to qualify as section 509(a)(1) publicly sup-received in its first through fifth tax years). If the Support. For purposes of publicly supportedported organizations because of these provi-organization is required to file Form 990 or organizations, the term support includes (but issions, see Section 509(a)(2) Organizations,990-EZ, it must establish that it meets the public not limited to): later. See also Gross receipts from a relatedsupport test each year on Schedule A (Form 990activity in the discussion on section 509(a)(2)1. Gifts, grants, contributions, or membershipor 990-EZ).organizations.fees,

Reasonable expectation of public support.Membership fees. Membership fees are in-2. Net income from unrelated business activi-An organization that can reasonably be ex-

cluded in the term support if they are paid toties, whether or not those activities are car-pected to meet the one-third support test or theprovide support for the organization rather thanried on regularly as a trade or business,facts and circumstances test during its first 5to buy admissions, merchandise, services, oryears is one that can show that its organizational 3. Gross investment income, the use of facilities.structure, current or proposed programs and

4. Tax revenues levied for the benefit of anactivities, and actual or intended method of op-Support from a governmental unit. For pur-organization and either paid to or spent oneration can reasonably be expected to attractposes of the one-third support test and thebehalf of the organization, andthe type of broadly based support from the gen-ten-percent-of-support requirement, the termeral public, public charities, and governmental 5. The value of services or facilities furnished support from a governmental unit includes anyunits that is necessary to meet the public sup- by a governmental unit to an organization amounts received from a governmental unit, in-port requirements discussed earlier under Qual- without charge (except services or facilities cluding donations or contributions and amountsifying As Publicly Supported. generally furnished to the public without received on a contract entered into with a gov-

charge).Example. Organization Y was formed in ernmental unit for the performance of services,January 2008 and uses a December 31 tax year. or from a government research grant. However,

Amounts that are not support. The termAfter September 9, 2008, and before December these amounts are not support from a govern-support does not include: 31, 2008, Organization Y filed a Form 1023 mental unit for these purposes if they constitute

requesting recognition of exemption as an oramounts received from the exercise or perform-1. Any amount received from the exercise organization described in section 501(c)(3) and in ance of the organization’s exempt functions.performance by an organization of the pur-sections 170(b)(1)(A)(vi) and 509(a)(1). In its Any amount paid by a governmental unit topose or function constituting the basis forapplication, Organization Y established that it an organization will not be treated as receivedits exemption (in general, these amountscan reasonably be expected to meet the from the exercise or performance of its exemptinclude amounts received from any activityone-third support test. Organization Y receives a function if the purpose of the payment is prima-the conduct of which is substantially re-determination letter that it is an organization rily to enable the organization to provide a serv-lated to the furtherance of the exempt pur-described in section 501(c)(3) and sections ice to, or maintain a facility for, the direct benefitpose or function, other than through the170(b)(1)(A)(vi) and 509(a)(1) effective as of the of the public (regardless of whether part of theproduction of income), ordate of formation. expense of providing the service or facility is

Organization Y is described in sections paid for by the public), rather than to serve the2. Contributions of services for which a de-170(b)(1)(A)(vi) and 509(a)(1) for its first 5 tax direct and immediate needs of the payor. Thisduction is not allowed.years (tax years ending December 31, 2008, includes:

These amounts are excluded from both the nu-through December 31, 2012). Organization Ymerator and the denominator of the fractions in 1. Amounts paid to maintain library facilitiescan qualify as a public charity beginning with thedetermining compliance with the one-third sup- that are open to the public,tax year ending December 31, 2013, if Organi-port test and ten-percent-of-support require-zation Y meets the one-third support test or facts 2. Amounts paid under government programsment. The following discusses an exception toand circumstances test for the tax years ending to nursing homes or homes for the aged tothis general rule.December 31, 2009, through December 31, provide health care or domiciliary services

2013, or for the tax years ending December 31, Organizations dependent primarily on to residents of these facilities, and2008, through December 31, 2012. gross receipts from related activities. Orga-

3. Amounts paid to child placement or childnizations will not satisfy the one-third supportRulings or determinations of public sup-guidance organizations under governmenttest or the ten-percent-of-support requirement ifport status. An organization may request aprograms for services rendered to childrenthey receive: ruling or determination letter that it is describedin the community.

in section 170(b)(1)(A)(vi). This request is made1. Almost all support from gross receipts from

on Form 1023, or at such other time as the These payments are mainly to enable the recipi-related activities, and

organization believes it is described in section ent organization to provide a service or maintain2. An insignificant amount of support from170(b)(1)(A)(vi). The IRS may revoke the sec- a facility for the direct benefit of the public, rather

governmental units (without regard totion 170(b)(1)(A)(vi) ruling or determination let- than to serve the direct and immediate needs ofamounts referred to in (3) in the list ofter if, on examination, the organization has not the payor. Furthermore, any amount received




from a governmental unit under circumstances a donation of $5,000 without imposing any re- gross investment income (defined under Sec-in which the amount would be treated as a grant strictions or conditions upon the gift. M later tion 509(a)(2) Organizations, later) may be ex-will generally constitute support from a govern- makes a $5,000 grant to X, an organization cluded under this rule.mental unit. See the discussion of Grants, later, devoted to giving public performances of cham-

Characteristics of an unusual grant. Aunder Section 509(a)(2) Organizations. ber music. Since the grant to X is treated asgrant or contribution will be considered an unu-being received from M, it is fully includible in theMedicare and Medicaid payments. Medi- sual grant if the above three factors apply and ifnumerator of X’s support fraction for the tax year

care and Medicaid payments are received from it has all of the following characteristics. If theseof receipt.contracts entered into with state and federal factors and characteristics apply, then evengovernmental units. However, payments are without the benefit of an advance ruling, grant-Example 2. Assume M is the same organi-made for services already provided to eligible ors or contributors have assurance that they willzation described in Example 1. Tom Grove givesindividuals, rather than to encourage or enable not be considered responsible for substantialM a donation of $10,000, but requires that Man organization to provide services to the public. and material changes in the organization’sspend the money to support organizations de-The individual patient, not a governmental unit, sources of support. voted to the advancement of contemporaryactually controls the ultimate recipient of these American music. M has complete discretion as 1. The grant or contribution is not made by apayments by selecting the health care organiza- to the organizations of the type described to person (or related person) who created thetion. As a result, these payments are not consid- which it will make a grant. M decides to make organization or was a substantial contribu-ered support from a governmental unit. grants of $5,000 each to Y and Z, both being tor to the organization before the grant orMedicare and Medicaid payments are gross re- organizations described in section 501(c)(3) and contribution.ceipts derived from the exercise or performance devoted to furthering contemporary Americanof exempt activities and, therefore, are not in- 2. The grant or contribution is not made by amusic. Since the grants to Y and Z are treated ascluded in the term support. person (or related person) who is in a posi-having been received from M, Y and Z each may

tion of authority, such as a foundationinclude one of the $5,000 grants in the numera-Support from the general public. In deter-manager, or who otherwise has the abilitytor of its support fraction. Although the donationmining whether the one-third support test or theto exercise control over the organization.to M was conditioned upon the use of the fundsten-percent-of-support requirement is met, in-Similarly, the grant or contribution is notfor a particular purpose, M was free to select theclude in your computation support from direct ormade by a person (or related person) who,ultimate recipient.indirect contributions from the general public.because of the grant or contribution, ob-This includes contributions from an individual,tains a position of authority or the ability toExample 3. N is a national foundation fortrust, or corporation but only to the extent thatotherwise exercise control over the organi-the encouragement of art and is a publicly sup-the total contributions from the individual, trust,zation.ported organization. Grants to N are permitted toor corporation, during the current tax year and

be earmarked for particular purposes. O, whichthe 4-year period immediately before the current 3. The grant or contribution is in the form ofis an art workshop devoted to training youngtax year, are not more than 2% of the organiza- cash, readily marketable securities, or as-artists and which is claiming status as a publiclytion’s total support for the same period. sets that directly further the organization’ssupported organization, persuades C, a privateThus, a contribution by any one individual exempt purposes, such as a gift of a paint-foundation, to make a grant of $25,000 to N. C iswill be included in full in the denominator of the ing to a museum.a disqualified person with respect to O. C makesfraction used in the one-third support test or the

4. The donee organization has received a fi-the grant to N with the understanding that Nten-percent-of-support requirement. However,nal ruling or determination letter classifyingwould be bound to make a grant to O in the sumthe contribution will be included in the numeratorit as a publicly supported organization andof $25,000, in addition to a matching grant of N’sonly to the extent that it is not more than 2% ofthe organization is actively engaged in afunds to O in the sum of $25,000. Only thethe denominator. In applying the 2% limit, allprogram of activities in furtherance of its$25,000 received directly from N is considered acontributions made by a donor and by any per-exempt purpose.grant from N. The other $25,000 is an indirectson in a special relationship to the donor (certain

contribution from C to O and is to be excludedDisqualified persons discussed under Absence 5. No material restrictions or conditions havefrom the numerator of O’s support fraction to theof control by disqualified persons) are consid- been imposed by the grantor or contributorextent it exceeds the 2% limit.ered made by one person. The 2% limit does not upon the organization in connection with

apply to support received from governmental the grant or contribution.Unusual grants. In applying the 2% limit tounits or to contributions from other publicly sup-determine whether the one-third support test or 6. If the grant or contribution is intended forported charities, except as provided underthe ten-percent-of-support requirement is met, operating expenses, rather than capitalGrants from public charities, later.exclude contributions that are considered unu- items, the terms and amount of the grant

Indirect contributions. The term indirect sual grants from both the numerator and denom- or contribution are expressly limited to 1contributions from the general public includes inator of the appropriate percent-of-support year’s operating expenses.contributions received by the organization from fraction. Generally, unusual grants are substan-organizations (such as publicly supported orga- tial contributions or bequests from disinterested Ruling request. Before any grant or contri-nizations) that normally receive a substantial parties if the contributions: bution is made, a potential grantee organizationpart of their support from direct contributions can request a ruling as to whether the grant or

1. Are attracted by the publicly supported na-from the general public, except as provided contribution may be excluded as an unusualture of the organization,under Grants from public charities, next. grant. This request can be filed by the grantee

organization with the Manager, EO Determina-2. Are unusual or unexpected in amount, andGrants from public charities. Contribu-tions, for its area. The organization must submittions received from a governmental unit or from 3. Would adversely affect, because of the all information necessary to make a determina-a publicly supported organization (including a size, the status of the organization as nor- tion, including information relating to the factorschurch that meets the requirements for being mally being publicly supported. (The or- and characteristics listed in the precedingpublicly supported) are not subject to the 2% ganization must otherwise meet the paragraphs. If a favorable ruling is issued, thelimit unless the contributions represent amounts support test in that year without benefit of ruling can be relied upon by the grantor or con-either expressly or impliedly earmarked by a the grant or contribution.) tributor of the particular contribution in question.donor to the governmental unit or publicly sup-The issuance of the ruling will be at the soleFor a grant (see Grants, later) that meets theported organization as being for, or for the bene-discretion of the IRS. The potential grantee or-requirements for exclusion, if the terms of thefit of, the particular organization claiming aganization should follow the procedures set outgranting instrument require that the funds bepublicly supported status.in Revenue Procedure 2010-4 (or any later up-paid to the recipient organization over a perioddate) to request a ruling.Example 1. M, a national foundation for the of years, the amount received by the organiza-

encouragement of the musical arts, is a publicly tion each year under the terms of the grant may Grants and contributions that fail to qualifysupported organization. George Spruce gives M be excluded for that year. However, no item of for exclusion will affect the way the support tests




are applied. See Exception for material changes public for the 2012 tax year normally exceeds O’s total support. O expends substantially all ofone-third of M’s total support ($202,000/ its annual income for its exempt purposes andin sources of support, earlier.$600,000 = 33.67 percent) for the applicable thus depends on the funds it annually solicitsIf a ruling is requested, in addition to theperiod (2008 through 2012). M meets the from the public as well as its investment incomecharacteristics listed earlier under Characteris-one-third support test for 2012 and is therefore in order to carry out its activities on a normal andtics of an unusual grant, the following factorspublicly supported for the tax years 2012 and continuing basis and to acquire new works of art.may be considered by the IRS in determining if2013. O has, for the entire period of its existence, beenthe grant or contribution is an unusual grant.

open to the public and more than 300,000 peo-1. Whether the contribution was a bequest or Example 2. N is recognized as an organiza- ple (from S City and elsewhere) have visited the

a transfer while living. A bequest will be tion described in section 501(c)(3). It was cre- museum in the current tax year and the 4 yearsgiven more favorable consideration than a ated to maintain public gardens containing immediately preceding the current tax year.transfer while living. botanical specimens and displaying statuary Under these circumstances, O does not

and other art objects. The facilities, works of art, meet the one-third support test for its current2. Whether, before the receipt of the contribu-and a large endowment were all contributed by a year because it has received only 25 percent oftion, the organization has carried on ansingle contributor. The members of the govern- its total support for the applicable 5-year periodactive program of public solicitation anding body of the organization are unrelated to its from the general public. However, under theexempt activities and has been able to at-creator. The gardens are open to the public facts set forth, O has met the 10 percent supporttract a significant amount of public support.without charge and attract many visitors each limitation under Temp. Reg. section

3. Whether, before the year of contribution, year. For the current tax year and the 4 tax years 1.170A-9T(f)(3)(i), as well as the requirementsthe organization met the one-third support preceding the current tax year, 95% of the orof Temp. Reg. section 1.170A-9T(f)(3)(ii). Undertest without benefit of any exclusions of ganization’s total support was received from in- all of the facts set forth, O is considered asunusual grants. vestment income from its original endowment. N meeting the requirements of the facts and cir-

also maintains a membership society that is cumstances test on the basis of satisfying4. Whether the organization may reasonablysupported by members of the general public Temp. Reg. section 1.170A-T9(f)(3)(iii)(A)be expected to attract a significant amountwho wish to contribute to the upkeep of the through (D). O is therefore publicly supported forof public support after the contribution.gardens by paying a small annual membership its current tax year and the immediately suc-Continued reliance on unusual grants tofee. Over the 5-year period in question, these ceeding tax year.fund an organization’s current operatingfees from the general public constituted the re-expenses (as opposed to providing newmaining 5% of the organization’s total support. Example 4. In 1960, the P Philharmonicendowment funds) may be evidence thatUnder these circumstances, N does not meet Orchestra was organized in T City by a localthe organization cannot reasonably be ex-the one-third support test for its current tax year. music society and a local women’s club to pres-pected to attract future support from theFurthermore, since only 5% was received from ent to the public a wide variety of musical pro-general public.the general public, N does not satisfy the 10 grams intended to foster music appreciation in

5. Whether the organization has a represen- percent support limitation under Temp. Reg. the community. P is recognized as an organiza-tative governing body. section 1.170A-9T(f)(3)(i), and therefore does tion described in section 501(c)(3). The orches-

not qualify as publicly supported under the facts tra is composed of professional musicians whoand circumstances test. Because N has failed to are paid by the association. Twelve perform-satisfy the 10 percent support limitation, none of ances, open to the public, are scheduled eachComprehensive Examplesthe other requirements or factors in Temp. year. A small admission charge is made for eachRegs. section 1.170A-9T(f)(3)(iii)(A) through (E) of these performances. In addition, several per-

Example 1. M is recognized as an organiza- can be considered in determining whether N formances are staged annually without charge.tion described in section 501(c)(3). For the years qualifies as a publicly supported organization. During the current tax year and the 4 tax2008 through 2012 (the applicable period for the For its current tax year, N is not an organization years immediately preceding the current taxtax year 2012 under Temp. Regs. section described in section 170(b)(1)(A)(vi). year, P received separate contributions of1.170A-9T(f)(3)), M received support (as de- $200,000 each from A and B (not members of afined in paragraphs Temp. Regs. section Example 3. O, an art museum, is recog- single family) and support of $120,000 from the1.170A-9T(f)(6) through (8) of $600,000 from nized as an organization described in section T Community Chest, a public federated fun-the following sources: 501(c)(3). In 1930, O was founded in S City by draising organization operating in T City. P de-

members of a single family to collect, preserve, pends on these funds to carry out its activitiesInvestment Income . . . . . . . . . . . . $300,000 interpret, and display to the public important and will continue to depend on contributions ofCity Y (a governmental unit described 40,000works of art. O is governed by a Board of Trust- this type to be made in the future. P has alsoin section 170(c)(1)) . . . . . . . . . . .ees that originally consisted almost entirely of begun a fundraising campaign in an attempt toUnited Way (an organizationmembers of the founding family. However, since expand its activities for the coming years.described in section 170(b)(1)(A)(vi)) 40,0001945, members of the founding family or per- P is governed by a Board of Directors com-Contributions . . . . . . . . . . . . . . . 220,000sons standing in relationship to the members of posed of five individuals. A faculty member of aTotal support . . . . . . . . . . . . . . . . $600,000that family described in section 4946(a)(1)(C) local college, the president of a local music soci-through (G) have annually constituted less than ety, the head of a local banking institution, aFor tax year 2012, M’s public support is com-one-fifth of the Board of Trustees. The remain- prominent doctor, and a member of the govern-puted as follows:ing board members are citizens of S City from a ing body of the local Chamber of Commercevariety of professions and occupations who rep- currently serve on the Board and represent theOne-third of total support . . . . . . . . $200,000resent the interests and views of the people of S interests and views of the community in the

Support from a governmental unit City in the activities carried on by the organiza- activities carried on by P.described in section 170(c)(1) . . . . $40,000tion rather than the personal or private interests For P’s current tax year, its sources of sup-Indirect contributions from theof the founding family. O solicits contributions port are computed on the basis of the current taxgeneral public (United Way) . . . . . . 40,000from the general public, and for the current tax year and the 4 immediately preceding tax years,Contributions by various donors (noyear and each of the 4 tax years immediately as follows.one having made contributions thatpreceding the current tax year, O has receivedtotal more than $12,000—2% of total

Contributions . . . . . . . . . . . . . . . $520,000total contributions (in small sums of less thansupport) . . . . . . . . . . . . . . . . . . . 50,000Receipts from performances . . . . . 100,000$100, none of which exceeds 2 percent of O’sSix contributions (each in excess of

$620,000total support for such period) in excess of$12,000—2% of total support) 6 ×Less:$10,000. These contributions from the general$12,000 . . . . . . . . . . . . . . . . . . . 72,000Receipts from performancespublic represent 25 percent of the organization’s$202,000(excluded, see Support) . . . . . . . . 100,000total support for that 5-year period. For the same

Total support . . . . . . . . . . . . . . $520,000M’s support from governmental units and from period, investment income form several largedirect and indirect contributions from the general endowment funds has constituted 75 percent of




a. To modify any restriction or condition onCommunity TrustsT Community Chest (indirect supportthe distribution of funds for any speci-from the general public) . . . . . . . . $120,000 Community trusts are often established to at- fied charitable purposes or to specifiedTwo contributions (each over tract large contributions of a capital or endow- organizations if in the sole judgment of$10,400—2% of total support) 2 ×

ment nature for the benefit of a particular the governing body (without the neces-$10,400 . . . . . . . . . . . . . . . . . . . 20,800community or area. Often these contributions sity of the approval of any participatingTotal support from general public . . $140,800come initially from a small number of donors. trustee, custodian, or agent), the restric-While the community trust generally has a gov- tion or condition becomes, in effect, un-P’s support from the general public, directly anderning body composed of representatives of the necessary, incapable of fulfillment, orindirectly, does not meet the one-third supportparticular community or area, its contributions inconsistent with the charitable needs oftest ($140,800/$520,000 = 27% of total sup-are often received and maintained in the form of the community or area served,port). However, because P receives 27 percentseparate trusts or funds that are subject to vary-of its total support from the general public, it b. To replace any participating trustee,ing degrees of control by the governing body.meets the 10 percent support limitation under custodian, or agent for breach of fiduci-To qualify as a publicly supported organiza-Temp. Reg. section 1.170A-T9(f)(3)(i). P also ary duty under state law, andtion, a community trust must meet the one-thirdmeets the requirements of Temp. Reg. sectionsupport test, explained earlier under Qualifying c. To replace any participating trustee,1.170A-T9(f)(3)(ii). As a result of satisfyingAs Publicly Supported. If it cannot meet that test, etc., for failure to produce a reasonablethese requirements and factors, P is consideredit must be organized and operated so as to return of net income over a reasonableto meet the facts and circumstances test andattract new and additional public or governmen- period of time. (The governing body willtherefore qualifies as a publicly supported or-tal support on a continuous basis sufficient to determine what is reasonable.)ganization for its current tax year and the imme-meet the facts and circumstances test, also ex-diately succeeding tax year.plained earlier. Community trusts are generally 4. The organization must prepare periodic fi-able to satisfy the attraction of public support nancial reports treating all of the funds thatExample 5. Q is recognized as an organiza-requirement (as contained in the facts and cir- are held by the community trust, either di-tion described in section 501(c)(3) and it is acumstances test) if they seek gifts and bequests rectly or in component parts, as funds ofphilanthropic organization. Q was founded infrom a wide range of potential donors in the the organization.1965 by C for the purpose of making annualcommunity or area served, through banks orcontributions to worthy charities. C created Q as A community trust can meet the requirementtrust companies, through attorneys or other pro-a charitable trust by transferring $500,000 worth in (3) above even if its exercise of the powers infessional persons, or in other appropriate waysof appreciated securities to Q. (3)(a), (b), or (c) is reviewable by an appropriatethat call attention to the community trust as aUnder the trust agreement, C and two other state authority.potential recipient of gifts and bequests madefamily members are the sole trustees of Q andfor the benefit of the community or area served. Component part. To be treated as a com-are vested with the right to appoint successorA community trust, however, does not have to ponent part of a community trust (rather than astrustees. In each of the current tax year and theengage in periodic, community-wide, fundrais- a separate trust or a not-for-profit corporation), a4 tax years immediately preceding the currenting campaigns directed toward attracting a large trust or fund: tax year, Q received $15,000 in investment in-number of small contributions in a manner simi-come from its original endowment. Each year Q

1. Must be created by gift, bequest, legacy,lar to campaigns conducted by a communitysolicits funds by operating a charity ball at C’sdevise, or other transfer to a communitychest or a united fund.residence. Guests are invited and asked totrust that is treated as a single entity (de-make contributions of $100 per couple. Duringscribed above), andSeparate trusts or funds. Any communitythe 5-year period involved, $15,000 was re-

trust may be treated as a single entity, ratherceived from the proceeds of these events. C and 2. May not be directly or indirectly subjectedthan as an aggregation of separate funds, inhis family have also made contributions to Q of by the transferor to any material restrictionwhich case all qualifying funds associated with$25,000 over the 5-year period at issue. Q or condition with respect to the transferredthat organization (whether a trust, not-for-profitmakes disbursements each year of substantially assets.corporation, unincorporated association, or aall of its net income to the public charities cho-combination thereof) will be treated as compo-sen by the trustees.

Grantors and contributors. Grantors, con-nent parts of the organization.Q’s sources of support for the current taxtributors, or distributors to a community trust

year and the 4 tax years immediately preceding Single entity. To be treated as a single en- may rely on the public charity status, which thethe current tax year are as follows: tity, a community trust must meet all of the fol- organization has claimed in a timely filed notice,

lowing requirements. on or before the date the IRS informs the publicInvestment income . . . . . . . . . . . . . $60,000(through such means as publication in the Inter-Contributions . . . . . . . . . . . . . . . . $40,000 1. The organization must be commonlynal Revenue Bulletin) that such reliance hasTotal support . . . . . . . . . . . . . . . $100,000 known as a community trust, fund, founda-expired. However, if the grantor, contributor, ortion, or other similar name conveying theContributions from the general public $15,000 distributor acquires knowledge that the IRS hasconcept of a capital or endowment fund tonotified the community trust that it has failed toOne contribution (over $2,000—2% support charitable activities in the commu-establish that it is a public charity, then relianceof total support) 1 × $2,000 . . . . . . . 2,000 nity or area it serves.on the claimed status expires at the time suchTotal support from general public . . . $17,000

2. All funds of the organization must be sub- knowledge is acquired.ject to a common governing instrument (orQ’s support from the general public does nota master trust or agency agreement) thatmeet the one-third support test ($17,000/may be embodied in a single (or several) Section 509(a)(2) Organizations$100,000 = 17% of total support). Even though itdocument(s) containing common lan-

does meet the ten-percent-of-support require- Section 509(a)(2) excludes certain types ofguage.ment, its method of solicitation makes it ques- broadly based, publicly supported organizations

3. The organization must have a commontionable whether Q satisfies Temp. Reg. section from private foundation status. Generally, angoverning body (or distribution committee) organization described in section 509(a)(2) may1.170A-9T(f)(3)(ii). Because of its method of op-that either directs or, in the case of a fund also fit the description of a publicly supportederating, Q also has a greater burden of estab-designated for specified beneficiaries, organization under section 509(a)(1). There are,lishing its publicly supported nature. Based onmonitors the distribution of all funds exclu- however, two basic differences. these facts and on Q’s failure to receive sively for charitable purposes. The govern-

favorable consideration under the remaining ing body must have the power in the 1. For section 509(a)(2) organizations, thef a c t o r s o f T e m p . R e g . s e c t i o n governing instrument, the instrument of term support includes items of support dis-1.170A-9T(f)(3)(iii), Q does not satisfy the facts transfer, the resolutions or bylaws of the cussed earlier (under Support, in the dis-and circumstances test and therefore does not governing body, a written agreement, or cussion of Section 509(a)(1)qualify as a publicly supported organization. otherwise— Organizations) and income from activities




directly related to their exempt function. included in computing tax on unrelated business 2. Whether a substantial part of the organiza-tion’s initial funding is to be provided by theThis income is not included in meeting the income from trades or businesses.general public, by public charities, or bysupport test for a publicly supported organ- Definition of normally. Both support testsgovernment grants rather than by a limitedization under section 509(a)(1). are computed on the basis of the nature of the number of grantors or contributors who are

2. Section 509(a)(2) places a limit on the total organization’s normal sources of support. An disqualified persons with respect to the or-gross investment income and unrelated organization will be considered to have normally ganization,business taxable income (in excess of the met both tests for its current tax year and the tax

3. Whether a substantial proportion of the or-unrelated business tax) an organization year immediately following, if it meets thoseganization’s initial funds are placed, or willmay have, while section 509(a)(1) does tests on the basis of the total support receivedremain, in an endowment and whether thenot. for the current tax year and the 4 tax yearsinvestment of those funds is unlikely to re-immediately before the current tax year.To be excluded from private foundation treat- sult in more than one-third of its total sup-

ment under section 509(a)(2), an organization Computation period for public support. If at port being received from gross investmentmust meet two support tests. the time of applying for tax-exempt status, an income and from unrelated business tax-

able income in excess of the tax imposedorganization can reasonably be expected to1. The one-third support test.on that income,meet the one-third support test and the

2. The not-more-than-one-third support test. not-more-than-one-third support test during its 4. Whether an organization that carries onfirst 5 tax years, the organization will qualify forBoth these tests are designed to insure that fundraising activities has developed a con-classification as a public charity under sectionan organization excluded from private founda- crete plan for solicitation of funds on a509(a)(2) for its first 5 years. Beginning with thetion treatment is responsive to the general pub- community or area-wide basis,organization’s sixth tax year, the organizationlic, rather than to the private interests of a limited

5. Whether an organization that carries onwill be described in section 509(a)(2) if it meetsnumber of donors or other persons.community service activities has a con-t h e o n e - t h i r d s u p p o r t t e s t a n dcrete program to carry out its work in thenot-more-than-one-third support test for its sixthOne-third support test. The one-third sup-community,year (based on support received in its secondport test will be met if an organization normally

through sixth tax years) or as a carryover for itsreceives more than one-third of its support in 6. Whether membership dues for individualfifth tax year (based on support received in itseach tax year from any combination of: (rather than institutional) members of anfirst through fifth tax years). If the organization is organization that carries on education or1. Gifts, grants, contributions, or membership required to file Form 990 or 990-EZ, it must other exempt activities for or on behalf offees, and establish that it meets the one-third support test members have been fixed at rates de-and not-more-than-one-third support test each2. Gross receipts from admissions, sales of signed to make membership available to ayear on Schedule A (Form 990 or 990-EZ).merchandise, performance of services, or broad cross section of the public rather

furnishing facilities in an activity that is not than to restrict membership to a limitedReasonable expectation of public support.an unrelated trade or business, subject to number of persons, andAn organization that can reasonably be ex-certain limits, discussed below under Limit pected to meet the one-third support test and 7. Whether an organization that provideson gross receipts. not-more-than-one-third support test under sec- goods, services, or facilities is or will be

tion 509(a)(2) during its first 5 years is one thatFor this purpose, the support must be from required to make its services, facilities,can show that its organizational structure, cur-permitted sources, which include: performances, or products available (re-rent or proposed programs and activities, and gardless of whether a fee is charged) to• Section 509(a)(1) organizations, described actual or intended method of operation can rea- the general public, public charities, or gov-earlier, sonably be expected to attract the type of ernmental units rather than to a limitedbroadly based support from the general public,• Governmental units, described under Sec- number of persons or organizations.public charities, and governmental units that istion 509(a)(1) Organizations, earlier, andnecessary to meet these tests. The facts that are Unusual grants. An unusual grant can be ex-• Persons other than Disqualified persons relevant to this determination and the weight cluded from the support test computation if it: (defined under Section 509(a)(3) Organi- accorded each fact may differ from case to case.

zations), later. An organization cannot reasonably be expected 1. Was attracted by the publicly supportedto meet the one-third support test and the nature of the organization,

Limit on gross receipts. In computing the not-more-than-one-third support test when the2. Was unusual or unexpected in amount,amount of support received from gross receipts facts indicate that an organization is likely during

andunder (2) above, gross receipts from related its first 5 tax years to receive less than one-thirdactivities received from any person or from any of its support from permitted sources or to re- 3. Would, because of its size, adversely af-bureau or similar agency of a governmental unit ceive more than one-third of its support from fect the status of the organization as nor-are includible in any tax year only to the extent gross investment income and unrelated busi- mally meeting the one-third support test.the gross receipts are not more than the greater ness taxable income. (The organization must otherwise meet theof $5,000 or 1% of the organization’s total sup- All pertinent facts and circumstances are test in that year without benefit of the grantport in that year. taken into account in determining whether the or contribution.)

organizational structure, programs, or activities,Not-more-than-one-third support test. This

and method of operation of an organization will Characteristics of an unusual grant. Atest will be met if an organization normally re-

give that organization a reasonable expectation grant or contribution will be considered an unu-ceives no more than one-third of its support in

that it will meet the support tests. Some pertinent sual grant if the above three factors apply and iteach tax year from the total of:

factors considered are: has all of the following characteristics. If thesefactors and characteristics apply, then even1. Gross investment income, and

1. Whether the organization has or will have without the benefit of an advance ruling, grant-2. The excess (if any) of unrelated business a governing body that is composed of per- ors or contributors have assurance that they will

taxable income from unrelated trades or sons having special knowledge in the par- not be considered responsible for an act thatbusinesses acquired after June 30, 1975, ticular field in which the organization is results in an organization’s change of supportover the tax imposed on that income. operating or of community leaders, such status.

as elected officials, members of the clergy,Gross investment income. Gross invest- and educators, or, in the case of a mem- 1. The grant or contribution is not made by a

ment income means the gross amount of in- bership organization, of individuals elected person (or related person) who created thecome from interest, dividends, payments with under the organization’s governing instru- organization or was a substantial contribu-respect to securities loans, rents, and royalties, ment or bylaws by a broadly based mem- tor to the organization before the grant orbut it does not include any income that would be bership, contribution.




2. The grant or contribution is not made by a 4. Whether the organization met the one-third M may submit a request for a private letter rulingsupport test in the past without the benefit that the $500,000 contribution from Z qualifiesperson (or related person) who is in a posi-of any exclusions of unusual grants. as an unusual grant.tion of authority, such as a foundation

Under the above circumstances, evenmanager, or who otherwise has the ability 5. Whether the organization has a represen-though Albert was a founder and member of theto exercise control over the organization. tative governing body.governing body of M, M may exclude Z’s contri-Similarly, the grant or contribution is notbution of $500,000 in 2010 as an unusual grantmade by a person (or related person) who,

Example 1. Y, an organization described in under Temp. Reg. section 1.509(a)-3T(c)(3) forbecause of the grant or contribution, ob-section 501(c)(3), was created by Marshall Pine, purposes of determining whether M meets thetains a position of authority or the ability tothe holder of all the common stock in M corpora- one-third support test under section 509(a)(2)otherwise exercise control over the organi-tion, Lisa, Marshall’s wife, and Edward Forest, for 2014.zation.Marshall’s business associate. The purpose of Y

3. The grant or contribution is in the form of Gifts, contributions, and grants distin-was to sponsor and equip athletic teams com-cash, readily marketable securities, or as- guished from gross receipts. In determiningposed of underprivileged children in the commu-sets that directly further the organization’s whether an organization normally receives morenity. Each of the three creators makes smallexempt purposes, such as a gift of a paint- than one-third of its support from permittedcash contributions to Y. Marshall, Lisa, and Ed-ing to a museum. sources, include all gifts, contributions, andward have been active participants in the affairs

grants received from permitted sources in theof Y since its creation. Y regularly raises small4. The donee organization has received ei-numerator of the support fraction in each taxamounts of contributions through fundraisingther an advance or final ruling or determi-year. However, gross receipts from admissions,drives and selling admission to some of thenation letter classifying it as a publiclysales of merchandise, performance of services,sponsored sporting events. The operations of Ysupported organization and, except for anor furnishing facilities, in an activity that is not anare carried out on a small scale, usually beingorganization operating under an advanceunrelated trade or business, are includible in therestricted to the sponsorship of two to four base-ruling or determination letter, the organiza- numerator of the support fraction in any tax yearball teams of underprivileged children.tion is actively engaged in a program of only to the extent that the amounts receivedIn 2009, M Corporation recapitalizes andactivities in furtherance of its exempt pur- from any person or from any bureau or similarcreates a first and second class of 6 percentpose. agency of a governmental unit are not more thannonvoting preferred stock, most of which is heldthe greater of $5,000 or 1% of support.5. No material restrictions or conditions have by Marshall and Lisa. In 2010, Marshall contrib-

been imposed by the grantor or contributor utes 49 percent of his common stock in M to Y. Rulings or determinations of public sup-upon the organization in connection with Marshall’s contribution of M’s common stock port status. An organization may request athe grant or contribution. was substantial and constitutes 90 percent of ruling or determination letter that it is described

Y’s total support for 2010. A combination of the in section 509(a)(2). This request is made on6. If the grant or contribution is intended forfacts and circumstances of the determining fac- Form 1023, or at such other time as the organi-operating expenses, rather than capitaltors preclude Marshall’s contribution of M’s com- zation believes it is described in sectionitems, the terms and amount of the grantmon stock in 2010 from being excluded as an 509(a)(2). The IRS may revoke the sectionor contribution are expressly limited to oneunusual grant under Temp. Reg. section 509(a)(2) ruling or determination letter if, uponyear’s operating expenses.1.509(a)-3T(c)(3) for purposes of determining examination, the organization has not met thewhether Y meets the one-third support test requirements. The IRS may also revoke the sec-Ruling request. If there is any doubt that aunder section 509(a)(2). tion 509(a)(2) ruling or determination letter if thegrant or contribution can be excluded as an

organization’s application for a ruling or determi-unusual grant, the grantee organization can re-Example 2. M was organized in 2009 to nation contained a material misstatement ofquest a ruling, submitting all of the necessary

promote the appreciation of ballet in a particular fact.information for making a determination to theregion of the United States. Its principal activi-Manager, EO Determinations. The IRS has the Reliance by grantors or contributors.ties consist of erecting a theater for the perform-sole discretion of issuing a ruling, but if a Grantors or contributors may rely on a determi-ance of ballet and the organization andfavorable ruling is issued, it can be relied on by nation or ruling letter that an organization isoperation of a ballet company. M receives athe grantor or contributor for purposes of a chari- described in section 509(a)(2) until notice ofdetermination letter that it is an organizationtable contributions deduction and by the organi- change of status of the organization is made todescribed in section 501(c)(3) and that it is azation for purposes of the exclusion for unusual the public (such as by publication in the Internalpublic charity described in section 509(a)(2).grants. The organization should follow the pro- Revenue Bulletin, or Publication 78, CumulativeThe governing body of M consists of nine promi-cedures set out in Revenue Procedure 2010-4 List of Organizations described in section 170(c)nent unrelated citizens residing in the region(or later update) to request a ruling on an unu- of the Internal Revenue Code of 1986, either ofwho have either an expertise in ballet or a strongsual grant. which can be searched at IRS.gov. However,interest in encouraging appreciation of the artIn addition to the characteristics listed above, this will not apply if the grantor or contributor wasform.the following factors may be considered by the responsible for, or aware of, the act or failure toIn 2010, Z, a private foundation, proposes toIRS in determining if the grant or contribution is act that resulted in the organization’s loss ofmake a grant of $500,000 in cash to M to providean unusual grant. classification as a publicly supported organiza-sufficient capital for M to commence its activi-

tion.ties. Although Albert Cedar, the creator of Z, is1. Whether the contribution was a bequest orone of the nine members of M’s governing body, Gifts and contributions. Any payment ofa transfer while living. A bequest will ordi-was one of M’s original founders, and continues money or transfer of property without adequatenarily be given more favorable considera-to lend his prestige to M’s activities and fundrais- consideration is considered a gift or contribution.tion than a transfer while living.ing efforts, Albert does not, directly or indirectly, When payment is made or property is trans-

2. Whether, before the contribution, the or- exercise any control over M. By the close of its ferred as consideration for admissions, sales ofganization carried on an actual program of first tax year, M also has received a significant merchandise, performance of services, or fur-public solicitation and exempt activities amount of support from a number of smaller nishing facilities to the donor, the status of theand was able to attract a significant contributions and pledges from members of the payment or transfer under section 170(c) deter-amount of public support. general public. M charges admission to the bal- mines whether and to what extent the payment

let performances to the general public.3. Whether the organization may reasonably or transfer is a gift or contribution as distin-be expected to attract a significant amount Although the support received in 2010 will guished from gross receipts from related activi-of public support after the contribution. not impact M’s status as a public charity for its ties.Continued reliance on unusual grants to first 5 tax years, it will be relevant to the determi- The amount includible in computing supportfund an organization’s current operating nation of whether M meets the one-third support from gifts, grants, or contributions of property orexpenses can be evidence that the organi- test under section 509(a)(2) for the 2014 tax use of property is the fair market or rental valuezation cannot attract future support from year, using the computation period 2010 of the property at the date of the gift or contribu-the general public. through 2014. Within the appropriate timeframe, tion.




Example. P is a local agricultural club and is organization uses membership fees as a means public charity’s donors, it will retain its characteran organization described in section 501(c)(3). It of selling admissions, merchandise, services, or as a contribution from the donor, and if, formakes awards at its annual fair for outstanding the use of facilities to members of the general example, the donor is a substantial contributorspecimens of produce and livestock to en- public who have no common goal or interest to the ultimate recipient, the amount is excludedcourage interest and proficiency by young peo- (other than the desire to buy the admissions, from the numerator of the support fraction. If aple in farming and raising livestock. Most of merchandise, services, or use of facilities), the public charity makes both an indirect contribu-these awards are cash or other property fees are not membership fees but are gross tion from its donor and an additional grant to thedonated by local businessmen. When the receipts. ultimate recipient, the indirect contribution isawards are made, the donors are given recogni- treated as made first.On the other hand, to the extent the basiction for their donations by being identified as the purpose of the payment is to provide support for An indirect contribution is one that is ex-donor of the award. The recognition given to the organization rather than to buy admissions, pressly or impliedly earmarked by the donor asdonors is merely incidental to the making of the merchandise, services, or the use of facilities, being for, or for the benefit of, a particular recipi-award to worthy youngsters. For these reasons, the payment is a membership fee. ent rather than for a particular purpose.the donations are contributions. The amount in-cludible in computing support is equal to the Bureau defined. The term bureau or similar Method of accounting. An organization’scash contributed or the fair market value of other agency of a governmental unit for determining support is determined under the same account-property on the dates contributed. amounts subject to the $5,000 or 1% limit means ing method that it uses in keeping its books and

a specialized operating unit of the executive, that it otherwise uses to report on its Form 990Grants. Grants often contain certain termsjudicial, or legislative branch of government in or 990-EZ, if it is required to file Form 990 orand conditions imposed by the grantor. Becausewhich business is conducted under certain rules 990-EZ. For example, if a grantor makes a grantof the imposition of terms and conditions, theand regulations. Since the term bureau refers to to an organization payable over a term of years,frequent similarity of public purposes of grantora unit functioning at the operating, as distinct the grant will be includible in the support fractionand grantee, and the possibility of benefit to thefrom the policy-making, level of government, it of the grantee organization under the account-grantor, amounts received as grants for carryingnormally means a subdivision of a department of ing method it regularly uses in keeping its books.on exempt activities are sometimes difficult togovernment. The term would not usually includedistinguish from amounts received as gross re-those levels of government that are basically Gross receipts from a related activity.ceipts from carrying on exempt activities.policy-making or administrative, such as the of- When the charitable purpose of an organizationIn distinguishing the term gross receipts from fice of the Secretary or Assistant Secretary of a described in section 501(c)(3) is accomplishedthe term grants, the term gross receipts means department, but would consist of the highest through furnishing facilities for a rental fee oramounts received from an activity that is not an operational level under the policy-making or ad- loans to a particular class of persons, such asunrelated trade or business, if a specific service, ministrative levels. aged, sick, or needy persons, the support re-facility, or product is provided to serve the direct Amounts received from a unit functioning at ceived from those persons will be consideredand immediate needs of the payor rather than the policy-making or administrative level of gov- gross receipts from a related exempt activityprimarily to confer a direct benefit on the general ernment are treated as received from one bu- rather than gross investment income or unre-public. In general, payments made primarily to reau or similar agency of the unit. Units of a lated business taxable income.enable the payor to realize or receive some governmental agency above the operating level

However, if the organization also furnisheseconomic or physical benefit as a result of the are combined and considered a separate bu-facilities or loans to persons who are not mem-service, facility, or product obtained will be reau for this purpose. Thus, an organization thatbers of a particular class and furnishing thetreated as gross receipts by the payee. has gross receipts from both a policy-making orfacilities or funds does not contribute importantlyFor example, a profit-making organization, administrative unit and an operational unit of ato accomplishing the organization’s exempt pur-primarily for its own betterment, contracts with a department will be treated as having gross re-poses, the support received from furnishing thenonprofit organization for a service from that ceipts from two bureaus. For this purpose, thefacilities or funds will be considered rents ororganization. Any payments received by the Departments of Air Force, Army, and Navy areinterest and will be treated as gross investmentnonprofit organization (whether from the separate departments and each has its ownincome or unrelated business taxable income.profit-making organization or from another non- policy-making, administrative, and operating

profit) for similar services are primarily for the units. Example. X, an organization described inbenefit of the payor and are therefore grosssection 501(c)(3), is organized and operated toreceipts, rather than grants. Example 1. The Bureau for Africa and theprovide living facilities for needy widows of de-Research leading to the development of tan- Bureau for Latin America are considered sepa-ceased servicemen. X charges the widows agible products for the use or benefit of a payor rate bureaus. Each is an operating unit undersmall rental fee for the use of the facilities. Sincegenerally will be treated as a service provided to the Administrator of the Agency for InternationalX is accomplishing its exempt purpose throughserve the direct and immediate needs of the Development, a policy-making official. If an or-the rental of the facilities, the support receivedpayor, while basic research or studies carried on ganization had gross receipts from both of thesefrom the widows is considered gross receiptsin the physical or social sciences generally will bureaus, the amount of gross receipts from eachfrom a related exempt activity. However, if Xbe treated as primarily to confer a direct benefit would be subject to the greater of $5,000 or therents part of its facilities to persons having noupon the general public. 1% limit.relationship to X’s exempt purpose, the support

Medicare and Medicaid payments are gross received from these rentals will be consideredExample 2. A bureau is an operating unitreceipts from the exercise or performance of an gross investment income or unrelated businessunder the administrative office of the Executiveexempt function. The individual patient, not a taxable income.Director. The subdivisions of the bureau aregovernmental unit, actually controls the ultimateGeographic Areas and Project Developmentrecipient of these payments. Therefore, Medi-Staff. If an organization had gross receipts fromcare and Medicaid receipts for services provided Section 509(a)(3) Organizationsthese subdivisions, the total gross receipts fromto each patient are included as gross receipts tothese subdivisions would be considered grossthe extent they are not more than the greater of Section 509(a)(3) excludes from the definition ofreceipts from the same bureau and would be$5,000 or 1% of the organization’s total support private foundation those organizations that meetsubject to the greater of $5,000 or the 1% limit.for the tax year. all of the three following requirements.

Grants from public charities. For purposes 1. The organization must be organized andMembership fees distinguished from grossof the one-third support test, grants received operated exclusively for the benefit of, toreceipts. The fact that a membership organi-from a section 509(a)(1) organization (public perform the functions of, or to carry out thezation provides services, admissions, facilities,charity) are generally includible in full in comput- purposes of one or more specified organi-or merchandise to its members as part of itsing the numerator of the support fraction for that zations as described in sections 509(a)(1)overall activities will not, in itself, result in thetax year. or 509(a)(2). These section 509(a)(1) andclassification of fees received from members as

509(a)(2) organizations are commonlygross receipts subject to the $5,000 or 1% limit However, if the amount received is consid-called publicly supported organizations.rather than membership fees. However, if an ered an indirect contribution from one of the




2. The organization has one of three types of performs the functions of or carries out the pur- controlled in connection with one or more sec-relationships with one or more organiza- poses of such supported organization. tion 509(a)(1) or 509(a)(2) organizations is ations described in sections 509(a)(1) or Type II supporting organization. The control orOrganizations controlled by donors. Gen-509(a)(2). It must be: management of the supporting organizationerally, if a Type I or Type III supporting organiza-

must be vested in the same persons that controltion supports an organization that is controlleda. Operated, supervised, or controlled by or manage the publicly supported organization.by a donor, the supporting organization isone or more section 509(a)(1) or In order for an organization to be supervised ortreated as a private foundation (rather than as a509(a)(2) organizations (Type I support- controlled in connection with a publicly sup-public charity) for purposes of the relationshiping organization), ported organization, common supervision ortest. Type I and Type III organizations will notcontrol by the persons supervising or controllingb. Supervised or controlled in connection satisfy the relationship test if they accept anyboth organizations must exist to ensure that thewith one or more section 509(a)(1) or gifts or contributions from:supporting organization will be responsive to the509(a)(2) organizations (Type II sup-needs and requirements of the publicly sup-1. Any person (other than an organization de-porting organization), orported organization.scribed in section 509(a)(1), (2), or (4))

c. Operated in connection with one or An organization will not be considered super-who controls, directly or indirectly, eithermore section 509(a)(1) or 509(a)(2) or- vised or controlled in connection with one oralone or together with persons listed in (2)ganizations (Type III supporting organi- more publicly supported organizations if itor (3) below, the governing body of a sup-zation). merely makes payments (mandatory or discre-ported organization;

tionary) to the publicly supported organizations.2. A family member of a person described in3. The organization must not be controlled This is true even if the obligation to make pay-

(1), above; ordirectly or indirectly by disqualified persons ments is legally enforceable and the organiza-(defined later) other than foundation man- tion’s governing instrument contains provisions3. A 35-percent controlled entity.agers and other than one or more organi- requiring the distribution. These arrangementszations described in section 509(a)(1) or do not provide a sufficient connection betweenCategory one. This category includes organi-509(a)(2). the payor organization and the needs and re-zations either operated, supervised, or con-

quirements of the publicly supported organiza-trolled by or supervised or controlled inSection 509(a)(3) differs from the other pro-tions to constitute supervision or control inconnection with organizations described in sec-visions of section 509 that describe a publiclyconnection with the organizations.tion 509(a)(1) or 509(a)(2) (which can be eithersupported organization. Instead of describing an

domestic or foreign).organization that conducts a particular kind ofOrganizational and operational tests. ToThese kinds of organizations have a govern-activity or that receives financial support fromqualify as a section 509(a)(3) organization (sup-ing body that either includes a majority of mem-the general public, section 509(a)(3) describesporting organization), the organization must bebers elected or appointed by one or moreorganizations that have established certain rela-both organized and operated exclusively for thepublicly supported organizations or that consiststionships in support of section 509(a)(1) orpurposes set out in requirement (1) at the begin-of the same persons that control or manage the509(a)(2) organizations. Thus, an organizationning of this section. If an organization fails topublicly supported organizations. If an organiza-can qualify as other than a private foundationmeet either the organizational or the operationaltion is to qualify under this category, it also musteven though it may be funded by a single donor,test, it cannot qualify as a supporting organiza-meet an organizational test, an operational test,family, or corporation (with certain exceptionstion.and not be controlled by disqualified persons.described in Organizations controlled by do-

These requirements are covered later in thisnors). This kind of funding ordinarily would indi- Organizational test. An organization is or-discussion.cate private foundation status, but a section ganized exclusively for one or more of the pur-

509(a)(3) organization has limited purposes and poses specified in requirement (1) only if itsOperated, supervised, or controlled by.activities and gives up a significant degree of articles of organization: An organization that is operated, supervised, orindependence. controlled by one or more section 509(a)(1) or 1. Limit the purposes of the organization toMore than one type of relationship may exist 509(a)(2) organizations is a Type I supporting one or more of those purposes,between a supporting organization and a pub- organization. Each of these terms, as used forlicly supported organization. Any relationship, 2. Do not expressly empower the organiza-supporting organizations, presupposes a sub-however, must ensure that the supporting ortion to engage in activities that are not instantial degree of direction over the policies,ganization will be responsive to the needs or furtherance of those purposes,programs, and activities of a supporting organi-demands of, and will be an integral part of or zation by one or more publicly supported organi- 3. Specify (as explained later under Specifiedmaintain a significant involvement in, the opera- zations. The relationship required under any one organizations) the publicly supported orga-tions of one or more publicly supported organi- of these terms is comparable to that of a parent nizations on whose behalf the organizationzations. and subsidiary, in which the subsidiary is under is operated, andThe first two relationships, operated, super- the direction of and is accountable or responsi-vised, or controlled by and supervised or con- 4. Do not expressly empower the organiza-ble to the parent organization. This relationshiptrolled in connection with, are based on an tion to operate to support or benefit anyis established when a majority of the officers,existence of majority control of the governing organization other than the ones specifieddirectors, or trustees of the supporting organiza-body of the supporting organization by the pub- in item (3).tion are appointed or elected by the governinglicly supported organization. They have the body, members of the governing body, officers In meeting the organizational test, the organ-same rules for meeting the tests under require- acting in their official capacity, or the member- ization’s purposes as stated in its articles can bement (1) and are discussed in Category one ship of one or more publicly supported organiza- as broad as, or more specific than, the purposesbelow. The operated in connection with relation- tions. set forth in requirement (1) at the beginning ofship requires that the supporting organization be A supporting organization can be operated, the discussion of Section 509(a)(3) Organiza-responsive to and have operational relation- supervised, or controlled by one or more publicly tions. Therefore, an organization that by theships with publicly supported organizations. supported organizations even though its gov- terms of its articles is formed for the benefit ofThis third relationship has different rules for erning body is not made up of representatives of one or more specified publicly supported organi-meeting the requirement (1) tests and is dis- the specified publicly supported organizations zations will, if it otherwise meets the other re-cussed separately in Category two, later. for whose benefit it is operated. This occurs only quirements, be considered to have met the

if it can be demonstrated that the purposes ofSupported organizations. Supported organi- organizational test.the publicly supported organizations are carriedzation means, with respect to a supporting or- For example, articles stating that an organi-out by benefiting the specified publicly sup-ganization described in section 509(a)(3), an zation is formed to perform the publishing func-ported organizations (discussed later underorganization described in section 509(a)(1) or tions of a specified university are enough toSpecified organizations).509(a)(2) for whose benefit the supporting or- comply with the organizational test. An organi-

ganization is organized and operated, or with Supervised or controlled in connection zation operated, supervised, or controlled by, orrespect to which the supporting organization with. An organization that is supervised or supervised or controlled in connection with, one




or more publicly supported organizations to class for another publicly supported organ- Disqualified persons. For the purposes ofthe rules discussed in this publication, the fol-ization either in the same or a differentcarry out the purposes of those organizationslowing persons are considered disqualified per-class designated in the articles,will be considered to have met these require-sons: ments if the purposes set forth in its articles are 2. Permit the supporting organization to oper-

similar to but no broader than the purposes set ate for the benefit of new or additional pub- 1. All substantial contributors to the founda-forth in the articles of its controlling organiza- licly supported organizations of the same tion.tions. If, however, the organization by which it is or a different class designated in the arti-

2. All foundation managers of the foundation.operated, supervised, or controlled is a publicly cles, orsupported section 501(c)(4), 501(c)(5), or 3. An owner of more than 20% of:3. Permit the supporting organization to vary501(c)(6) organization, the supporting organiza-

the amount of its support among different a. The total combined voting power of ation will be considered to have met these re-publicly supported organizations within the corporation that is (during such owner-quirements if its articles require it to carry onclass or classes of organizations desig- ship) a substantial contributor to thecharitable, etc., activities within the meaning ofnated by the articles. foundation,section 170(c)(2).

See also the rules considered under the Organi- b. The profits interest of a partnership thatLimits. An organization is not organized ex-zational test, in the later discussion for organiza- is (during such ownership) a substantialclusively for the purposes specified in require-tions in Category two. contributor to the foundation, orment (1) if its articles expressly permit it to

Operational test — permissible beneficia-operate to support or to benefit any organization c. The beneficial interest of a trust or unin-ries. A supporting organization will be re-other than the specified publicly supported orga- corporated enterprise that is (duringgarded as operated exclusively to support onenizations. It will not meet the organizational test such ownership) a substantial contribu-or more specified publicly supported organiza- tor to the foundation.even though the actual operations of the organi-tions only if it engages solely in activities thatzation have been exclusively for the benefit ofsupport or benefit the specified organizations. 4. A member of the family of any of the indi-the specified publicly supported organizations.

viduals just listed.These activities may include making paymentsSpecified organizations. In order to meet to or for the use of, or providing services or 5. A corporation of which more than 35% ofrequirement (1), an organization must be organ- facilities for, individual members of the charita- the total combined voting power is ownedized and operated exclusively to support or ben- ble class benefited by the specified publicly sup- by persons just listed.efit one or more specified publicly supported ported organization.

organizations. The manner in which the publicly 6. A partnership of which more than 35% ofFor example, a supporting organization maysupported organizations must be specified in the the profits interest is owned by personsmake a payment indirectly through another un-articles will depend on whether the supporting described in (1), (2), (3), or (4).related organization to a member of a charitableorganization is operated, supervised, or con- class benefited by a specified publicly supported 7. A trust, or estate, of which more than 35%trolled by or supervised or controlled in connec- organization, but only if the payment is a grant to of the beneficial interest is owned by per-tion with the organizations or whether it is an individual rather than a grant to an organiza- sons described in (1), (2), (3), or (4).operated in connection with the organizations. tion. Similarly, an organization will be regarded

Remember, however, that foundation manag-Generally, the articles of the supporting or- as operated exclusively to support or benefit oneers and publicly supported organizations areganization must designate each of the specified or more specified publicly supported organiza-not disqualified persons for purposes of theorganizations by name, unless: tions even if it supports or benefits a sectionthird requirement under section 509(a)(3).

501(c)(3) organization, other than a private1. The supporting organization is operated, foundation, that is operated, supervised, or con- If a person who is a disqualified person with

supervised, or controlled by or supervised trolled directly by or in connection with a publicly respect to a supporting organization, such as aor controlled in connection with one or substantial contributor, is appointed or desig-supported organization, or an organization thatmore publicly supported organizations and nated as a foundation manager of the support-is a publicly owned college or university. How-the articles of organization of the supporting organization by a publicly supportedever, an organization will not be regarded as oneing organization require that it be operated beneficiary organization to serve as the repre-that is operated exclusively to support or benefitto support or benefit one or more benefi- sentative of the publicly supported organization,a publicly supported organization if any part ofciary organizations that are designated by that person is still a disqualified person, ratherits activities is in furtherance of a purpose otherclass or purpose and include: than a representative of the publicly supportedthan supporting or benefiting one or more speci-

organization.fied publicly supported organizations.a. The publicly supported organizations

An organization is considered controlled forOperational test — permissible activities.referred to above (without designatingthis purpose if the disqualified persons, by com-A supporting organization does not have to paythe organizations by name), orbining their votes or positions of authority, canits income to the publicly supported organiza-

b. publicly supported organizations that require the organization to perform any act thattions to meet the operational test. It can satisfyare closely related in purpose or func- significantly affects its operations or can preventthe test by using its income to carry on an inde-tion to those publicly supported organi- the organization from performing the act. Thispendent activity or program that supports orzations, or includes, but is not limited to, the right of anybenefits the specified publicly supported organi-

substantial contributor or spouse to designatezations. All such support, however, must be lim-2. A historic and continuing relationship ex- annually the recipients from among the publiclyited to permissible beneficiaries described

ists between the supporting organization supported organizations of the income from hisearlier. The supporting organization also mayand the publicly supported organizations, or her contribution. Except as explained underengage in fundraising activities, such as solicita-and because of this relationship, a sub- Proof of independent control, next, a supportingtions, fundraising dinners, and unrelated trade

organization will be considered to be controlledstantial identity of interests has developed or business, to raise funds for the publicly sup-directly or indirectly by one or more disqualifiedbetween the organizations. ported organizations or for the permissible ben-persons if the voting power of those persons iseficiaries.If a supporting organization is operated, su- 50% or more of the total voting power of the

pervised, or controlled by, or is supervised or organization’s governing body, or if one or moreAbsence of control by disqualified persons.controlled in connection with, one or more pub- of those persons have the right to exercise vetoThe third requirement an organization mustlicly supported organizations, it will not fail the power over the actions of the organization.meet to qualify as a supporting organizationtest of being organized for the benefit of speci-requires that the organization not be controlled Thus, if the governing body of a foundation isfied organizations solely because its articles: directly or indirectly by one or more disqualified composed of five trustees, none of whom has a

1. Permit the substitution of one publicly sup- persons (other than foundation managers or one veto power over the actions of the foundation,or more publicly supported organizations).ported organization within a designated and no more than two trustees are at any time




disqualified persons, the foundation is not con- name to satisfy the test. But a supporting organi- way of regulation or otherwise, designed to en-sidered controlled directly or indirectly by one or zation that has one or more specified organiza- sure that the supporting organization remainsmore disqualified persons by reason of this fact tions designated by name in its articles will not responsive to the needs and demands of thealone. However, all pertinent facts and circum- fail the organizational test solely because its supported organization.stances (including the nature, diversity, and in- articles:come yield of an organization’s holdings, the Integral-part test. The organization will meet

1. Permit a publicly supported organizationlength of time particular stocks, securities, or this test if it maintains a significant involvementthat is designated by class or purposeother assets are retained, and its manner of in the operations of one or more publicly sup-rather than by name to be substituted forexercising its voting rights with respect to stocks ported organizations and these organizationsthe publicly supported organization or or-in which members of its governing body also are in turn dependent upon the supporting or-ganizations designated by name in the arti-have some interest) are considered in determin- ganization for the type of support that it provides.cles, but only if the substitution ising whether a disqualified person does in fact To meet this test, either of the following must beconditioned upon the occurrence of anindirectly control an organization. satisfied.event that is beyond the control of the sup-

Proof of independent control. An organi- porting organization, such as loss of ex- 1. The activities engaged in for, or on behalfzation is permitted to establish to the satisfaction emption, substantial failure or of, the publicly supported organizations areof the IRS that disqualified persons do not di- abandonment of operations, or dissolution activities to perform the functions of or torectly or indirectly control it. For example, in the of the organization or organizations desig- carry out the purposes of the organiza-case of a religious organization operated in con- nated in the articles, tions, and, but for the involvement of thenection with a church, the fact that the majoritysupporting organization, would normally be2. Permit the supporting organization to oper-of the organization’s governing body is com-engaged in by the publicly supported orga-ate for the benefit of an organization that isposed of lay persons who are substantial con-nizations themselves, ortributors to the organization will not disqualify not a publicly supported organization, but

the organization under section 509(a)(3) if a only if the supporting organization is cur- 2. The supporting organization makes pay-representative of the church, such as a bishop or rently operating for the benefit of a publicly ments of substantially all of its income to,other official, has control over the policies and supported organization and the possibility or for the use of, publicly supported organi-decisions of the organization. of its operating for the benefit of other than zations, and the amount of support re-

a publicly supported organization is received by one or more of these publiclyCategory two. This category includes organi- mote, or supported organizations is enough to en-zations operated in connection with one or more sure the attentiveness of these organiza-3. Permit the supporting organization to varyorganizations described in section 509(a)(1) or tions to the operations of the supportingthe amount of its support between different509(a)(2). These organizations are Type III sup- organization.designated organizations, as long as itporting organizations. They cannot be operated

meets the requirements of the integral-part If item (2) is being relied on, a substantialin connection with any supported organizationtest (discussed later) with respect to at amount of the total support of the supportingthat is not organized in the United States. How-least one beneficiary organization. organization also must go to those publicly sup-ever, for a supporting organization that supports

ported organizations that meet the attentivenessa foreign organization on August 17, 2006, this If the beneficiary organization referred to inrequirement with respect to the supporting or-does not apply until the first day of the organiza- (2) is not a publicly supported organization, theganization. Except as explained in the next par-tion’s third tax year beginning after August 17, supporting organization will not meet the opera-agraph, the amount of support received by a2006. tional test. Therefore, if a supporting organiza-publicly supported organization must representThis kind of section 509(a)(3) organization is tion substituted a beneficiary other than aa large enough part of the organization’s totalone that has certain types of operational rela- publicly supported organization and operated insupport to ensure such attentiveness. In apply-tionships. If an organization is to qualify as a support of that beneficiary, the supporting or-ing this, if the supporting organization makessection 509(a)(3) organization because it is op- ganization would not be one described in sec-payments to, or for the use of, a particular de-erated in connection with one or more publicly tion 509(a)(3).

supported organizations, it must not be con- partment or school of a university, hospital, orMethod two. If a historic and continuing re-trolled by disqualified persons (as described church, the total support of the department or

lationship exists between the supporting organi-earlier) and it must meet an organizational test, school must be substituted for the total supportzation and the publicly supported organizations,a responsiveness test, an integral-part test, and of the beneficiary organization.and because of this relationship, a substantialan operational test. Even when the amount of support receivedidentity of interests has developed between the by a publicly supported beneficiary organizationorganizations, then the articles of organizationOrganizational test. This test requires that does not represent a large enough part of thewill not have to designate the specified organi-the organization, in its governing instrument: beneficiary organization’s total support, thezation by name. amount of support received from a supporting1. Limit its purposes to supporting one or

organization may be large enough to meet themore publicly supported organizations, Responsiveness test. An organization will requirements of item (2) of the integral-part testmeet this test if it is responsive to the needs or2. Designate the organizations operated, su- if it can be demonstrated that, in order to avoiddemands of the publicly supported organiza-pervised, or controlled by, and the interruption of a particular function or activ-tions. To meet this test, the publicly supported ity, the beneficiary organization will be suffi-3. Not have express powers inconsistent with organizations must elect, appoint, or maintain a ciently attentive to the operations of thethese purposes. close and continuous working relationship with supporting organization. This may occur whenthe officers, directors, or trustees of the support-These tests apply to all supporting organiza- either the supporting organization or the benefi-ing organization; consequently, the officers, di-tions. ciary organization earmarks the support re-rectors, or trustees of the publicly supportedIn the case of an organization that is oper- ceived from the supporting organization for aorganizations have a significant voice in the in-ated in connection with one or more publicly particular program or activity, even if the pro-vestment policies of the supporting organiza-supported organizations, however, the designa- gram or activity is not the beneficiary organiza-tion, the timing of grants and the manner oftion requirement under the organizational test tion’s primary program or activity, as long as themaking them, the selection of recipients, andcan be satisfied using either of the following two program or activity is a substantial one.generally the use of the income or assets of themethods. All factors, including the number of beneficia-supporting organization. ries, the length and nature of the relationshipMethod one. If an organization is organized

Notification requirement. In each tax year, between the beneficiary and supporting organi-and operated to support one or more publiclythe Type III supporting organization must notify zation, and the purpose to which the funds aresupported organizations and it is operated ineach supported organization of its support and put, will be considered in determining whetherconnection with that type of organization or or-provide each supported organization with any the amount of support received by a publiclyganizations, then its articles of organizationinformation that may be required by the IRS, by supported beneficiary organization is largemust designate the specified organizations by




enough to ensure the attentiveness of the or- chamber of commerce, or other organization under section 509(a)(2). If this type of relation-ganization to the operations of the supporting described in section 501(c)(4), 501(c)(5), or ship is established or used between an organi-organization. 501(c)(6) may qualify as a supporting organiza- zation seeking 509(a)(3) status and two or more

Normally, the attentiveness of a beneficiary tion under section 509(a)(3) and therefore not organizations seeking 509(a)(2) status, theorganization is motivated by the amounts re- be classified as a private foundation if both the amount and character of support received by theceived from the supporting organization. Thus, following conditions are met. former organization will be prorated among thethe more substantial the amount involved, in latter organizations.1. The supporting organization must meet allterms of a percentage of the publicly supported In determining whether a relationship existsthe requirements previously specified (theorganization’s total support, the greater the like-

between an organization seeking 509(a)(3) sta-organizational tests, the operational test,lihood that the required degree of attentivenesstus (supporting organization) and one or moreand one of the relationship tests and notwill be present. However, in determiningorganizations seeking 509(a)(2) status (benefi-be controlled by disqualified persons).whether the amount received from the support-ciary organizations) for the purpose of avoidinging organization is large enough to ensure the 2. The section 501(c)(4), 501(c)(5), or private foundation status, all pertinent facts andattentiveness of the beneficiary organization to 501(c)(6) organization would be described circumstances will be taken into account. Thethe operations of the supporting organization in section 509(a)(2) if it was a charitablefollowing facts may be used as evidence that(including attentiveness to the nature and yield organization described in sectionsuch a relationship was not established orof the supporting organization’s investments), 501(c)(3). This provision allows separateavailed of to avoid classification as a privateevidence of actual attentiveness by the benefi- charitable funds of certain noncharitablefoundation. ciary organization is of almost equal importance. organizations to be described in section

Imposing this requirement is merely one of 509(a)(3) if the noncharitable organizations 1. The supporting organization is operated tothe factors in determining whether a supporting receive their support and otherwise oper- support or benefit several specified benefi-organization is complying with the attentiveness ate in the manner specified by section ciary organizations.test. The absence of this requirement will not 509(a)(2).preclude an organization from classification as a 2. The beneficiary organization has a sub-supporting organization if it complies with the stantial number of dues-paying membersSpecial rules of attribution. To determineother factors. who have an effective voice in the man-whether an organizat ion meets theHowever, when none of the beneficiary orga- agement of both the supporting and thenot-more-than-one-third support test in sectionnizations are dependent upon the supporting beneficiary organizations.509(a)(2), amounts received by the organizationorganization for a large enough amount of their

from an organization that seeks to be a section 3. The beneficiary organization is composedsupport, the requirements of item (2) of the inte-509(a)(3) organization because of its support of of several membership organizations, eachgral-part test will not be satisfied, even thoughthe organization are gross investment incomethe beneficiary organizations have enforceable of which has a substantial number of mem-(rather than gifts or contributions) to the extentrights against the supporting organization under bers, and the membership organizationsthey are gross investment income of the distrib-state law. have an effective voice in the managementuting organization. (This rule also applies toIf an organization cannot meet the require- of the supporting and beneficiary organiza-amounts received from a charitable trust, corpo-ments of item (2) of the integral-part test for its tions.ration, fund, association, or similar organizationcurrent tax year solely because the amount re-

4. The beneficiary organization receives athat is required by its governing instrument orceived by one or more of the beneficiaries fromsubstantial amount of support from theotherwise to distribute, or that normally doesthe supporting organization is no longer largegeneral public, public charities, or govern-distribute, at least 25% of its adjusted net in-enough, it can still qualify under the integral-partmental grants.come to the organization, and whose distributiontest if it can establish that it has met the require-

normally comprises at least 5% of its adjustedments of item (2) of the integral-part test for any 5. The supporting organization uses its fundsnet income.) All income that is gross investment5-year period and that there has been an historic to carry on a meaningful program of activi-income of the distributing organization will beand continuing relationship of support between ties to support or benefit the beneficiaryconsidered distributed first by that organization.the organizations between the end of the 5-year organization and, if the supporting organi-If the supporting organization makes distribu-period and the tax year in question. zation were a private foundation, this usetions to more than one organization, the amount

would be sufficient to avoid the impositionof gross investment income considered distrib-Operational test. The requirements for meet-

of the tax on failure to distribute income.uted will be prorated among the distributees.ing the operational test for organizations oper-ated, supervised, or controlled by publicly 6. The operations of the beneficiary and sup-Also, treat amounts paid by an organizationsupported organizations (discussed earlier, porting organizations are managed by dif-to provide goods, services, or facilities for theunder Qualifying as Publicly Supported) have direct benefit of an organization seeking section ferent persons, and each organizationlimited applicability to organizations operated in 509(a)(2) status (rather than for the direct bene- performs a different function.connection with one or more publicly supported fit of the general public) in the same manner as

7. The supporting organization is not able toorganizations. This is because the operational amounts received by the latter organization.exercise substantial control or influencerequirements of the integral-part test, just dis- These amounts will be treated as gross invest-over the beneficiary organization becausecussed, generally are more specific than the ment income to the extent they are gross invest-the beneficiary organization receives sup-general rules found for the operational test in the ment income of the organization spending theport or holds assets that are disproportion-preceding category. However, a supporting oramounts. An organization seeking sectionately large in comparison with the supportganization can fail both the integral-part test and 509(a)(2) status must file a separate statementreceived or assets held by the supportingthe operational test if it conducts activities of its with its annual information return, Form 990 ororganization.own that do not constitute activities or programs 990-EZ, listing all amounts received from sup-

that would, but for the supporting organization, porting organizations.have been conducted by any publicly supported

Effect on 509(a)(3) organizations. If a bene-Relationships created for avoidance pur-organization named in the supporting organiza-ficiary organization fails to meet either of theposes. If a relationship between an organiza-tion’s governing instrument. A similar result oc-support tests of section 509(a)(2) due to thesetion seeking section 509(a)(3) status and ancurs for such activities or programs that wouldprovisions, and the beneficiary organization isorganization seeking section 509(a)(2) status isnot have been conducted by an organizationone for whose support the organization seekingestablished or used to avoid classification as awith which the supporting organization has es-section 509(a)(3) status is operated, then theprivate foundation with respect to either organi-tablished an historic and continuing relationship.supporting organization will not be considered tozation, then the character and amount of sup-be operated exclusively to support or benefitport received by the section 509(a)(3)Supporting other than section 501(c)(3) or-one or more section 509(a)(1) or 509(a)(2) orga-organization will be attributed to the sectionganizations. An organization operated in con-nizations and therefore would not qualify for509(a)(2) organization for purposes of determin-junction with a social welfare organization, labor

ing whether the latter meets the support tests section 509(a)(3) status.or agricultural organization, business league,




Request change in public charity classifica- by publication in the Internal Revenue Bulletin) conduct of its activities for which it was organ-tion. A section 501(c)(3) tax-exempt organiza- or another applicable date, if any, specified in ized, of substantially all (85% or more) of thetion seeking to change its public charity the public notice. In appropriate cases, however, lesser of its:classification from a section 509(a)(3) support- the treatment of grants and contributions and

1. Adjusted net income, oring organization to a section 509(a)(1) or the status of grantors and contributors to an509(a)(2) organization has to submit a written organization described in Section 509(a)(1), 2. Minimum investment return.request for a determination as to public charity Section 509(a)(2), or Section 509(a)(3) may bestatus under Revenue Procedure 2010-4, affected pending verification of the continued Assets test. A private foundation will meet2010-1 I.R.B. 122 available at www.IRS.gov/ classification of the organization. Notice to this the assets test if substantially more than halfpub/irs-tege/rp2010-4.pdf. This request has to effect will be made in a public announcement by (65% or more) of its assets are: include the following: the IRS. In these cases, the effect of grants and

contributions made after the date of the an- 1. Devoted directly to the active conduct of its1. A subject line or other indicator on the first nouncement will depend on the statutory qualifi- exempt activity, to a functionally related

page of the request in bold, underlined, or cation of the organization as an organization business, or to a combination of the two,all capitals font indicating “REQUEST FOR described in section Section 509(a)(1), Section

2. Stock of a corporation that is controlled byDETERMINATION AS TO PUBLIC CHAR- 509(a)(2), or Section 509(a)(3).the foundation (by ownership of at leastITY STATUS”;

The preceding paragraph shall not ap- 80% of the total voting power of all classes2. A statement requesting reclassification ply if the grantor or contributor: of stock entitled to vote and at least 80% of

from section 509(a)(3) to another public the total shares of all other classes ofCAUTION!

charity classification under sections stock) and substantially all (at least 85%)509(a)(1) and 170(b)(1)(A)(vi) or section 1. Had knowledge of the revocation of the the assets of which are devoted as pro-509(a)(2); and ruling or determination letter classifying the vided above, or

organization as an organization described3. Either 3. Any combination of (1) and (2).in section 509(a)(1), 509(a)(2), or509(a)(3), ora. A copy of the organization’s signed This test is intended to apply to organizations

Form 990, Parts I through XI of Form such as museums and libraries.2. Was in part responsible for, or was aware990-EZ, Parts I through VI, with the of, the act, the failure to act, or the sub- Support test. A private foundation will meetcompleted Schedule A (Form 990 or stantial and material change on the part of the support test if: 990-EZ), Public Charity Status and the organization that gave rise to the revo-Public Support, as filed with the IRS for cation. 1. Substantially all (at least 85%) of its sup-the tax year immediately before the tax port (other than gross investment income)year in which the request is made; or is normally received from the general pub-

lic and five or more unrelated exempt orga-b. The organization’s support information Section 509(a)(4) Organizationsnizations,for the past 5 completed tax years, us-

Section 509(a)(4) excludes from classificationing the organization’s method of ac- 2. Not more than 25% of its support (otheras private foundations those organizations thatcounting used to complete the Form than gross investment income) is normallyqualify under section 501(c)(3) as organized and990 or Form 990-EZ for such years. received from any one exempt organiza-operated for the purpose of testing products forThis information can be provided to thetion, andpublic safety. Generally, these organizationsIRS on a completed Schedule A (Form

test consumer products to determine their ac- 3. Not more than 50% of its support is nor-990 or 990-EZ).ceptability for use by the general public. mally received from gross investment in-

The request must be signed under penalties come.of perjury by an authorized official and mailed to: Private Operating This test is intended to apply to special-purpose

FoundationsIRS-TEGE foundations, such as learned societies and as-Attn: Correspondence Unit, Room 4024 sociations of libraries.

Some private foundations qualify as private op-P.O. Box 2508Endowment test. A foundation will meeterating foundations. These are types of privateCincinnati, OH 45201

the endowment test if it normally makes qualify-foundations that, although lacking general pub-ing distributions directly for the active conduct oflic support, make qualifying distributions directly

The organization will receive a determination its exempt function of at least two-thirds of itsfor the active conduct of their educational, chari-letter indicating whether the change in public minimum investment return.table, and religious purposes, as distinct fromcharity classification has been made. There is merely making grants to other organizations for The minimum investment return for any pri-no user fee for this determination letter. these purposes. vate foundation for any tax year is 5% of the

excess of the total fair market value of all assetsMost of the restrictions and requirementsClassification under section 509(a). If an or-that apply to private foundations also apply to of the foundation (other than those used directlyganization is described in section 509(a)(1), andprivate operating foundations. However, there in the active conduct of its exempt purpose) overis also described in either Section 509(a)(2) orare advantages to being classified as a private the amount of indebtedness incurred to acquireSection 509(a)(3), it will be treated as a sectionoperating foundation. For example, a private those assets.509(a)(1) organization.operating foundation (as compared to a private In determining whether the amount of quali-The organization will receive a determinationfoundation) can be the recipient of grants from a fying distributions is at least two-thirds of theletter indicating whether the change in publicprivate foundation without having to distribute organization’s minimum investment return, thecharity classification has been made. There isthe funds received currently within 1 year, and organization is not required to trace the sourceno user fee for this determination letter.the funds nevertheless may be treated as quali- of the expenditures to determine whether they

Reliance by grantors and contributors. fying distributions by the donating private foun- were derived from investment income or fromOnce an organization has received a ruling or dation; charitable contributions to a private contributions.determination letter classifying it as an organiza- operating foundation qualify for a higher charita- This test is intended to apply to organizationstion described in Section 509(a)(1), Section ble deduction limit on the donor’s tax return; and such as research organizations that actively509(a)(2), or Section 509(a)(3), the treatment of the excise tax on net investment income does conduct charitable activities but whose personalgrants and contributions and the status of grant- not apply to an exempt operating foundation. services are so great in relationship to charitableors and contributors to the organization will gen- assets that the cost of those services cannot beerally not be affected by reason of a later Private operating foundation means any pri- met out of small endowments.revocation by the IRS of the organization’s clas- vate foundation that meets the assets test, the

Exempt operating foundations. The ex-sification until the date on which notice of support test, or the endowment test, and makescise tax on net investment income does notchange of status is made to the public (generally qualifying distributions directly, for the active


www.irs.gov/pub/irs-tege/rp2010-4.pdf

www.irs.gov/pub/irs-tege/rp2010-4.pdf



apply to an exempt operating foundation. An may participate in the formulation of legis- 1. 20% of the exempt purpose expenditures ifexempt operating foundation for the tax year is the exempt purpose expenditures are notlation (direct lobbying).any private foundation that: over $500,000,

However, the term attempting to influence legis-2. $100,000 plus 15% of the excess of thelation does not include the following activities. 1. Is an operating foundation, as described

exempt purpose expenditures overpreviously,1. Making available the results of nonpartisan $500,000 if the exempt purpose expendi-

2. Has been publicly supported for at least 10 analysis, study, or research. tures are over $500,000 but not overtax years or was an operating foundation $1,000,000,2. Examining and discussing broad social,on January 1, 1983, or for its last tax year

economic, and similar problems. 3. $175,000 plus 10% of the excess of theending before January 1, 1983,exempt purpose expenditures over3. Providing technical advice or assistance3. Has a governing body that, at all times $1,000,000 if the exempt purpose expendi-(where the advice would otherwise consti-during the tax year, is broadly representa- tures are over $1,000,000 but not overtute the influencing of legislation) to a gov-tive of the general public and consists of $1,500,000, or

ernmental body or to a committee or otherindividuals no more than 25% of whom are4. $225,000 plus 5% of the excess of thesubdivision thereof in response to a writtendisqualified individuals, and

exempt purpose expenditures overrequest by that body or subdivision.4. Does not have any officer, at any time dur- $1,500,000 if the exempt purpose expendi-

4. Appearing before, or communicating with,ing the tax year, who is a disqualified indi- tures are over $1,500,000.any legislative body about a possible deci-vidual.

The term exempt purpose expendituression of that body that might affect the exis-The foundation must obtain a ruling letter from means the total of the amounts paid or incurredtence of the organization, its powers andthe IRS recognizing this special status. (including depreciation and amortization, but notduties, its tax-exempt status, or the deduc-

capital expenditures) by an organization for thetion of contributions to the organization.New organization. If you are applying for rec-tax year to accomplish its exempt purposes. Inognition of exemption as an organization de- 5. Communicating with a government official addition, it includes: scribed in section 501(c)(3) and you wish to or employee, other than:

establish that your organization is a private op- 1. Administrative expenses paid or incurrederating foundation, you should complete Part X a. A communication with a member or em- for the organization’s exempt purposes,of your exemption application (Form 1023). ployee of a legislative body (when the and

communication would otherwise consti-2. Amounts paid or incurred for the purposetute the influencing of legislation), or

of influencing legislation, whether or notb. A communication with the principal pur- the legislation promotes the organization’sLobbying Expenditures

pose of influencing legislation. exempt purposes.

In general, if a substantial part of the activities of Exempt purpose expenditures do not includeAlso excluded are communications between anyour organization consists of carrying on propa- amounts paid or incurred to or for:organization and its bona fide members aboutganda or otherwise attempting to influence leg-legislation or proposed legislation of direct in- 1. A separate fundraising unit of the organi-islation, your organization’s exemption fromterest to the organization and the members, zation, orfederal income tax will be denied. However, aunless these communications directly en-public charity (other than a church, an integrated 2. One or more other organizations, if thecourage the members to attempt to influenceauxiliary of a church or of a convention or asso- amounts are paid or incurred primarily forlegislation or directly encourage the membersciation of churches, or a member of an affiliated fundraising.to urge nonmembers to attempt to influencegroup of organizations that includes a church,legislation, as explained earlier.etc.) may avoid this result. Such a charity can Grass roots nontaxable amount. The

elect to replace the substantial part of activities grass roots nontaxable amount for any organi-Lobbying expenditures limits. If a publictest with a limit defined in terms of expenditures zation for any tax year is 25% of the lobbyingcharitable organization makes the election to befor influencing legislation. Private foundations nontaxable amount for the organization for that

cannot make this election. subject to the lobbying expenditures limits rules tax year.(instead of the substantial part of activities test),

Making the election. Use Form 5768, Elec- Years for which election is effective. Onceit will not lose its tax-exempt status under sec-tion/Revocation of Election By an Eligible Sec- an organization elects to come under these pro-tion 501(c)(3), unless it normally makes:t ion 501(c)(3) Organization To Make visions, the election will be in effect for all tax• Lobbying expenditures that are more thanExpenditures To Influence Legislation, to make years that end after the date of the election and

150% of the lobbying nontaxable amountthe election. The form must be signed and post- begin before the organization revokes this elec-for the organization for each tax year, ormarked within the first tax year to which it ap- tion.

plies. If the form is used to revoke the election, it • Grass roots expenditures that are moremust be signed and postmarked before the first Note. These elective provisions for lobbyingthan 150% of the grass roots nontaxableday of the tax year to which it applies. activities by public charities do not apply to aamount for the organization for each taxEligible section 501(c)(3) organizations that church, an integrated auxiliary of a church or of ayear.have made the election to be subject to the limits convention or association of churches, or aon lobbying expenditures must use Part II-A of See Tax on excess expenditures to influence member of an affiliated group of organizationsSchedule C (Form 990 or 990-EZ) to figure legislation, later, in this section. that includes a church, etc., or a private founda-these limits. tion. Moreover, these provisions will not apply toLobbying expenditures. These are any

any organization for which an election is not inexpenditures that are made for the purpose ofAttempting to influence legislation. At-effect.tempting to influence legislation, for this pur- attempting to influence legislation, as discussed

pose, means: earlier under Attempting to influence legislation. Expenditures of affiliated organizations. Iftwo or more section 501(c)(3) organizations areGrass roots expenditures. This term re-1. Any attempt to influence any legislationmembers of an affiliated group of organizationsfers only to those lobbying expenditures that arethrough an effort to affect the opinions ofand at least one of these organizations hasmade to influence legislation by attempting tothe general public or any segment thereofmade the election regarding the treatment ofaffect the opinions of the general public or any(grass roots lobbying), andcertain lobbying expenditures, then the determi-segment thereof.

2. Any attempt to influence any legislation nation as to whether excess lobbying expendi-Lobbying nontaxable amount. The lobby-through communication with any member tures have been made and the determination as

ing nontaxable amount for any organization foror employee of a legislative body or with to whether the expenditure limits, described ear-any tax year is the lesser of $1,000,000 or: any government official or employee who lier, have been exceeded by more than 150%




will be made as though the affiliated group is one expenditures. An additional tax may be imposed establishment of safeguards to prevent futurepolitical expenditures.organization. on the managers of those organizations.

If the group has excess lobbying expendi- Tax on organization. Organizations that Status after loss of exemption for lobbyingtures, each organization for which the election is lose their exemption under section 501(c)(3) or political activities. As explained earlier, aneffective for the year will be treated as an organi- organization can lose its tax-exempt statusdue to lobbying activities generally will be sub-zation that has excess lobbying expenditures in under section 501(c)(3) because of lobbying ac-ject to an excise tax of 5% of the lobbying expen-an amount that equals the organization’s pro- tivities or participation or intervention in a politi-ditures. The tax does not apply to privateportionate share of the group’s excess lobbying cal campaign on behalf of or in opposition to afoundations. Also, the tax does not apply toexpenditures. Further, if the expenditure limits, candidate for public office. If this happens to anorganizations that have elected the lobbying lim-described in this section, are exceeded by more organization, it cannot later qualify for exemp-its of section 501(h) or to churches orthan 150%, each organization for which the tion under section 501(c)(4).church-related organizations that cannot electelection is effective for that year will lose its these limits. This tax must be paid by the organi-tax-exempt status under section 501(c)(3). zation.

Two organizations will be considered mem-Tax on managers. Managers may also bebers of an affiliated group of organizations if:

liable for a 5% tax on the lobbying expenditures1. The governing instrument of one of the orthat result in the disqualification of the organiza-

ganizations requires it to be bound by deci- tion. For the tax to apply, a manager would have 4.sions of the other organization on to agree to the expenditures knowing that thelegislative issues, or expenditures were likely to result in the organi-

zation’s not being described in section2. The governing board of one of the organi-501(c)(3). No tax will be imposed if the man- Other Sectionzations includes persons who:ager’s agreement is not willful and is due toreasonable cause.a. Are specifically designated representa- 501(c)tives of the other organization or areExcise taxes on political expenditures. Themembers of the governing board, of-law imposes an excise tax on the political expen-ficers, or paid executive staff members Organizationsditures of section 501(c)(3) organizations. Aof the other organization, andtwo-tier tax is imposed on both the organizations

b. Have enough voting power to cause or and the managers of those organizations.prevent action on legislative issues by IntroductionTaxes on organizations. An initial tax ofthe controlled organization by combin-

10% of certain political expenditures is imposed This chapter contains specific information foring their votes.on a charitable organization. A second tax of certain organizations described in section100% of the expenditure is imposed if the politi- 501(c), other than those organizations that arecal expenditure that resulted in the imposition of described in section 501(c)(3). SectionTax on excess expenditures to influence leg-the initial (first-tier) tax is not corrected within a 501(c)(3) organizations are covered in chapter 3islation. If an election for a tax year is in effectspecified period. These taxes must be paid by of this publication.for an organization and that organization ex-the organization. The Table of Contents at the beginning ofceeds the lobbying expenditures limits, an ex-

this publication, as well as the Organization Ref-cise tax of 25% of the excess lobbying Taxes on managers. An initial tax of 21/2%erence Chart, may help you locate at a glanceexpenditures for the tax year will be imposed. of the amount of certain political expendituresthe type of organization discussed in this chap-Excess lobbying expenditures for a tax year, in (up to $5,000 for each expenditure) is imposedter.this case, means the greater of: on a manager of an organization who agrees to

such expenditures knowing that they are politi-1. The amount by which the lobbying expen-

cal expenditures. No tax will be imposed if theditures made by the organization during manager’s agreement was not willful and wasthe tax year are more than the lobbying 501(c)(4) - Civicdue to reasonable cause. A second tax of 50%nontaxable amount for the organization for of the expenditures (up to $10,000 for eachthat tax year, or Leagues and Socialexpenditure) is imposed on a manager if he or

she refuses to agree to a correction of the ex-2. The amount by which the grass roots ex- Welfare Organizationspenditures that resulted in the imposition of thependitures made by the organization dur-initial (first-tier) tax. For purposes of these taxes,ing the tax year are more than the grass If your organization is not organized for profitan organization manager is generally an officer,roots nontaxable amount for the organiza- and will be operated only to promote social wel-director, trustee, or any employee having au-tion for that tax year. fare to benefit the community, you should filethority or responsibility concerning the organiza- Form 1024 to apply for recognition of exemptionEligible organizations that have made the election’s political expenditures. These taxes must from federal income tax under section 501(c)(4).tion to be subject to the limits on lobbying expen- be paid by the manager of the organization. The discussion that follows describes the infor-ditures and that owe the tax on excess lobbying

mation you must provide when applying. ForPolitical expenditures. Generally, politicalexpenditures (as computed in Part VI-A ofapplication procedures, see chapter 1.expenditures that will trigger these taxes areSchedule A (Form 990)) must file Form 4720 to

To qualify for exemption under sectionamounts paid or incurred by a section 501(c)(3)report and pay the tax.501(c)(4), the organization’s net earnings mustorganization in any participation or intervention

Organization that no longer qualifies. An be devoted only to charitable, educational, orin any political campaign for or against any can-organization that no longer qualifies for exemp- recreational purposes. In addition, no part of thedidate for public office. Political expenditurestion under section 501(c)(3) because of sub- organization’s net earnings can inure to the ben-include publication or distribution of statementsstantial lobbying activities will not at any time efit of any private shareholder or individual. If thefor these purposes. Political expenditures alsothereafter be treated as an organization de- organization provides an excess benefit to cer-include certain expenditures by organizationsscribed in section 501(c)(4). This provision, tain persons, an excise tax may be imposed.that are formed primarily to promote the candi-however, does not apply to certain organizations See Excise tax on excess benefit transactions,dacy (or prospective candidacy) of an individual(churches, etc.) that cannot make the election under Excess Benefit Transactions in chapter 5for public office and by organizations that arediscussed earlier. for more information about this tax.effectively controlled by a candidate and are

used primarily to promote that candidate.Tax on disqualifying lobbying expenditures. Examples. Types of organizations that areThe law imposes a tax on certain organizations if Correction of expenditure. A correction of considered to be social welfare organizationsthey no longer qualify under section 501(c)(3) by a political expenditure is the recovery, if possi- are civic associations and volunteer fire compa-reason of having made disqualifying lobbying ble, of all or part of the expenditure and the nies.

Chapter 4 Other Section 501(c) Organizations Page 45REL 00929



Nonprofit operation. You must submit evi- 501(c)(6) - Business Leagues, etc. for more inbefore the local legislature and administra-dence that your organization is organized and formation. tive agencies in zoning, traffic, and parkingwill be operated on a nonprofit basis. However, matters,such evidence, including the fact that your or- Specific Organizations • An organization that tries to encourage in-ganization is organized under a state law relat-

dustrial development and relieve unem-ing to nonprofit corporations, will not in itself The following information should be contained in ployment in an area by making loans toestablish a social welfare purpose. the application form and accompanying state- businesses so they will relocate to the

ments of certain types of civic leagues or social area, andSocial welfare. To establish that your organi- welfare organizations.zation is organized exclusively to promote social • An organization that holds an annual festi-

Volunteer fire companies. If your organiza-welfare, you should submit evidence with your val of regional customs and traditions.tion wishes to obtain exemption as a volunteerapplication showing that your organization willfire company or similar organization, you shouldoperate primarily to further (in some way) thesubmit evidence that its members are activelycommon good and general welfare of the peopleengaged in fire fighting and similar disaster as-of the community (such as by bringing aboutsistance, whether it actually owns the fire fight- 501(c)(5) - Labor,civic betterment and social improvements).ing equipment, and whether it provides anyAn organization that restricts the use of its Agricultural andassistance for its members, such as death andfacilities to employees of selected corporationsmedical benefits in case of injury to them.and their guests is primarily benefiting a private HorticulturalIf your organization does not have an inde-group rather than the community. It thereforependent social purpose, such as providing rec-does not qualify as a section 501(c)(4) organiza- Organizationsreational facilities for members, it may betion. Similarly, an organization formed to repre-exempt under section 501(c)(3). In this event,sent member-tenants of an apartment complex If you are a member of an organization thatyour organization should file Form 1023.does not qualify, since its activities benefit the wants to obtain recognition of exemption from

member-tenants and not all tenants in the com- Homeowners’ associations. A membership federal income tax as a labor, agricultural, ormunity. However, an organization formed to pro- organization formed by a real estate developer horticultural organization, you should submit anmote the legal rights of all tenants in a particular to own and maintain common green areas, application on Form 1024. You must indicate incommunity may qualify under section 501(c)(4) streets, and sidewalks and to enforce covenants your application for exemption and accompany-as a social welfare organization. to preserve the appearance of the development ing statements that no part of the organization’s

should show that it is operated for the benefit of net earnings will inure to the benefit of any mem-Political activity. Promoting social welfare all the residents of the community. The term ber. In addition, you should follow the proceduredoes not include direct or indirect participation or community generally refers to a geographical for obtaining recognition of exempt status de-intervention in political campaigns on behalf of unit recognizable as a governmental subdivi- scribed in chapter 1. Submit any additional infor-or in opposition to any candidate for public of- sion, unit, or district thereof. Whether a particu- mation that may be required, as described in thisfice. However, if you submit proof that your or- lar association meets the requirement of section.ganization is organized exclusively to promote benefiting a community depends on the factssocial welfare, it can obtain exemption even if it and circumstances of each case. Even if an area Tax treatment of donations. Contributions toparticipates legally in some political activity on represented by an association is not a commu- labor, agricultural, and horticultural organiza-behalf of or in opposition to candidates for public nity, the association can still qualify for exemptions are not deductible as charitable contribu-office. See the discussion in chapter 2 under tion if its activities benefit a community. tions on the donor’s federal income tax return.Political Organization Income Tax Return. The association should submit evidence that However, such payments may be deductible as

areas such as roadways and park land that it business expenses if they are ordinary and nec-Social or recreational activity. If social activ-owns and maintains are open to the general essary in the conduct of the taxpayer’s trade orities will be the primary purpose of your organi-public and not just its own members. It also must business. For more information about certainzation, you should not file an application forshow that it does not engage in exterior mainte- limits affecting the deductibility of these busi-exemption as a social welfare organization butnance of private homes. ness expenses, see Deduction not allowed forshould file for exemption as a social club de-

A homeowners’ association that is not ex- dues used for political or legislative activities,scribed in section 501(c)(7).empt under section 501(c)(4) and that is a con- under 501(c)(6) - Business Leagues, etc.dominium management association, aRetirement benefit program. An organiza-residential real estate management association,tion established by its members that has as its Labor Organizationsor a timeshare association generally can electprimary activity providing supplemental retire-under the provisions of section 528 to receive A labor organization is an association of workersment benefits to its members or death benefitscertain tax benefits that, in effect, permit it to who have combined to protect and promote theto their beneficiaries does not qualify as an ex-exclude its exempt function income from its interests of the members by bargaining collec-empt social welfare organization. It may qualifygross income. tively with their employers to secure better work-under another paragraph of section 501(c) de-

ing conditions.pending on all the facts. Other organizations. Other nonprofit organi-To show that your organization has the pur-However, a nonprofit association that is es- zations that qualify as social welfare organiza-

pose of a labor organization, you should includetablished, maintained, and funded by a local tions include:in the articles of organization or accompanyinggovernment to provide the only retirement bene-

• An organization operating an airport that is statements (submitted with your exemption ap-fits to a class of employees may qualify as aon land owned by a local government, plication) information establishing that the or-social welfare organization under sectionwhich supervises the airport’s operation, ganization is organized to better the conditions501(c)(4).and that serves the general public in an of workers, improve the grade of their products,

Tax treatment of donations. Donations to area with no other airport, and develop a higher degree of efficiency in theirvolunteer fire companies are deductible on the respective occupations. In addition, no net earn-• A community association that works to im-donor’s federal income tax return, but only if ings of the organization can inure to the benefitprove public services, housing, and resi-made for exclusively public purposes. Contribu- of any member.dential parking; publishes a freetions to civic leagues or other section 501(c)(4)

community newspaper; sponsors a com-organizations generally are not deductible as Composition of membership. While a labor

munity sports league, holiday programs,charitable contributions for federal income tax organization generally is composed of employ-

and meetings; and contracts with a privatepurposes. They may be deductible as trade or ees or representatives of the employees (in the

security service to patrol the community,business expenses, if ordinary and necessary in form of collective bargaining agents) and similarthe conduct of the taxpayer’s business. How- • A community association devoted to pre- employee groups, evidence that an organiza-ever, see Deduction not allowed for dues used serving the community’s traditions, archi- tion’s membership consists mainly of workersfor political or legislative activities, under tecture, and appearance by representing it does not in itself indicate an exempt purpose.

Page 46 Chapter 4 Other Section 501(c) Organizations REL 00930



You must show in your application that your 5. Encouraging improvements in the produc- Line of business. This term generally re-organization has the purposes described in the tion of fish on privately owned fish farms. fers either to an entire industry or to all compo-preceding paragraph. These purposes can be nents of an industry within a geographic area. It

6. Negotiating with processors for the price toaccomplished by a single labor organization act- does not include a group composed of busi-

be paid to members for their crops.ing alone or by several organizations acting to- nesses that market a particular brand within angether through a separate organization. industry.

Benefits to members. The payment by a la- Common business interest. A commonbor organization of death, sick, accident, and business interest of all members of the organi-501(c)(6) -similar benefits to its individual members with zation must be established by the applicationfunds contributed by its members, if made under documents.Business Leagues, etc.a plan to better the conditions of the members,

Examples. Activities that would tend to il-does not preclude exemption as a labor organi-If your association wants to apply for recognition lustrate a common business interest are:zation. However, an organization does not qual-of exemption from federal income tax as a non-ify for exemption as a labor organization if it has 1. Promotion of higher business standardsprofit business league, chamber of commerce,no authority to represent members in job-related and better business methods and encour-real estate board, or board of trade, it should filematters, even if it provides weekly income to its agement of uniformity and cooperation byForm 1024. For a discussion of the procedure tomembers in the event of a lawful strike by the a retail merchants association,follow, see chapter 1.members’ union, in return for an annual pay-

Your organization must indicate in its appli- 2. Education of the public in the use of credit,ment by the member.cation form and attached statements that no part

3. Establishment of uniform casualty ratesof its net earnings will inure to the benefit of anyAgricultural and and compilation of statistical information byprivate shareholder or individual and that it is notan insurance rating bureau operated byorganized for profit or organized to engage in anHorticultural Organizationscasualty insurance companies,activity ordinarily carried on for profit (even if the

Agricultural and horticultural organizations are business is operated on a cooperative basis or 4. Establishment and maintenance of the in-connected with raising livestock, forestry, culti- produces only sufficient income to be tegrity of a local commercial market,vating land, raising and harvesting crops or self-sustaining).aquatic resources, cultivating useful or orna- 5. Operation of a trade publication primarilyIn addition, your organization must be prima-mental plants, and similar pursuits. intended to benefit an entire industry, andrily engaged in activities or functions that are the

For the purpose of these provisions, aquatic basis for its exemption. It must be primarily sup- 6. Encouragement of the use of goods andresources include only animal or vegetable life, ported by membership dues and other income services of an entire industry (such as abut not mineral resources. The term harvesting, from activities substantially related to its exempt lawyer referral service whose main pur-in this case, includes fishing and related pur- purpose. pose is to introduce individuals to the usesuits. A business league, in general, is an associa- of the legal profession in the hope thatAgr icul tural organizat ions can be tion of persons having some common business they will enter into lawyer-client relation-quasi-public in character and are often designed interest, the purpose of which is to promote that ships on a paying basis as a result).to encourage the development of better agricul- common interest and not to engage in a regulartural and horticultural products through a system business of a kind ordinarily carried on for profit. Improvement of business conditions.of awards, using income from entry fees, gate Trade associations and professional associa- Generally, this must be shown to be the purposereceipts, and donations to meet the necessary tions are considered business leagues. of the organization. This is not established byexpenses of upkeep and operation. When the

evidence of particular services that provide aChamber of commerce. A chamber of com-activities are directed toward the improvementconvenience or economy to individual membersmerce usually is composed of the merchantsof marketing or other business conditions in onein their businesses, such as advertising thatand traders of a city.or more lines of business, rather than the im-carries the name of members, interest-free

provement of production techniques or the bet-loans, assigning exclusive franchise areas, op-Board of trade. A board of trade often con-terment of the conditions of persons engaged ineration of a real estate multiple listing system, orsists of persons engaged in similar lines of busi-agriculture, the organization must qualify for ex-operation of a credit reporting agency.ness. For example, a nonprofit organizationemption as a business league, board of trade, or

formed to regulate the sale of a specified agricul-other organization, as discussed next in the sec- Stock or commodity exchange. A stock ortural commodity to assure equal treatment oftion on 501(c)(6) organizations. commodity exchange is not a business league,producers, warehouse workers, and buyers is aThe primary purpose of exempt agricultural chamber of commerce, real estate board, orboard of trade.and horticultural organizations must be to better board of trade and is not exempt under section

Chambers of commerce and boards of tradethe conditions of those engaged in agriculture or 501(c)(6).usually promote the common economic inter-horticulture, develop more efficiency in agricul-ests of all the commercial enterprises in a given Legislative activity. An organization that isture or horticulture, or improve the products.trade community. exempt under section 501(c)(6) can work for theThe following list contains some examples of

enactment of laws to advance the common busi-activities that show an agricultural or horticul- Real estate board. A real estate board con- ness interests of the organization’s members.tural purpose. sists of members interested in improving thebusiness conditions in the real estate field. It is Deduction not allowed for dues used for po-1. Promoting various cooperative agricultural,not organized for profit and no part of the net litical or legislative activities. A taxpayerhorticultural, and civic activities among ru-earnings inures to the benefit of any private cannot deduct the part of dues or other pay-ral residents by a state and county farmshareholder or individual. ments to a business league, trade association,and home bureau.

labor union, or similar organization that is for anyGeneral purpose. You must indicate in the2. Exhibiting livestock, farm products, and of the following activities.material submitted with your application thatother characteristic features of agricultureyour organization will be devoted to the improve-and horticulture. 1. Influencing legislation.ment of business conditions of one or more lines

3. Testing soil for members and nonmembers 2. Participating or intervening in a politicalof business as distinguished from the perform-

of the farm bureau on a cost basis, the campaign for, or against, any candidate forance of particular services for individual per-

results of the tests and other recommenda- public office.sons. It must be shown that the conditions of a

tions being furnished to the communityparticular trade or the interests of the community 3. Trying to influence the general public, or

members to educate them in soil treat-will be advanced. Merely indicating the name of part of the general public, with respect to

ment.the organization or the object of the local statute elections, legislative matters, or referen-

4. Guarding the purity of a specific breed of under which it is created is not enough to dums (also known as grass roots lobby-livestock. demonstrate the required general purpose. ing).




4. Communicating directly with certain execu- • College alumni associations that are not of sick and death benefits is not operating exclu-tive branch officials to try to influence their described in chapter 3 under Alumni asso- sively for pleasure, recreation, and other non-official actions or positions. ciation, profitable purposes.

See Dues Used for Lobbying or Political Activi- • College fraternities or sororities operating Limited membership. The membership inties under Required Disclosures in chapter 2 for chapter houses for students, a social club must be limited. To show that yourmore information. organization has a purpose that would charac-• Country clubs,

terize it as a club, you should submit evidenceException for local legislation. Members • Amateur hunting, fishing, tennis, swim- with your application that there are limits oncan deduct dues (or assessments) to an organi-

ming, and other sport clubs, admission to membership consistent with thezation that are for expenses of:

character of the club.• Dinner clubs that provide a meeting place,A social club that issues corporate member-1. Appearing before, submitting statements library, and dining room for members,

ship is dealing with the general public in the formto, or sending communications to mem-• Hobby clubs, of the corporation’s employees. Corporatebers of a local council or similar governing

members of a club are not the kind of membersbody with respect to legislation or pro- • Garden clubs, andcontemplated by the law. Gross receipts fromposed legislation of direct interest to the

• Variety clubs. these members would be a factor in determiningmember, orwhether the club qualifies as a social club. See

2. Communicating information between the Gross receipts from nonmembership sources,Discrimination prohibited. Your organiza-member and the organization with respect later. Bona fide individual memberships paid fortion will not be recognized as tax exempt if itsto local legislation or proposed legislation by a corporation would not have an effect on thecharter, bylaws, or other governing instrument,of direct interest to the organization or the gross receipts source.or any written policy statement provides for dis-member. The fact that a social club may have ancrimination against any person on the basis ofassociate (nonvoting) class of membership willLegislation or proposed legislation is of direct race, color, or religion.not be, in and of itself, a cause for nonrecogni-interest to a taxpayer if it will, or can reasonably However, a club that in good faith limits itstion of exemption. However, if one membershipbe expected to, affect the taxpayer’s trade or membership to the members of a particular re-class pays substantially lower dues and feesbusiness. ligion to further the teachings or principles of thatthan another membership class, although bothreligion and not to exclude individuals of a partic-De minimis exception. In-house expendi- classes enjoy the same rights and privileges inular race or color will not be considered as dis-tures of $2,000 or less for the year for activities using the club facilities, there may be an inure-criminating on the basis of religion. Also, the(1) – (4) listed earlier will not prevent a deduc- ment of income to the benefited class, resultingrestriction on religious discrimination does nottion for dues if the dues meet all other tests to be in a denial of the club’s exemption.apply to a club that is an auxiliary of a fraternaldeductible as a business expense.

beneficiary society (discussed later) if that soci- Support. In general, your club should beGrass roots lobbying. A tax-exempt trade ety is described in section 501(c)(8) and exempt supported solely by membership fees, dues,

association, labor union, or similar organization from tax under section 501(a) and limits its and assessments. However, if otherwise enti-is considered to be engaging in grass roots membership to the members of a particular re- tled to exemption, your club will not be disquali-lobbying if it contacts prospective members or ligion. fied because it raises revenue from memberscalls upon its own members to contact their through the use of club facilities or in connectionPrivate benefit prohibited. No part of the or-employees and customers for the purpose of with club activities.

ganization’s net earnings can inure to the benefiturging such persons to communicate with theirof any person having a personal and private Business activities. If your club will engageelected state or Congressional representativesinterest in the activities of the organization. For in business, such as selling real estate, timber,to support the promotion, defeat, or repeal ofpurposes of this requirement, it is not necessary or other products or services, it generally will belegislation that is of direct interest to the organi-that net earnings be actually distributed. Even denied exemption. However, evidence submit-zation. Any dues or assessments directly relatedundistributed earnings can benefit members. ted with your application form that your organi-to such activities are not deductible by the tax-Examples of this include a decrease in member- zation will provide meals, refreshments, orpayer, since the individuals being contacted,ship dues or an increase in the services the club services related to its exempt purposes only towho are not members of the organization, are aprovides to its members without a correspond- its own members or their dependents or guestssegment of the general public.ing increase in dues or other fees paid for club will not cause denial of exemption.support. However, fixed-fee payments to mem-Tax treatment of donations. Contributions to

Facilities open to public. Evidence thatbers who bring new members into the club areorganizations described in this section are notyour club’s facilities will be open to the generalnot an inurement of the club’s net earnings, if thedeductible as charitable contributions on the do-public (persons other than members or theirpayments are reasonable compensation for per-nor’s federal income tax return. They may bedependents or guests) may cause denial of ex-formance of a necessary administrative service.deductible as trade or business expenses if ordi-emption. This does not mean, however, that anynary and necessary in the conduct of the tax- Purposes. To show that your organization dealing with outsiders will automatically deprivepayer’s business. possesses the characteristics of a club within a club of exemption.

the meaning of the exemption law, you shouldGross receipts from nonmembership

submit evidence with your application that per-sources. A section 501(c)(7) organization can

sonal contact, commingling, and fellowship existreceive up to 35% of its gross receipts, including501(c)(7) - Social and among members. You must show that membersinvestment income, from sources outside of its

are bound together by a common objective ofmembership without losing its tax-exempt sta-Recreation Clubs pleasure, recreation, and other nonprofitabletus. Of the 35%, up to 15% of the gross receipts

purposes.can be derived from the use of the club’s facili-If your club is organized for pleasure, recreation, Fellowship need not be present betweenties or services by the general public or fromand other similar nonprofitable purposes and each member and every other member of a clubother activities not furthering social or recrea-substantially all of its activities are for these if it is a material part in the life of the organiza-tional purposes for members. If an organizationpurposes, it should file Form 1024 to apply for tion. A statewide or nationwide organization thathas outside income that is more than theserecognition of exemption from federal income is made up of individual members, but is dividedlimits, all the facts and circumstances will betax. into local groups, satisfies this requirement iftaken into account in determining whether theIn applying for recognition of exemption, you fellowship is a material part of the life of eachorganization qualifies for exempt status.should submit the information described in this local group.

section. Also see chapter 1 for the procedures to The term other nonprofitable purposes Gross receipts. Gross receipts, for this pur-follow. means other purposes similar to pleasure and pose, are receipts from the normal and usual

Typical organizations that should file for rec- recreation. For example, a club that, in addition (traditionally conducted) activities of the club.ognition of exemption as social clubs include: to its social activities, has a plan for the payment These receipts include charges, admissions,




membership fees, dues, assessments, invest- 1. Is a fraternal organization,ment income, and normal recurring capital gains

2. Operates under the lodge system or for the 501(c)(4), 501(c)(9), andon investments. Receipts do not include initia-exclusive benefit of the members of a fra-

tion fees and capital contributions. Unusualternal organization itself operating under 501(c)(17) -amounts of income, such as from the sale of athe lodge system, and

clubhouse or similar facility, are not included in Employees’3. Provides for the payment of life, sick, acci-gross receipts or in figuring the percentage lim-dent, or other benefits to the members ofits. Associationsthe society, order, or association or their

Fraternity foundations. If your organization dependents.This section describes the information to be pro-is a foundation formed for the exclusive purposevided upon application for recognition of exemp-of acquiring and leasing a chapter house to a Lodge system. Operating under the lodgetion by the following types of employees’local fraternity chapter or sorority chapter main- system means carrying on activities under aassociations:tained at an educational institution and does not form of organization that comprises local

engage in any social or recreational activities, it branches, chartered by a parent organization1. A voluntary employees’ beneficiary associ-may be a title holding corporation (discussed, and largely self-governing, called lodges, chap-

ation (including federal employees’ as-later, under section 501(c)(2) organizations and ters, or the like.sociations) organized to pay life, sick,under section 501(c)(25) organizations) rather

Payment of benefits. It is not essential that accident, and similar benefits to membersthan a social club.every member be covered by the society’s pro- or their dependents, or designated benefi-gram of sick, accident, or death benefits. AnTax treatment of donations. Donations to ciaries, if no part of the net earnings of theorganization can qualify for exemption if most ofexempt social and recreation clubs are not de- association inures to the benefit of any pri-its members are eligible for benefits, and theductible as charitable contributions on the do- vate shareholder or individual, andbenefits are paid from contributions or dues paidnor’s federal income tax return.by those members. 2. A supplemental unemployment benefit

The benefits must be limited to members and trust whose primary purpose is providingtheir dependents. If members will have the abil- for payment of supplemental unemploy-ity to confer benefits to other than themselves

ment benefits.501(c)(8) and 501(c)(10) and their dependents, exemption will not be rec-Both the application form to file and the infor-ognized.- Fraternal Beneficiary

mation to provide are discussed later under theWhole-life insurance. Whole-life insurancesection that describes your employee associa-Societies and constitutes a life benefit under section 501(c)(8)tion. Chapter 1 describes the procedures to fol-even though the policy may contain investmentlow in applying for exemption.Domestic Fraternal features such as a cash surrender value or a

policy loan.SocietiesTax treatment of donations. Donations toReinsurance pool. Payments by a fraternalthese organizations are not deductible as chari-beneficiary society into a state-sponsored rein-This section describes the information to be pro-

surance pool that protects participating insurers table contributions on the donor’s federal in-vided upon application for recognition of exemp-against excessive losses on major medical come tax return.tion by two types of fraternal societies:health and accident insurance will not precludebeneficiary and domestic. The major distinctionexemption as a fraternal beneficiary society.is that fraternal beneficiary societies provide for Local Employees’

the payment of life, sick, accident, or other bene- Associations (501(c)(4))fits to their members or their dependents, while Domestic Fraternal Societiesdomestic fraternal societies do not provide these (501(c)(10)) A local association of employees whose mem-benefits but rather devote their earnings to fra- bership is limited to employees of a designatedternal, religious, charitable, etc., purposes. The A domestic fraternal society, order, or associa- person or persons in a particular municipality,procedures to follow in applying for recognition tion must file an application for recognition of and whose income will be devoted exclusively toof exemption are described in chapter 1. exemption from federal income tax on Form

charitable, educational, or recreational pur-1024. The application and accompanying state-If your organization is controlled by a centralposes. A local employees’ association must ap-ments should establish that the organization:organization, you should check with your con-ply for recognition of exemption by filing Formtrolling organization to determine whether your

1. Is a domestic fraternal organization, 1024. The organization must submit evidenceunit has been included in a group exemptionthat:letter or can be added. If so, your organization 2. Operates under the lodge system,

need not apply for individual recognition of ex-1. It is of a purely local character,3. Devotes its net earnings exclusively to re-emption. For more information see Group Ex-

ligious, charitable, scientific, literary, edu-emption Letter in chapter 1 of this publication. 2. Its membership is limited to employees ofcational, and fraternal purposes, and a designated person or persons in a partic-

Tax treatment of donations. Donations by an 4. Does not provide for the payment of life, ular locality, andindividual to a domestic fraternal beneficiary so- sick, accident, or other benefits to its mem-

3. Its net earnings will be devoted exclusivelyciety or a domestic fraternal society operating bers.to charitable, educational, or recreationalunder the lodge system are deductible as chari-

The organization can arrange with insurance purposes.table contributions only if used exclusively forcompanies to provide optional insurance to itsreligious, charitable, scientific, literary, or educa- A local association of employees that hasmembers without jeopardizing its exempt status.tional purposes or for the prevention of cruelty to

established a system of paying retirement orchildren or animals.death benefits, or both, to its members will notqualify for exemption since the payment of theseFraternal Beneficiarybenefits is not considered as being for charita-Societies (501(c)(8)) ble, educational, or recreational purposes. Simi-larly, a local association of employees that isA fraternal beneficiary society, order, or associa-operated primarily as a cooperative buying serv-tion must file an application for recognition ofice for its members in order to obtain discountexemption from federal income tax on Formprices on merchandise, services, and activities1024. The application and accompanying state-does not qualify for exemption.ments should establish that the organization:




they are or were employees. For example, an gross income, these nondiscrimination require-Voluntary Employees’individual will qualify as an employee even ments do not apply. The benefit will be consid-Beneficiary Associations though the individual is on a leave of absence or ered nondiscriminatory only if it meets the

(501(c)(9)) has been terminated due to retirement, disabil- nondiscrimination provision of the applicableity, or layoff. Code section. For example, benefits provided

An application for recognition of exemption as a Generally, membership is voluntary if an af- under a medical reimbursement plan wouldvoluntary employees’ beneficiary association firmative act is required on the part of an em- meet the nondiscrimination requirements for anmust be filed on Form 1024. The material sub- ployee to become a member. Conversely, association, if the benefits meet the nondiscrimi-mitted with the application must show that your membership is involuntary if the designation as nation requirements of Code section 105(h)(3)organization: a member is due to employee status. However, and 105(h)(4).

an association will be considered voluntary if1. Is a voluntary association of employees, Excluded employees. Certain employeesemployees are required to be members of the

who are not covered by a plan can be excluded2. Will provide for payment of life, sick, acci- organization as a condition of their employmentfrom consideration in applying these require-dent, or other benefits to members or their and they do not incur a detriment (such as aments. These include employees:dependents or designated beneficiaries payroll deduction) as a result of their member-

and substantially all of its operations are ship. An employer has not imposed involuntary 1. Who have not completed 3 years of serv-for this purpose, and membership on the employee if membership is ice,

required as the result of a collective bargaining3. Will not allow any of its net earnings to 2. Who have not attained age 21,agreement or as an incident of membership in ainure to the benefit of any private individuallabor organization. 3. Who are seasonal or less than half-timeor shareholder except in the form of sched-

employees,uled benefit payments. Payment of benefits. The information submit-ted with your application must show that your 4. Who are not in the plan and who are in-To be complete, an application must include aorganization will pay life, sick, accident, supple- cluded in a unit of employees covered by acopy of the document (such as the trust instru-mental unemployment, or other similar benefits. collective bargaining agreement if thement) by which the organization was created; aThe benefits can be provided directly by your class of benefits involved was the subjectfull description of the benefits available to par-association or indirectly by your association of good faith bargaining, orticipants and the terms and conditions of eligibil-through the payments of premiums to an insur-ity for benefits (usually contained in a plan 5. Who are nonresident aliens and who re-ance company (or fees to a medical clinic). Ben-document); and, if providing benefits pursuant to ceive no earned income from the employerefits can be in the form of medical, clinical, ora collective bargaining agreement, a copy of that that has United States source income.hospital services, transportation furnished foragreement.medical care, or money payments.

Highly compensated individual. A highlyNote. Under section 4976, the reversion of compensated individual is one who:Nondiscrimination requirements. An organ-funds from a section 501(c)(9) organization to

ization that is part of a plan will not be exemptthe employer who created the beneficiary asso- 1. Owned 5 percent or more of the employerunless the plan meets certain nondiscriminationciation may subject the employer to a 100 % at any time during the current year or therequirements. However, if the organization ispenalty excise tax on the amount of the rever- preceding year,part of a plan that is a collective bargainingsion.agreement that was the subject of good faith 2. Received more than $110,000 in 2009 (thebargaining between employee organizations amount is adjusted annually for inflation –Notice requirement. An organization will notand employers, the plan need not meet these in 2010 the amount remains at $110,000)be considered tax exempt under this sectionrequirements for the organization to qualify as in compensation from the employer for theunless the organization gives notice to the IRStax exempt. preceding year, andthat it is applying for recognition of exempt sta-

A plan meets the nondiscrimination require-tus. The organization gives notice by filing Form 3. Was among the top 20% of employees byments only if both of the following statements1024. If the notice is not given by 15 months compensation for the preceding year.are true.after the end of the month in which the organiza-But the employer can choose not to have (3)tion was created, the organization will not be 1. Each class of benefits under the plan is apply.exempt for any period before notice is given. An provided under a classification of employ-

extension of time for filing the notice can be Aggregation rules. The employer canees that is set forth in the plan and doesgranted under the same procedures as those choose to treat two or more plans as one plan fornot discriminate in favor of employees whodescribed for section 501(c)(3) organizations in purposes of meeting the nondiscrimination re-are highly compensated individuals.chapter 3 under Application for Recognition of quirements. Employees of controlled groups of

2. The benefits provided under each class ofExemption. corporations, trades, or businesses under com-benefits do not discriminate in favor of mon control, or members of an affiliated service

Membership. Membership of a section highly compensated individuals. group, are treated as employees of a single501(c)(9) organization must consist of individu- employer. Leased employees are treated asA life insurance, disability, severance pay, orals who are employees and have an employ- employees of the recipient.supplemental unemployment compensationment-related common bond. This common bond

benefit does not discriminate in favor of highly One employee. A trust created to providecan be a common employer (or affiliated em-compensated individuals merely because the benefits to one employee will not qualify as aployers), coverage under one or more collectivebenefits available bear a uniform relationship to voluntary employees’ beneficiary associationbargaining agreements, membership in a laborthe total compensation, or the basic or regular under section 501(c)(9).union, or membership in one or more locals of arate of compensation, of employees covered by

national or international labor union.the plan.

The membership of an association can in- SupplementalFor purposes of determining whether a planclude some individuals who are not employees, Unemployment Benefitmeets the nondiscrimination requirements, theprovided they have an employment-related

employer can elect to exclude all disability or Trusts (501(c)(17))bond with the employee-members. For exam-severance payments payable to individuals who

ple, the owner of a business whose employeesare in pay status as of January 1, 1985. This will A trust or trusts forming part of a written plan

are members of the association can be a mem-not apply to any increase in such payment by (established and maintained by an employer, his

ber. An association will be considered com-any plan amendment adopted after June 22, or her employees, or both) providing solely for

posed of employees if 90% of its total1984. the payment of supplemental unemployment

membership on one day of each quarter of itsIf a plan provides a benefit for which there is compensation benefits must file the application

tax year consists of employees.a nondiscrimination provision provided under for recognition of exemption on Form 1024. The

Employees. Employees include individuals Chapter 1 of the Internal Revenue Code as a trust must be a valid, existing trust under localwho became entitled to membership because condition of that benefit being excluded from law and must be evidenced by an executed




document. A conformed copy of the plan of that it will not knowingly again engage in a pro- any excess of payments over losses and ex-hibited transaction. An authorized principal of-which the trust is a part should be attached to penses, and to share in any assets upon disso-ficer of your organization must make thisthe application. lution.declaration under the penalties of perjury.To be complete, an application must include The rights and interests of members in the

If your organization has satisfied all require-a copy of the document (such as the trust instru- annual savings of the organization must be de-ments as a supplemental unemployment benefitment) by which the organization was created; a termined in proportion to their business with thetrust described in section 501(c)(17), it will befull description of the benefits available to par- organization. Upon dissolution, gains from thenotified in writing that it has been recognized asticipants and the terms and conditions of eligibil- sale of appreciated assets must be distributed toexempt. However, the organization will be ex-ity for benefits (usually contained in a plan all persons who were members during the pe-empt only for those tax years after the tax year indocument); and, if providing benefits pursuant to riod the assets were owned by the organizationwhich the claim for exemption (Form 1024) isa collective bargaining agreement, a copy of that in proportion to the amount of business donefiled. Tax year in this case means the estab-agreement. during that period. The bylaws must not providelished annual accounting period of the organiza- for forfeiture of a member’s rights and interesttion or, if the organization has not established anNote. Under Code section 4976, the rever- upon withdrawal or termination.annual accounting period, the calendar year.sion of funds from a section 501(c)(17) organi-

Membership. Membership of a mutual or-For more information about the requirements forzation to the employer who created theganization consists of those who join the organi-reestablishing an exemption previously denied,supplemental unemployment benefit trust mayzation to obtain its services, and have a voice incontact the IRS.subject the employer to a 100% penalty exciseits management. In a stock company, the stock-tax on the amount of the reversion.holders are members. However, a mutual lifeinsurance organization cannot have policyhold-Notice requirement. An organization will noters other than its members.be considered tax exempt under this section 501(c)(12) - Local

unless the organization gives notice to the IRS Losses and expenses. In furnishing serv-Benevolent Lifethat it is applying for recognition of exempt sta- ices substantially at cost, an organization musttus. The organization gives notice by filing Form use its income solely for paying losses and ex-Insurance1024. If the notice is not given by 15 months penses. Any excess income not retained in rea-after the end of the month in which the organiza- sonable reserves for future losses andAssociations, Mutualtion was created, the organization will not be expenses belongs to members in proportion toexempt for any period before such notice is their patronage or business done with the organ-Irrigation andgiven. An extension of time for filing the notice is ization. If such patronage refunds are retained ingranted under the same procedures as those Telephone Companies, reasonable amounts for purposes of expandingdescribed for section 501(c)(3) organizations in

and improving facilities, retiring capital indebted-chapter 3 under Application for Recognition of and Like Organizations ness, acquiring other assets, and unexpectedExemption.

expenses, the organization must maintain rec-Each of the following organizations apply for ords sufficient to reflect the equity of each mem-Types of payments. You must show that the recognition of exemption from federal income ber in the assets acquired with the funds.supplemental unemployment compensation tax by filing Form 1024.

benefits will be benefits paid to an employee Distributions of proceeds. The coopera-because of the employee’s involuntary separa- 1. Benevolent life insurance associations of a tive may distribute the unexpended balance oftion from employment (whether or not the sepa- purely local character and like organiza- collections or assessments remaining on handration is temporary) resulting directly from a tions. at the end of the year to members or patronsreduction-in-force, discontinuance of a plant or prorated on the basis of their patronage or busi-2. Mutual ditch or irrigation companies andoperation, or other similar conditions. In addi- ness done with the cooperative. Such distribu-like organizations.tion, sickness and accident benefits (but not tion represents a refund in the costs of services

3. Mutual or cooperative telephone compa-vacation, retirement, or death benefits) may be rendered to the member.nies and like organizations.included in the plan if these are subordinate to

the unemployment compensation benefits. The 85% RequirementA like organization is an organization that per-forms a service comparable to that performed byDiversion of funds. It must be impossible All of the organizations listed above must submitany one of the above organizations.under the plan (at any time before the satisfac- evidence with their application that they receive The information to be provided upon appli-tion of all liabilities with respect to employees 85% or more of their gross income from theircation by each of these organizations is de-under the plan) to use or to divert any of the members for the sole purpose of meeting lossesscribed in this section. For information as to thecorpus or income of the trust to any purpose and expenses. Nevertheless, certain items ofprocedures to follow in applying for exemption,other than the payment of supplemental unem- income are excluded from the computation ofsee chapter 1.ployment compensation benefits (or sickness or the 85% requirement if the organization is a

accident benefits to the extent just explained). General requirements. These organizations mutual or cooperative telephone or electric com-must use their income solely to cover losses and pany.Discrimination in benefits. Neither the terms expenses, with any excess being returned to

of the plan nor the actual payment of benefits members or retained to cover future losses and Mutual or cooperative telephone company.can be discriminatory in favor of the company’s expenses. They must collect at least 85% of A mutual or cooperative telephone company willofficers, stockholders, supervisors, or highly their income from members for the sole purpose exclude from the computation of the 85% re-paid employees. However, a plan is not discrimi- of meeting losses and expenses. quirement any income received or accrued from:natory merely because benefits bear a uniformMutual character. These organizations, otherrelationship to compensation or the rate of com- 1. A nonmember telephone company for thethan benevolent life insurance associations,pensation. performance of communication services in-must be organized and operated on a mutual or volving the completion of long distanceProhibited transactions and exemption. If cooperative basis. They are associations of per- calls to, from, or between members of theyour organization is a supplemental unemploy- sons or organizations, or both, banded together mutual or cooperative telephone company,ment benefit trust and has received a denial of to provide themselves a mutually desirable serv-

exemption because it engaged in a prohibited 2. Qualified pole rentals,ice approximately at cost and on a mutual basis.transaction, as defined by section 503(b), it can To maintain the mutual characteristic of demo- 3. The sale of display listings in a directoryfile a claim for exemption in any tax year follow- cratic ownership and control, they must be so furnished to its members, oring the tax year in which the notice of denial was organized and operated that their membersissued. It must file the claim on Form 1024. The 4. The prepayment of a loan created in 1987,have the right to choose the management, toorganization must include a written declaration 1988, or 1989, under section 306A, 306B,receive services at cost, to receive a return of




or 311 of the Rural Electrification Act of has no effect upon exemption for years in which include those that in addition to paying deaththe 85% requirement is met. benefits also provide for the payment of sick,1936.

Gain from the sale or conversion of the or- accident, or health benefits. However, an organ-ganization’s property is not considered an ization that pays only sick, accident, or health

Mutual or cooperative electric company. A amount received from members in determining benefits, but not life insurance benefits, is not anmutual or cooperative electric company will ex- whether the organization’s income consists of organization similar to a benevolent life insur-clude from the computation of the 85% require- amounts collected from members. ance association and should not apply for recog-ment any income received or accrued from: Because the 85% income test is based on nition of exemption as described in this section.

gross income, capital losses cannot be used to1. Qualified pole rentals, Burial and funeral benefit insurance or-reduce capital gains for purposes of this test.ganization. This type of organization can ap-2. Any provision or sale of electric energy

Example. The books of an organization reply for recognition of exemption as antransmission services or ancillary service ifflect the following for the calendar year. organization similar to a benevolent life insur-the services are provided on a nondiscrimi-

ance company if it establishes that the benefitsnatory open access basis under an open Collections from members . . . . . . . . $2,400 are paid in cash and if it is not engaged directlyaccess transmission tariff approved or ac- Short-term capital gains . . . . . . . . . 600 in the manufacture of funeral supplies or thecepted by the Federal Energy Regulatory Short-term capital losses . . . . . . . . . 400 performance of funeral services. An organiza-Commission (FERC) or under an indepen- Other income . . . . . . . . . . . . . . . . None tion that provides its benefits in the form ofdent transmission provider agreement ap- Gross income ($2,400 + $600 =$3000) 100% supplies and service is not a life insurance com-proved or accepted by FERC (other than Collected from members ($2,400) . . . 80% pany. Such an organization can seek recogni-income received or accrued directly or indi- tion of exemption from federal income tax,Since amounts collected from members dorectly from a member), however, as a mutual insurance company othernot constitute at least 85% of gross income, the

than life.organization is not entitled to exemption from3. The provision or sale of electric energy dis-federal income tax for the year.tribution services or ancillary services if the

Voluntary contributions in the nature of giftsservices are provided on a nondiscrimina- Mutual or Cooperativeare not taken into account for purposes of thetory open-access basis to distribute elec- Associations85% computation.tric energy not owned by the mutual or

Other tax-exempt income besides gifts iselectric cooperative company: Mutual ditch or irrigation companies, mutual orconsidered as income received from other than cooperative telephone companies, and like or-

a. To end-users who are served by distri- members in applying the 85% test. ganizations need not establish that they are of abution facilities not owned by the com- If the 85% test is not met, your organization, purely local character. They can serve noncon-pany or any of its members (other than if classifiable under this section, will not qualify tiguous areas.income received or accrued directly or for exemption as any other type of organization

Like organization. A like organization is aindirectly from a member), or described in this publication.cooperative or mutual organization that per-

b. Generated by a generation facility not Tax treatment of donations. Donations to an forms a service similar to mutual ditch, irrigation,owned or leased by the company or any organization described in this section are not telephone, or electric companies. Examples in-of its members and which is directly deductible as charitable contributions on the do- clude the following: cooperatives that provideconnected to distribution facilities nor’s federal income tax return. protection of river banks to prevent erosion,owned by the company or any of its water and sewer services, cable television, sat-members (other than income received Local Life Insurance ellite, television, cellular phone services,or accrued directly or indirectly from a two-way radio service, or natural gas services.Associationsmember),

A benevolent life insurance association or an4. Any nuclear decommissioning transaction, organization seeking recognition of exemption

or on grounds of similarity to a benevolent life in- 501(c)(13) - Cemeterysurance association must submit evidence upon5. Any asset exchange or conversion trans-applying for recognition of exemption that it willaction. Companiesbe of a purely local character, that its excess

An electric cooperative’s sale of excess fuel funds will be refunded to members or retained in If your organization wishes to obtain recognitionat cost in the year of purchase is not income for reasonable reserves to meet future losses and of exemption from federal income tax as a cem-purposes of determining compliance with the expenses, and that it meets the 85% income etery company or a corporation chartered solely85% requirement. requirement. If an organization issues policies for the purpose of the disposal of human bodies

for stipulated cash premiums, or if it requires by burial or cremation, it must file an applicationQualified pole rental. The term qualifiedadvance deposits to cover the cost of the insur- on Form 1024. For the procedure to follow to filepole rental means any rental of a pole (or otherance and maintains investments from which an application, see Application, Approval, andstructure used to support wires) if the pole (ormore than 15% of its income is derived, it will not Appeal Procedures in chapter 1.other structure) is used: be entitled to exemption. A nonprofit mutual cemetery company that

To establish that your organization is of a1. By the telephone or electric company to seeks recognition of exemption should submitpurely local character, it should show that itssupport one or more wires that are used by evidence with its application that it is owned andactivities will be confined to a particular commu-the company in providing telephone or operated exclusively for the benefit of its lotnity, place, or district irrespective of political sub-electric services to its members, and owners who hold lots for bona fide burial pur-divisions. If the activities of an organization are poses and not for purposes of resale. A mutual2. Pursuant to the rental to support one or limited only by the borders of a state, it cannot cemetery company that also engages in charita-more wires (in addition to wires described be purely local in character. A benevolent life ble activities, such as the burial of paupers, willin (1)) for use in connection with the trans- insurance association that does not terminate be regarded as operating within this standard.mission by wire of electricity or of tele- membership when a member moves from the The fact that a mutual cemetery company limitsphone or other communications. local area in which the association operates will its membership to a particular class of individu-qualify for exemption if it meets the other re-The term rental, for this purpose, includes als, such as members of a family, will not affectquirements.any sale of the right to use the pole (or other its status as mutual so long as all the other

A copy of each type of policy issued by yourstructure). requirements of section 501(c)(13) are met.organization should be included with the appli-The 85% requirement is applied on the basis If your organization is a nonprofit corporationcation for recognition of exemption.of an annual accounting period. Failure of an chartered solely for the purpose of the disposal

organization to meet the requirement in a partic- of human bodies by burial or cremation, youOrganizations similar to local benevolent lifeular year precludes exemption for that year, but should show that it is not permitted by its charterinsurance companies. These organizations




to engage in any business not necessarily inci- perpetual care and maintenance of an aban-dent to that purpose. Operating a mortuary is not doned cemetery as a whole, may qualify for 501(c)(14) - Creditpermitted. However, selling monuments, mark- exemption.ers, vaults, and flowers solely for use in the Unions and OtherCare of individual plots. When funds arecemetery is permitted if the profits from these

received by a cemetery company for the perpet-sales are used to maintain the cemetery as a Mutual Financialual care of an individual lot or crypt, a trust iswhole.created that is subject to federal income tax. Any Organizations

How income can be used. You should show trust income that is used or permanently setthat your organization’s earnings are or will be aside for the care, maintenance, or beautifica- If your organization wants to obtain recognitionused only in one or more of the following ways. of exemption as a credit union without capitaltion of a particular family burial lot or mausoleum

stock, organized and operated under state lawcrypt is not deductible in computing the trust’s1. To pay the ordinary and necessary ex-for mutual purposes and without profit, it musttaxable income.penses of operating, maintaining, and im-file an application that includes the facts, infor-proving the cemetery or crematorium.mation, and attachments described in this sec-

2. To buy cemetery property. Common and preferred stock. A cemetery tion. In addition, it should follow the procedurescompany that issues common stock can qualify3. To create a fund that will provide a source for filing an application described in Applicationfor exemption only if no dividends may be paid.of income for the perpetual care of the Procedures in chapter 1.The payment of dividends must be legally pro-cemetery or a reasonable reserve for any Federal credit unions organized and oper-hibited either by the corporation’s charter or byordinary or necessary purpose. ated in accordance with the Federal Creditapplicable state law. Union Act, as amended, are instrumentalities ofNo part of the net earnings of your organiza-

Generally, a cemetery company or cremato- the United States and, therefore, are exempttion can inure to the benefit of any private share-rium is not exempt if it issues preferred stock. under section 501(c)(1). They are included in aholder or individual.

Ordinary and necessary expenses in con- group exemption letter issued to the NationalHowever, it can still be exempt if the preferrednection with the operation, management, main- Credit Union Administration. They are not dis-stock was issued before November 28, 1978, ortenance, and improvement of the cemetery are cussed in this publication.was issued after that date under a written planpermitted, as are reasonable fees for the serv- State-chartered credit unions and other mu-adopted before that date. The adoption of theices of a manager. tual financial organizations file applications forplan must be shown by the acts of the responsi-

recognition of exemption from federal incomeBuying cemetery property. Payments can ble officers and appear on the official records oftax under section 501(c)(14). The other mutualbe made to amortize debt incurred to buy land, the organization.financial organizations must be corporations orbut cannot be in the nature of profit distributions.

The preferred stock issued either before No-You must show the method used to finance the associations without capital stock organizedvember 28, 1978, or under a plan adoptedpurchase of the cemetery property and that the before September 1, 1957, and operated forbefore that date, must meet all the followingpurchase price of the land at the time of its sale mutual purposes and without profit to providerequirements.to the cemetery was not unreasonable. reserve funds for, and insurance of, shares or

Except for holders of preferred stock (dis- deposits in:1. The preferred stock entitles the holders tocussed later), no person can have any interest individends at a fixed rate that is not more 1. Domestic building and loan associations,the net earnings of a tax-exempt cemetery com-than the greater of the legal rate of interestpany or crematorium. Therefore, if property is 2. Cooperative banks (without capital stock)in the state of incorporation or 8% a yeartransferred to the organization in exchange for

organized and operated for mutual pur-on the value of the consideration for whichan interest in the organization’s net earnings,poses and without profit,the organization will not be exempt so long as the stock was issued.

that interest remains outstanding. 3. Mutual savings banks (not having capital2. The organization’s articles of incorporationAn equity interest in the organization is an stock represented by shares), or

require:interest in the net earnings of the organization.4. Mutual savings banks described in sectionHowever, an interest in the organization that is a. That the preferred stock be retired at 591(b).not an equity interest may still be an interest in

par as rapidly as funds become avail-the organization’s net earnings. For example, a Similar organizations, formed before Septemberable from operations, andbond issued by a cemetery company that pro- 1, 1957, that provide reserve funds for (but notvides for a fixed rate of interest and also pro- b. That all funds not required for the pay- insurance of shares or deposits in) one of thevides for additional interest payments based on ment of dividends on or for the retire- types of savings institutions described in (1), (2),the income of the organization is considered an ment of preferred stock be used by the or (3) above may be exempt from tax if 85% orinterest in the net earnings of the organization. more of the organization’s income is from pro-company for the care and improvementSimilarly, a convertible debt obligation issued

viding reserve funds and from investments.of the cemetery property.after July 7, 1975, is considered an interest inThere is no specific restriction against the issu-the net earnings of the organization.ance of capital stock for these organizations.

Perpetual care organization. A perpetual Building and loan associations, savings andTax treatment of donations. Donations tocare organization, including, for example, a trust loan associations, mutual savings banks, andexempt cemetery companies, corporationsorganized to receive, maintain, and administer cooperative banks, other than those describedchartered solely for human burial purposes, andfunds that it receives from a nonprofit in this section, are not exempt from tax. How-perpetual care funds (operated in connectiontax-exempt cemetery under state law and con- ever, certain corporations organized and oper-tracts, can apply for recognition of exemption on with such exempt organizations) are deductible

ated in conjunction with farmers’ cooperativesForm 1024, even though it does not own the as charitable contributions on the donor’s fed- can be exempt under section 521.land used for burial. However, the income from eral income tax return. However, a donor cannotthese funds must be devoted exclusively to the deduct a contribution made for the perpetual Application form. The IRS does not provide aperpetual care and maintenance of the nonprofit care of a particular lot or crypt. Payments made printed application form for the use of organiza-cemetery as a whole. Also, no part of the net to a cemetery company or corporation as part of tions described in this section. Any form of writ-earnings can inure to the benefit of any private

the purchase price of a burial lot or crypt, ten application is acceptable as long as it showsshareholder or individual.whether irrevocably dedicated to the perpetual the information indicated in this section and in-In addition, a perpetual care organization notcare of the cemetery as a whole or earmarked cludes a declaration that it is made under theoperated for profit, but established as a civicfor the care of a particular lot, are also not penalties of perjury. The application must beenterprise to maintain and administer funds, the

submitted in duplicate.deductible.income of which is devoted exclusively to the




income is from providing reserve funds and from 7. To provide insurance benefits for its mem-State-Charteredbers or dependents of its members orinvestments. There should be attached a con-Credit Unions both.formed copy of the articles of incorporation or

other document setting forth the permitted pow-Your organization must show on its application 8. To provide social and recreational activi-ers or activities of the organization; the bylaws orthat it is formed under a state credit union law, ties for its members.other similar code of regulations; and the latestthe state and date of incorporation, and that theannual financial statement showing the receipts,state credit union law with respect to loans, Auxiliary unit. An auxiliary unit or society of adisbursements, assets, and liabilities of the or-investments, and dividends, if any, is being com- veterans’ organization can apply for recognitionganization.plied with. of exemption provided that the veterans’ organi-

A form of statement furnished to applicants zation (parent organization) meets the require-by the Credit Union National Association is ac- ments explained earlier in this section. Theceptable in meeting the application require- auxiliary unit or society must also meet all thements for credit unions, and may be used 501(c)(19) - Veterans’ following additional requirements.instead of the statement form of application justdescribed. The following is a reproduction of that Organizations 1. It is affiliated with, and organized in accor-form. dance with, the bylaws and regulations for-

A post or organization of past or present mem- mulated by the parent organization.Claim for Exemption from Federal Income bers of the Armed Forces of the United States

2. At least 75% of its members are eitherT a x ( D a t e ) T h e must file Form 1024 to apply for recognition ofpast or present members of the U.S.undersigned (Complete name) exemption from federal income tax. You shouldArmed Forces, spouses of those mem-Credit Union, Inc., (Complete ad- follow the general procedures outlined in chap- bers, or related to those members withindress, including street and number), a credit ter 1. The organization must also meet the quali- two degrees of kinship (grandparent,union operating under the credit union law of the fications described in this section. brother, sister, and grandchild representState of , claims exemption from Examples of groups that qualify for exemp- the most distant allowable relationship).federal income tax and supplies the following tion are posts or auxiliaries of the American

information relative to its operation. 3. All of its members either are members ofLegion, Veterans of Foreign Wars, and similarthe parent organization, spouses of aorganizations.1. Date of incorporation .member of the parent organization, or re-To qualify for recognition of exemption, your

2. It was incorporated under the credit union lated to a member of such organizationapplication should show:law of the State of , and is within two degrees of kinship.being operated under uniform bylaws 1. That the post or organization is organized 4. No part of its net earnings inure to theadopted by said state. in the United States or any of its posses- benefit of any private shareholder or indi-

sions,3. In making loans, the state credit union law vidual.requirements, including their purposes, se- 2. That at least 75% of the members are pastcurity, and rate of interest charged or present members of the U.S. Armed Trusts or foundations. Trusts or foundationsthereon, are complied with. for a veterans’ organization also can apply forForces and that at least 97.5% of all mem-

recognition of exemption provided that the par-bers of the organization are past or pres-4. Its investments are limited to securitiesent organization meets the requirements ex-ent members of the U.S. Armed Forces,which are legal investments for credit un-plained earlier. The trust or foundation must alsocadets (including only students in collegeions under the state credit union law.meet all the following qualifications.or university ROTC programs or at armed

5. Its dividends on shares, if any, are distrib- services academies) or spouses, widows,uted as prescribed by the state credit 1. The trust or foundation is in existencewidowers, ancestors, or lineal descendantsunion law. under local law and, if it is organized forof any of those listed here, and

charitable purposes, has a dissolution pro-I, the undersigned, a duly authorized officer of 3. That no part of net earnings inure to the vision similar to charitable organizations.the Credit Union, Inc., declare benefit of any private shareholder or indi- (See Articles of Organization in chapter 3that the above information is a true statement ofvidual. of this publication.)facts concerning the credit union.

In addition to these requirements, a veter- 2. The corpus or income cannot be divertedS i g n a t u r e o fans’ organization also must be operated exclu- or used other than for:Officer Titlesively for one or more of the following purposes.

a. The funding of a veterans’ organization,Other Mutual 1. To promote the social welfare of the com- described in this section,Financial Organizations munity (that is, to promote in some way the b. Religious, charitable, scientific, literary,

common good and general welfare of the or educational purposes or for the pre-Every other organization included in this section people of the community). vention of cruelty to children or animals,must show in its application the state in whichor2. To assist disabled and needy war veteransthe organization is incorporated and the date of

and members of the U.S. Armed Forcesincorporation; the character of the organization; c. An insurance set aside.and their dependents and the widows andthe purpose for which it was organized; its actualorphans of deceased veterans.activities; the sources of its receipts and the 3. The trust income is not unreasonably ac-

disposition thereof; whether any of its income cumulated and, if the trust or foundation is3. To provide entertainment, care, and assis-may be credited to surplus or may benefit any not an insurance set aside, a substantialtance to hospitalized veterans or membersprivate shareholder or individual; whether the portion of the income is in fact distributedof the U.S. Armed Forces.law relating to loans, investments, and dividends to the parent organization or for the pur-

4. To carry on programs to perpetuate theis being complied with; and, in general, all facts poses described in item 2(b).relating to its operations that affect its right to memory of deceased veterans and mem-

4. It is organized exclusively for one or moreexemption. bers of the Armed Forces and to comfortof the purposes listed earlier in this sectiontheir survivors.The application must include detailed infor-that are specifically applicable to the par-mation showing either that the organization pro- 5. To conduct programs for religious, charita- ent organization.vides both reserve funds for and insurance of ble, scientific, literary, or educational pur-

shares and deposits of its member financial or- poses.ganizations or that the organization provides Tax treatment of donations. Donations to

6. To sponsor or participate in activities of areserve funds for shares or deposits of its mem- war veterans’ organizations are deductible asbers and 85% or more of the organization’s patriotic nature. charitable contributions on the donor’s federal




income tax return. At least 90% of the organiza- d. To pay accident and health benefits or must file its application on Form 1024. The infor-tion’s membership must consist of war veterans. insurance premiums and other adminis- mation to submit upon application is describedThe term war veterans means persons, whether trative expenses for retired coal miners in this section. For a discussion of the proce-or not present members of the U.S. Armed and their spouses. The amount of as- dures for obtaining recognition of exemption,Forces, who have served in the U.S. Armed sets available for such use is generally see chapter 1, Application Procedures.Forces during a period of war (including the limited to 110% of the present value of You must show that your organization is aKorean and Vietnam conflicts, the Persian Gulf the liability for black lung benefits. corporation. If you are in doubt as to whetherwar, and later declared wars). your organization qualifies as a corporation for

2. No part of its assets can be used for, or this purpose, contact your IRS office.diverted to, any purposes other than: A title-holding corporation will qualify for ex-

emption only if there is effective ownership anda. The purposes described in 1,501(c)(20) - Group control over it by the distributee exempt organi-

zation. For example, the distributee organizationb. Payments into the Black Lung DisabilityLegal Services Plan may control the title-holding corporation by own-Trust Fund or into the general fund ofing its voting stock or possessing the power tothe U.S. Treasury (other than in satis-Organizations select nominees to hold its voting stock.faction of any tax or other civil or crimi-

nal liability of the person whoAn organization or trust created in the U.S. for Corporate charter. The corporate charterestablished or contributed to the trust),the exclusive function of forming a part of a must confine the purposes and powers of your

c. Investment in public debt securities ofqualified group legal services plan or plans can- organization to holding title to property, collect-the U.S., obligations of a state or localnot be exempt under section 501(c)(20) after ing income from the property, and turning thegovernment that are not in default as toJune 30, 1992. However, an organization that income over to an exempt organization. If theprincipal or interest, or time or demandhas already received a determination or ruling charter authorizes your organization to engagedeposits in a bank or an insured creditletter from the IRS recognizing its exemption in activities that go beyond these limits, its ex-union located in the United States.under section 501(c)(2) may, if it otherwise qual- emption may not be recognized even if its actual(These investments are restricted to theifies, request a ruling or determination modifying operations are so limited. If your organization’sextent that the trustee determines that aits exemption from section 501(c)(2) to section original charter does not limit its powers, you canportion of the assets is not currently501(c)(9) effective July 1, 1992. amend the charter to conform to the requiredneeded for the purposes described in limits and submit evidence with your application1.) that the charter has been amended.

Payment of income. You must show that your501(c)(21) - Black LungAn annual information return is required of corporation is required to turn over the entire

exempt trusts described in section 501(c)(21).Benefit Trusts income from the property, less expenses, to oneForm 990-BL, Information and Initial Excise Tax or more exempt organizations.Return for Black Lung Benefit Trusts and Cer-If your organization wishes to obtain recognition Actual payment of the income is required. Atain Related Persons, must be used for thisof exemption as a black lung benefit trust, it must mere obligation to use the income for the ex-purpose. A trust that normally has gross receiptsfile its application by letter and include a copy of empt organization’s benefit, or the fact that suchin each tax year of no more than $25,000 isits trust instrument. The general procedures to organization has control over the income doesexcepted from this filing requirement. However,follow for obtaining recognition are discussed in not satisfy this requirement.it must submit an annual electronic notice, Formchapter 1 of this publication. This section de-990-N (e-Postcard). Expenses. Expenses may reduce thescribes the additional (or specific) information to

amount of income required to be turned over tobe provided upon application. Excise taxes. See Chapter 5 for informa-the tax-exempt organization for which your or-tion on the excise tax that may be imposed onRequirements. A black lung benefit trust that ganization holds property. The term expensesthe organization.

is established in writing, created or organized in (for this purpose) includes not only ordinary andthe United States, and contributed to by any necessary expenses paid or incurred, but alsoTax treatment of donations. Contributionsperson (except an insurance company) will qual- reasonable additions to depreciation reservesby a taxpayer (generally, the coal mine operator)ify for tax-exempt status if it meets both of the and other reserves that would be proper for ato a black lung benefit trust are deductible forfollowing requirements. The trust must be irrevo- business corporation holding title to and main-federal income tax purposes under section 192.cable and there can be no right or possibility or taining property.The deduction is limited, and any excess contri-reversion of the corpus or income of the trust to In addition, the title-holding corporation canbutions are subject to an excise tax of 5%. Formthe coal mine operator or other creator, except retain part of its income each year to apply to6069, Return of Excise Tax on Excess Contribu-that the creator may recover excess contribu- debt on property to which it holds title. Thistions to Black Lung Benefit Trust Under Sectiontions. transaction is treated as if the income had been4953 and Computation of Section 192 Deduc-

turned over to the exempt organization and thetion, is used to compute the allowable deduction1. Its only purpose is: latter had used the income to make a contribu-and any excise tax liability. The form does nottion to the capital of the title-holding corporationhave to be filed if there is no excise tax liability.a. To satisfy in whole or in part the liabilitythat in turn applied the contribution to the debt.For more information about these contributions,of that person (generally, the coal mine

see Form 6069 and its instructions.operator contributing to the trust) for, or Waiver of payment of income. Generally,with respect to, claims for compensa- there is no payment of rent when the occupant oftion arising under federal or state stat- property held by your title-holding corporation isutes for disability or death due to the exempt organization for which your corpora-pneumoconiosis, tion holds the title. In this situation, the statutory501(c)(2) - Title-Holding

requirement that income be paid over to theb. To pay the premiums for insurance that Corporations for Single exempt organization is satisfied if your corpora-covers only that liability,tion turns over whatever income is available.

c. To pay the administrative and other in- Parentscidental expenses of that trust (includ- Application for recognition of exemption.ing legal, accounting, actuarial, and If your organization wants to obtain recognition In addition to the information required by Formtrustee expenses) in connection with of exemption from federal income tax as a cor- 1024, the title-holding corporation must furnishthe operation of the trust and process- poration organized to hold title to property, col- evidence that the organization for which title ising of black lung claims against such lect income from that property, and turn over the held has obtained recognition of exempt status.person arising under federal or state entire amount less expenses to a single parent If that organization has not been specificallystatutes, and organization that is exempt from income tax, it notified in writing by the IRS that it is exempt, the




title-holding corporation must submit the neces- 1. By selling or exchanging their stock orsary application and supporting documents to beneficial interest to any organization de- 501(c)(26) -enable the IRS to determine whether the organi- scribed in section 501(c)(25)(C), providedzation for which title is held qualifies for exemp- State-Sponsoredthat the sale or exchange does not causetion. A copy of a ruling or determination letter the number of shareholders or beneficia-issued to the organization for which title is held High-Risk Healthries to exceed 35.will be proof that it qualifies for exemption. How-

2. By having their stock or beneficial interest Coverageever, until the organization for which title is heldredeemed by the section 501(c)(25) organ-obtains recognition of exempt status or proof is Organizationssubmitted to show that it qualifies, the ti- ization upon 90 days notice.

tle-holding corporation cannot obtain recogni-If state law prevents a corporation from including A state-sponsored organization established totion of exemption.in its articles of incorporation the above provi- provide medical care to high-risk individualssions, such provisions must instead be included should apply by letter for recognition of exemp-Tax treatment of donations. Donations to anin the bylaws of the corporation. tion from federal income tax under sectionexempt title-holding corporation generally are

501(c)(26).not deductible as charitable contributions on the A 501(c)(25) organization can be organizedTo qualify for exemption, the organizationdonor’s federal income tax return. as a nonstock corporation if its articles of incor-

must be a membership organization establishedporation or bylaws provide members with theby a state exclusively to provide coverage forsame rights as described above.medical care on a nonprofit basis to high-riskindividuals who are state residents. It can pro-501(c)(25) -

Subsidiaries. A wholly owned subsidiary will vide coverage either by issuing insurance itselfor by entering into an arrangement with a healthnot be treated as a separate corporation, and allTitle-Holdingmaintenance organization (HMO).assets, liabilities, and items of income, deduc-

The state must determine the composition oftion, and credit will be treated as belonging toCorporations or Trustsmembership in the organization. No part of thethe section 501(c)(25) organization. Subsidiar-net earnings of the organization can inure to thefor Multiple Parents ies should not apply separately for recognition ofbenefit of any private shareholder or individual.exemption.

If your organization wants to obtain recognitionHigh-risk individuals. These are individuals,of exemption from federal income tax as antheir spouses and qualifying children, who, be-Tax treatment of donations. Donations to anorganization organized for the exclusive pur-cause of a pre-existing medical condition:exempt title-holding corporation generally arepose of acquiring, holding title to, and collecting

not deductible as charitable contributions on theincome from real property, and turning over the 1. Cannot get medical care coverage for thatentire amount less expenses to member organi- donor’s federal income tax return. condition through insurance or an HMO, orzations exempt from income tax, it should file its

2. Can get coverage for that condition only atapplication on Form 1024. For a discussion of Unrelated Business Incomea rate that is substantially higher than thethe procedures for obtaining recognition of ex-rate for the same coverage from theemption, see chapter 1, Application Procedures. In general, the receipt of unrelated businessstate-sponsored organization.income by a section 501(c)(25) organization will

Who can control the organization. Organi- subject the organization to loss of exempt statuszations recognized as exempt under this section since the organization cannot be exempt fromcan have up to 35 shareholders or beneficiaries, taxation if it engages in any business other thanin contrast to title-holding organizations recog-

that of holding title to real property and collecting 501(c)(27) - Qualifiednized as exempt under section 501(c)(2), whichthe income from the property. However, exemptcan have only one controlling parent organiza- State-Sponsoredstatus generally will not be affected by the re-tion.ceipt of debt-financed income that is treated as Workers’unrelated business taxable income solely be-Organizational requirements. A 501(c)(25)cause of section 514.organization must be either a corporation or a Compensation

trust. Only one class of stock is permitted in the Under section 514(c)(9), certain sharehold-case of a corporation. In the case of a trust, only ers or beneficiaries are not subject to unrelated Organizationsone class of beneficial interest is allowed. debt-financed income tax under section 514 on

Organizations eligible to acquire or hold in- their investments through the organization. 501(c)(27)(A) -- Pre-June 1, 1986, Organiza-terests in this type of title-holding organization These shareholders are generally schools, col- tions. A state-sponsored workers’ compensa-are qualified pension, profit-sharing, or stock leges, universities, or supporting organizations tion reinsurance organization should apply bybonus plans, governmental plans, governmentsof such educational institutions. Organizations letter for recognition of exemption from federaland their agencies and instrumentalities, and

income tax under section 501(c)(27).other than these will take into account as grosscharitable organizations.To qualify for exemption, any membershipincome from an unrelated trade or business their

The articles of incorporation or trust instru- organization must meet all the following require-pro rata share of income that is treated as unre-ment must include provisions showing that the ments.lated debt-financed income because sectioncorporation or trust is organized to meet the514(c)(9) does not apply. These organizationsrequirements of the statute, including compli- 1. It was established by a state before Junewill also take their pro rata share of the allowableance with the limitations on membership and 1, 1986, exclusively to reimburse its mem-deductions from unrelated taxable income.classes of stock or beneficial interest, and com- bers for losses under workers’ compensa-

pliance with the income distribution require- tion acts.ments. The organizing document must permit Real property. Real property can include per- 2. The state requires that the membershipthe organization’s shareholders or beneficiaries sonal property leased in connection with real consist of all persons who issue insuranceto dismiss the organization’s investment advi- property, but only if the rent from the personal covering workers’ compensation losses insor, if any, upon a vote of the shareholders or

property is not more than 15% of the total rent the state and all persons and governmentbeneficiaries holding a majority interest in thefor both the real property and the personal prop- entities who self-insure against thoseorganization.erty. losses.

The organizing document must permit theReal property acquired after June 10, 1987,shareholders or beneficiaries to terminate their 3. It operates as a nonprofit organization by

cannot include any interest as a tenant in com-interests by at least one of the following meth- returning surplus income to its members ormon (or similar interest) or any indirect interest.ods. workers’ compensation policyholders on a




periodic basis and by reducing initial pre- • Excise taxes on private foundations 2. Religious or apostolic associations or cor-miums in anticipation of investment in- porations described in section 501(d).• Excise taxes on 501(c)(21) black lungcome.

3. Entities described in section 170(c), includ-benefit trustsing states, possessions of the United

501(c)(27)(B) -- Organizations formed after States, the District of Columbia, politicalUseful ItemsDecember 31, 1987. Any organization (includ- subdivisions of states and political subdivi-

ing a mutual insurance company) can qualify for You may want to see: sions of possessions of the United Statesexemption if it meets all of the following require- (but not including the United States).ments. Forms (and Instructions)

4. Indian tribal governments within the mean-1. It is created by state law and is organized ing of section 7701(a)(40).❏ 4720 Return of Certain Excise Taxes

and operated under state law exclusively Under Chapters 41 and 42 of theto: Internal Revenue Code

Entity manager. An entity manager is anyperson with authority or responsibility similar toa. Provide workmen’s compensation insur- See chapter 6 for more information about get-that exercised by an officer, director, or trustee,ance which is required by state law or ting this form.and, for any act, the person that has authority orstate law must provide significant disin-responsibility with respect to the prohibitedcentives if employers fail to purchasetransaction.such insurance, and

b. Provide related coverage which is inci- Prohibited Tax Shelter Prohibited tax shelter transaction. A prohib-dental to workmen’s compensation in- ited tax shelter transaction is any listed transac-surance. Transactions tion, within the meaning of section 6707A(c)(2),

and any prohibited reportable transactions. A2. It provides workmen’s compensation insur- Section 4965 imposes an excise tax on: prohibited reportable transaction is a confiden-

ance to any employer in the state (for em-tial transaction within the meaning of Regula-• Certain tax-exempt entities that are partyployees in the state or temporarilytions section 1.6011-4(b)(3), and a transactionto prohibited tax shelter transactions, andassigned out-of-state) which seeks suchwith contractual protection within the meaning of

insurance and meets other reasonable re- • Any entity manager who approves or oth- Regulations section 1.6011-4(b)(4). See the In-quirements relating to the insurance. erwise causes the entity to be a party to a structions for Form 8886 for more information on

prohibited tax shelter transaction and3. The state makes a financial commitment to listed transactions and prohibited reportableknows or has reason to know that thesuch organization either by extending its transactions.transaction is a prohibited tax shelterfull faith and credit to the initial debt of thetransaction.organization or by providing the initial op- Subsequently listed transaction. Any trans-

erating capital of the organization. action to which the tax-exempt entity is a partyand is later determined to be a listed transactionAdditionally, section 6033 provides new disclo-4. The assets of the organization revert to theafter the entity has become a party to it, is asure requirements on a tax-exempt entity that isstate upon dissolution or the organizationsubsequently listed transaction.a party to a prohibited tax shelter transaction.is not permitted to dissolve under state

law.Tax-exempt entities. Tax-exempt entities

5. The majority of the board of directors or that are subject to section 4965 include:oversight body of such organization are

Entity Level Taxappointed by the chief executive officer or 1. Entities described in section 501(c), includ-other executive branch official of the state, ing but not limited to the following common Section 4965(a)(1) imposes an entity level ex-by the state legislature, or by both. types of entities: cise tax on any tax-exempt entity described in 1,

2, 3, or 4 above that becomes a party to aa. Instrumentalities of the United Statesprohibited tax shelter transaction or is a party todescribed in section 501(c)(1);a subsequently listed transaction (defined ear-

b. Churches, hospitals, museums, lier). The excise tax imposed on a tax-exemptschools, scientific research organiza- entity applies to tax years in which the entitytions, and other charities described in becomes a party to the prohibited tax shelter

transaction and any subsequent tax years. Thesection 501(c)(3);5.amount of the excise tax depends on whether

c. Civic leagues, social welfare organi- the tax-exempt entity knew or had reason tozations, and local associations of em- know that the transaction was a prohibited taxployees described in section 501(c)(4);Excise Taxes shelter transaction at the time it became a party

to the transaction.d. Labor, agricultural, or horticultural or-To figure and report the excise tax imposedganizations described in section

on a tax-exempt entity for being a party to a501(c)(5);Introductionprohibited tax shelter transaction, file Form

e. Business leagues, chambers of com-An excise tax may be imposed on certain 4720.merce, trade associations, and other or-tax-exempt organizations. For more information about this excise tax,ganizations described in section including information about how it is figured, see501(c)(6);Topics the Instructions for Form 4720.

This chapter discusses: f. Voluntary employees’ beneficiary as-sociations (VEBAs) described in section• Prohibited tax shelter transactions Manager Level Tax501(c)(9);

• Excess benefit transactions g. Credit unions described in section Section 4965(a)(2) imposes an excise tax on501(c)(14); any tax-exempt entity manager who approves or• Excess business holdings

otherwise causes the entity to be a party to ah. Insurance companies described in• Taxable distributions of sponsoring organi-prohibited tax shelter transaction and knows (orsection 501(c)(15); andzationshas reason to know) that the transaction is a

i. Veterans’ organizations described in• Taxes on prohibited benefits distributed prohibited tax shelter transaction. The excisesection 501(c)(19).from donor advised funds tax, in the amount of $20,000, is assessed for

Chapter 5 Excise Taxes Page 57REL 00941



each approval or other act causing the organiza- • The date on which the initial tax on the provided by the organization exceeds the valuetion to be a party to the prohibited tax shelter excess benefit transaction for the disquali- of the consideration (including the performancetransaction. To report this tax, file Form 4720. fied person is assessed. of services) received for providing such benefit.

The excess benefit transaction rules apply to alltransactions with disqualified persons, regard-Tax on Organization less of whether the amount of the benefit pro-

Managers vided is determined in whole or in part by theExcess Benefitrevenues of one or more activities of the organi-

If tax is imposed on a disqualified person for any zation.Transactionsexcess benefit transaction, an excise tax equalto 10% of the excess benefit is imposed on an

Excise tax on excess benefit transactions. To determine whether an excess benefitorganization manager who knowingly partici-A disqualified person who benefits from an ex- transaction has occurred, all consideration andpated in an excess benefit transaction, unlesscess benefit transaction, such as compensation, benefits exchanged between a disqualified per-such participation was not willful and was due tofringe benefits, or contract payments from cer- son and the applicable tax-exempt organization,reasonable cause. This tax cannot exceedtain section 501(c)(3) or 501(c)(4) organiza- and all entities it controls, are taken into account.$20,000 ($10,000 for transactions entered in ations, may have to pay an excise tax under For purposes of determining the value of eco-tax year beginning before August 18, 2006), forsection 4958. A manager of the organization nomic benefits, the value of property, includingeach transaction. There is also joint and severalmay also have to pay an excise tax under sec- the right to use property, is the fair market value.liability for this tax. A person can be liable fortion 4958. These taxes are reported on Form Fair market value is the price at which property,both the tax paid by the disqualified person and4720. or the right to use property, would change handsthe organization manager tax.

The excise taxes are imposed if an applica- between a willing buyer and a willing seller,An organization manager is any officer, di-ble tax-exempt organization provides an excess neither being under any compulsion to buy, sell,rector, or trustee of an applicable tax-exemptbenefit to a disqualified person and that benefit or transfer property or the right to use property,organization, or any individual having powers orexceeds the value of the benefit an organization and both having reasonable knowledge of rele-responsibilities similar to officers, directors, orreceived in the exchange. vant facts.trustees of the organization, regardless of title.

There are three taxes under section 4958.An organization manager is not considered to

Disqualified persons are liable for the first two Donor advised fund transactions occurringhave participated in an excess benefit transac-taxes and certain organization managers are after August 17, 2006. For a donor advisedtion where the manager has opposed the trans-liable for the third tax. fund, an excess benefit transaction includes aaction in a manner consistent with the fulfillment

Taxes imposed on excess benefit transac- grant, loan, compensation, or other similar pay-of the manager’s responsibilities to the organi-tions apply to transactions occurring on or after ment from the fund to a:zation. For example, a director who votesSeptember 14, 1995. However, these taxes do

against giving an excess benefit would ordinarily • Donor or donor advisor,not apply to a transaction under a written con-not be subject to the 10% tax.

tract that was binding on September 13, 1995, • Family member of a donor, or donor advi-A person participates in a transaction know-and at all times thereafter before the transaction sor,ingly if the person:occurred.• 35% controlled entity of a donor, or donor• Has actual knowledge of sufficient facts so

advisor, orthat, based solely upon those facts, suchTax on Disqualified Personstransaction would be an excess benefit • 35% controlled entity of a family member

An excise tax equal to 25% of the excess benefit transaction; of a donor, or donor advisor.is imposed on each excess benefit transaction • Is aware that such a transaction underbetween an applicable tax-exempt organization The excess benefit in this transaction is thethese circumstances may violate the provi-and a disqualified person. The disqualified per- amount of the grant, loan, compensation, orsions of federal tax law governing excessson who benefited from the transaction is liable other similar payment. For additional informa-benefit transactions; andfor the tax. tion see the Instructions for Form 4720.

• Negligently fails to make reasonable at-Additional tax on the disqualified person. If tempts to ascertain whether the transac- Supporting organization transactions occur-the 25% tax is imposed and the excess benefit tion is an excess benefit transaction, or ring after July 25, 2006. For any supportingtransaction is not corrected within the taxable the manager is in fact aware that it is such organization, defined in section 509(a)(3), anperiod, an additional excise tax equal to 200% of a transaction. excess benefit transaction includes grants,the excess benefit is imposed on any disquali-

loans, compensation, or other similar paymentKnowing does not mean having reason to know.fied person involved.provided by the supporting organization to a:The organization manager ordinarily will not beIf a disqualified person makes a payment of

considered knowing if, after full disclosure of theless than the full correction amount, the 200% • Substantial contributor,factual situation to an appropriate professional,tax is imposed only on the unpaid portion of the • Family member of a substantial contribu-the organization manager relied on the profes-correction amount. If more than one disqualified

tor,sional’s reasoned written opinion on mattersperson received an excess benefit from an ex-within the professional’s expertise or if the man-cess benefit transaction, all such disqualified • 35% controlled entity of a substantial con-ager relied on the fact that the requirements forpersons are jointly and severally liable for the tributor, orthe rebuttable presumption of reasonablenesstaxes. • 35% controlled entity of a family memberhave been satisfied. Participation by an organi-To avoid the 200% tax, a disqualified person

of a substantial contributor.zation manager is willful if it is voluntary, con-must correct the excess benefit transaction dur-scious, and intentional. An organizationing the taxable period. The 200% tax is abated

Additionally, an excess benefit transaction in-manager’s participation is due to reasonable(refunded if collected) if the excess benefitcludes any loans provided by the supportingcause if the manager has exercised responsibil-transaction is corrected within a 90-day correc-organization to a disqualified person (other thanity on behalf of the organization with ordinarytion period beginning on the date a statutoryan organization described in section 509(a)(1),business care and prudence.notice of deficiency is issued.(2), or (4)).

Taxable period. The taxable period means The excess benefit for substantial contribu-Excess Benefit Transactionthe period beginning with the date on which the tors and parties related to those contributorsexcess benefit transaction occurs and ending on includes the amount of the grant, loan, compen-An excess benefit transaction is a transaction inthe earlier of: sation, or other similar payment. For additionalwhich an economic benefit is provided by an

information see the Instructions for Form 4720.• The date a notice of deficiency was mailed applicable tax-exempt organization, directly orExcess benefit transaction rules generally doto the disqualified person for the initial tax indirectly, to or for the use of any disqualified

not apply to transactions between a supportingon the excess benefit transaction, or person, and the value of the economic benefit

Page 58 Chapter 5 Excise Taxes REL 00942



organization and its supported organization that Exception. For a correction of an excess Investment advisor. Investment advisoris described in sections 501(c)(4), (5), or (6). benefit transaction (discussed earlier), no means for any sponsoring organization, any per-

amount repaid in a manner prescribed by the son compensated by such organization (but notSecretary can be held in a donor advised fund. an employee of such organization) for managing

Date of Occurrence the investment of, or providing investment ad-vice for, assets maintained in donor advised

An excess benefit transaction occurs on the Applicable Tax-Exempt funds maintained by such sponsoring organiza-date the disqualified person receives the eco- Organization tion.nomic benefit from the organization for federal

Substantial contributor. In general, a sub-income tax purposes. However, when a single An applicable tax-exempt organization is a sec-stantial contributor means any person who con-contractual arrangement provides for a series of tion 501(c)(3) or 501(c)(4) organization that istributed or bequeathed an aggregate of morecompensation or other payments to or for the tax-exempt under section 501(a), or was suchthan $5,000 to the organization, if that amount isuse of a disqualified person during the disquali- an organization at any time during a 5-year pe-more than 2% of the total contributions andfied person’s tax year, any excess benefit trans- riod ending on the day of the excess benefitbequests received by the organization beforeaction with respect to these payments occurs on transaction.the end of the tax year of the organization inthe last day of the taxpayer’s tax year. An applicable tax-exempt organization does which the contribution or bequest is received byIn the case of benefits provided to a qualified not include: the organization from such person. A substantialpension, profit-sharing, or stock bonus plan, thecontributor includes the grantor of a trust.transaction occurs on the date the benefit is 1. A private foundation as defined in section

vested. In the case of the transfer of property 509(a), Family members. Family members of a dis-subject to a substantial risk of forfeiture, or in the qualified person include a disqualified person’s2. A governmental entity that is:case of rights to future compensation or prop- spouse, brothers or sisters (whether by whole orerty, the transaction occurs on the date the prop- a. Exempt from (or not subject to) taxation half-blood), spouses of brothers or sisterserty, or the rights to future compensation or without regard to section 501(a), or (whether by whole or half-blood), ancestors,property, is not subject to a substantial risk of children (including a legally adopted child),b. Not required to file an annual return,forfeiture. Where the disqualified person elects grandchildren, great grandchildren, andto include an amount in gross income in the tax spouses of children, grandchildren, and great3. A foreign organization, recognized by theyear of transfer under section 83(b), the excess grandchildren (whether by whole or half-blood).IRS or by treaty, that receives substantiallybenefit transaction occurs on the date the dis-

all of its support (other than gross invest-qualified person receives the economic benefit 35% controlled entity. The term 35% con-ment income) from sources outside thefor federal income tax purposes. trolled entity means:United States.

1. A corporation in which a disqualified per-Correcting the excess benefit. An excess An organization is not treated as a section son owns more than 35% of the total com-benefit transaction is corrected by undoing the 501(c)(3) or 501(c)(4) organization for any pe- bined voting power,excess benefit to the extent possible, and by riod covered by a final determination that thetaking any additional measures necessary to 2. A partnership in which such persons ownorganization was not tax-exempt under sectionplace the organization in a financial position not more than 35% of the profits interest, or501(a), but only if the determination was notworse than what it would have been if the dis- based on private inurement or one or more ex- 3. A trust or estate in which such personsqualified person were dealing under the highest cess benefit transactions. own more than 35% of the beneficial inter-fiduciary standards.

est.A disqualified person corrects an excess

benefit by making a payment in cash or cash In determining the holdings of a businessDisqualified Personequivalents, excluding payment by a promissory enterprise, any stock or other interest owned

A disqualified person is:note, equal to the correction amount to the appli- directly or indirectly shall apply.cable tax-exempt organization. The correction • Any person (at any time during the 5-year Persons having substantial influence. Per-amount equals the excess benefit plus the inter- period ending on the date of the transac- sons who hold certain powers, responsibilities,est on the excess benefit. The interest rate can tion) in a position to exercise substantial or interests are among those who are in a posi-be no lower than the applicable federal rate, influence over the affairs of the organization to exercise substantial influence over thecompounded annually, for the month the trans- tion, affairs of the organization. This includes, foraction occurred.

example, voting members of the governing• A family member of an individual de-A disqualified person can, with the agree-body, and persons holding the power of:scribed in 1, andment of the applicable tax-exempt organization,

make a payment by returning the specific prop- • Presidents, chief executives, or chief oper-• A 35% controlled entity.erty previously transferred in the excess trans- ating officers.action. In this case, the disqualified person is • Treasurers and chief financial officers.For donor advised funds, sponsoring organi-treated as making a payment equal to the lesser

zations, and certain supporting organiza-of: • Persons with a material financial interesttions occurring after August 17, 2006. The

in a provider-sponsored organization.• The fair market value of the property on following persons will be considered disqualifiedthe date the property is returned to the persons along with certain family members and Persons not considered to have substan-organization, or 35% controlled entities associated with them. tial influence. Persons who are not consid-

• The fair market value of the property on ered to be in a position to exercise substantial• Donors of donor advised funds,the date the excess benefit transaction oc- influence over the affairs of an organization in-• Investment advisors of sponsoring organi-curred. clude:

zations, and• An employee who receives benefits thatIf the payment resulting from the return of • Disqualified persons of a section 509(a)(3) total less than the highly compensatedproperty is less than the correction amount, the supporting organization for the organiza- amount in section 414(q)(1)(B)(i) and whodisqualified person must make an additional tions that organization supports. does not hold the executive or voting pow-cash payment to the organization equal to the

ers mentioned earlier in the discussion ondifference. For certain supporting organization trans-Disqualified Person is not a family mem-If the payment resulting from the return of the actions occurring after July 25, 2006. Sub-ber of a disqualified person, and is not aproperty exceeds the correction amount de- stantial contributors to supporting organizationssubstantial contributor,scribed above, the organization can make a will also be considered disqualified persons

cash payment to the disqualified person equal to along with their family members and 35% con- • Tax-exempt organizations described inthe difference. trolled entities. section 501(c)(3), and




• Section 501(c)(4) organizations with re- as compared to the organization as a • The disqualified person reports the benefitspect to transactions engaged in with whole. as income on the person’s original Formother section 501(c)(4) organizations. 1040, or on an amended form filed before

In the case of multiple organizations affiliated starting an IRS examination.Facts and circumstances. The determina- by common control or governing documents, the

tion of whether a person has substantial influ- determination of whether a person does or does Exception. If the economic benefit is ex-ence over the affairs of an organization is based cluded from the disqualified person’s gross in-not have substantial influence is made sepa-on all the facts and circumstances. Facts and come for income tax purposes, the applicablerately for each applicable tax-exempt organiza-circumstances that show a person has substan- tax-exempt organization is not required to indi-tion. A person may be a disqualified person withtial influence over the affairs of an organization cate its intent to provide an economic benefit asrespect to transactions with more than one or-include, but are not limited to, the following. compensation for services.ganization.

• The person founded the organization. Rebuttable presumption that a transactionReasonable compensation. Reasonableis not an excess benefit transaction. Pay-compensation is the value that would ordinarily• The person is a substantial contributor toments under a compensation arrangement arebe paid for like services by like enterprises underthe organization under the sectionpresumed to be reasonable and the transfer oflike circumstances. The section 162 standard507(d)(2)(A) definition, only taking into ac-property (or right to use property) is presumed towill apply in determining the reasonableness ofcount contributions to the organization forbe at fair market value, if the following threecompensation. The fact that a bonus or reve-the past 5 years.conditions are met.nue-sharing arrangement is subject to a cap is a

• The person’s compensation is primarily relevant factor in determining reasonableness of1. The transaction is approved in advance bybased on revenues derived from activities compensation.

an authorized body of the organization (orof the organization that the person con- To determine the reasonableness of com- an entity it controls) which is composed oftrols. pensation, all items of compensation provided individuals who do not have a conflict ofby an applicable tax-exempt organization in ex-• The person has or shares authority to con- interest concerning the transaction.change for performance of services are takentrol or determine a substantial portion of

2. Before making its determination, the au-into account in determining the value of com-the organization’s capital expenditures,thorized body obtained and relied upon ap-pensation (except for economic benefits that areoperating budget, or compensation for em-propriate data as to comparability. (Theredisregarded under the discussion Disregardedployees.is a special safe harbor for small organiza-benefits, later). Items of compensation include:• The person manages a discrete segment tions. If the organization has gross receipts

or activity of the organization that repre- • All forms of cash and noncash compensa- of less than $1 million, appropriate compa-sents a substantial portion of the activities, tion, including salary, fees, bonuses, sev- rability data includes data on compensa-assets, income, or expenses of the organi- erance payments, and deferred noncash tion paid by three comparablezation, as compared to the organization as compensation. organizations in the same or similar com-a whole.

munities for similar services.)• The payment of liability insurance premi-• The person owns a controlling interest ums for, or the payment or reimbursement 3. The authorized body adequately docu-(measured by either vote or value) in a by the organization of penalties, taxes, or ments the basis for its determination con-corporation, partnership, or trust that is a certain expenses under section 4958, un- currently with making that determination.disqualified person. less excludable from income as a de The documentation should include:

minimis fringe benefit under section• The person is a nonstock organization132(a)(4), a. The terms of the approved transactioncontrolled directly or indirectly by one or

and the date approved,more disqualified persons. • All other compensatory benefits, whetheror not included in gross income for income b. The members of the authorized body

Facts and circumstances tending to show that tax purposes, who were present during debate on thea person does not have substantial influence transaction that was approved and• Taxable and nontaxable fringe benefits,over the affairs of an organization include, but those who voted on it,except fringe benefits described in sectionare not limited to, the following.

132, and c. The comparability data obtained and re-• The person has taken a bona fide vow of lied upon by the authorized body and• Foregone interest on loans.poverty as an employee, agent, or on be- how the data was obtained,

half of a religious organization.An economic benefit is not treated as consid- d. Any actions by a member of the author-• The person is an independent contractor eration for the performance of services unless ized body having conflict of interest,

whose sole relationship to the organization the organization providing the benefit clearly in- andis providing professional advice (without dicates its intent to treat the benefit as compen-

e. Documentation of the basis of the de-having decision-making authority) with re- sation when the benefit is paid.termination before the later of the nextspect to transactions from which the inde- An applicable tax-exempt organization (ormeeting of the authorized body or 60pendent contractor will not economically entity that it controls) is treated as clearly indicat-days after the final actions of the au-benefit either directly or indirectly aside ing its intent to provide an economic benefit asthorized body are taken, and approvalfrom customary fees received for the pro- compensation for services only if the organiza-of records as reasonable, accurate, andfessional advice rendered. tion provides written substantiation that is con-complete within a reasonable timetemporaneous with the transfer of the economic• Any preferential treatment the person re- thereafter.benefits under consideration. Ways to provideceives based on the size of the person’s

contemporaneous written substantiation of itsdonation is also offered to others makingintent to provide an economic benefit as com- Disregarded benefits. The following eco-comparable widely solicited donations.pensation include: nomic benefits are disregarded for section 4958• The direct supervisor of the person is not purposes.• The organization produces a signed writ-a disqualified person.

ten employment contract, • Nontaxable fringe benefits that are ex-• The person does not participate in any cluded from income under section 132.• The organization reports the benefit asmanagement decisions affecting the or-compensation on an original Form W-2, • Benefits provided to a volunteer for theganization as a whole or a discrete seg-Form 1099, or Form 990, or on an organization if the benefit is provided toment of the organization that represents aamended form filed before starting an IRS the general public in exchange for a mem-substantial portion of the activities, assets,

income, or expenses of the organization, examination, or bership fee or contribution of $75 or less.

Page 60 Chapter 5 Excise Taxes REL 00944



• Benefits provided to a member of an or- donors that is owned and controlled by a spon- The tax on taxable distributions applies toganization due to the payment of a mem- soring organization and for which the donor has distributions occurring in tax years beginningbership fee or to a donor as a result of a or expects to have advisory privileges concern- after August 17, 2006.deductible contribution, if a significant ing the distribution or investment of the funds.number of disqualified persons make simi- Sponsoring organization. A sponsoring or-lar payments or contributions and are of- Supporting organizations. Only certain sup- ganization is a section170(c) organization that isfered a similar economic benefit. porting organizations are subject to the excess not a government organization (as referred to in

business holdings tax under section 4943. section 170(c)(1) and (2)(A)) or a private foun-• Benefits provided to a person solely as aThese include (1) Type III supporting organiza- dation and maintains one or more donor advisedmember of a charitable class that the ap-tions that are not functionally integrated and (2) funds.plicable tax-exempt organization intendsType II supporting organizations that accept anyto benefit as part of the accomplishment ofgift or contribution from a person who by himself Donor advised fund. A donor advised fund isits exempt purpose.or in connection with a related party controls the a fund or account:• A transfer of an economic benefit to or for supported organization that the Type II support-

the use of a governmental unit, as defined 1. Which is separately identified by referenceing organization supports.in section 170(c)(1), if exclusively for pub- to contributions of a donor or donors,lic purposes. Taxes. A private foundation that has excess 2. Which is owned and controlled by a spon-

holdings in a business enterprise may become soring organization, andSpecial exception for initial contracts. liable for an excise tax based on the amount ofSection 4958 does not apply to any fixed pay- 3. For which the donor (or any person ap-holdings. The initial tax is 10% (5% for tax yearsment made to a person under an initial contract. pointed or designated by the donor) has orbeginning before August 18, 2006) of the value

A fixed payment is an amount of cash or expects to have advisory privileges con-of the excess holdings and is imposed on theother property specified in the contract, or deter- cerning the distribution or investment oflast day of each tax year that ends during themined by a fixed formula that is specified in the the funds held in the donor advised fundstaxable period. The excess holdings are deter-contract, which is to be paid or transferred in or accounts because of the donor’s statusmined on the day during the tax year when theyexchange for the provision of specified services as a donor.were the largest.or property. If the foundation keeps the excess business

Exception. A donor advised fund does notA fixed formula can, generally, incorporate holdings after the initial tax has been imposed, itan amount that depends upon future specified include:becomes liable for an additional tax of 200% ofevents or contingencies, as long as no one has the remaining excess business holdings unless

1. A fund or account that makes distributionsdiscretion when calculating the amount of a pay- it disposes of them within the taxable period.only to a single identified organization orment or deciding whether to make a payment For more information on the tax on excess governmental entity, or(such as a bonus). business holdings, see the Instructions for Form

An initial contract is a binding written contract 2. Any fund or account for a person de-4720.between an applicable tax-exempt organization scribed in 3 above that gives advice aboutand a person who was not a disqualified person which individuals receive grants for travel,immediately before entering into the contract. study, or similar purposes, if:

A binding written contract, providing it can be Taxable Distributions a. The person’s advisory privileges areterminated or canceled by the applicableperformed exclusively by such persontax-exempt organization without the other of Sponsoringin their capacity as a committee mem-party’s consent (except as a result of substantialber of which all the committee membersnonperformance) and without substantial pen- Organizationsare appointed by the sponsoring organi-alty, is treated as a new contract, as of thezation.earliest date any termination or cancellation An excise tax is imposed on a sponsoring organ-

would be effective. Also, if the parties make a ization for each taxable distribution it makes b. No combination of persons with advi-material change to a contract, which includes an from a donor advised fund. An excise tax is also sory privileges, described in 3 above, orextension or renewal of the contract (except for imposed on any fund manager of the sponsoring persons related to those in 3 above di-an extension or renewal resulting from the exer- organization who agreed to the making of a rectly or indirectly control the commit-cise of an option by the disqualified person), or a distribution, knowing that it is a taxable distributee, ormore than incidental change to the amount pay- tion.

c. All grants from the fund or account areable under the contract, it is treated as a newcontract as of the effective date of the material awarded on an objective and nondis-Taxable distribution. A taxable distribution ischange. criminatory basis according to a proce-any distribution from a donor advised fund to any

dure approved in advance by the boardnatural person or to any other person if:More information. For more information,of directors of the sponsoring organiza-see the Instructions to Forms 990 and 4720.

1. The distribution is for any purpose other tion. The procedure must be designedthan one specified in section 170(c)(2)(B), to ensure that all grants meet the re-or quirements of section 4945(g)(1), (2), or

(3).2. The sponsoring organization maintainingExcess Businessthe donor advised fund does not exerciseexpenditure responsibility with respect toHoldings

Disqualified supporting organization. A dis-the distribution in accordance with sectionqualified supporting organization includes a4945(h).Private foundations are generally not permittedType III supporting organization that is not func-to hold more than a 20% interest in an unrelated However, a taxable distribution does not tionally integrated and any Type I, Type II, orbusiness enterprise. They may be subject to an include a distribution from a donor advised fund functionally integrated Type III supporting or-excise tax on the amount of any excess busi- to: ganization where the donor or donor advisorness holdings. For purposes of section 4943, for(and any related parties) directly or indirectly• Any organization described in sectiontax years beginning after August 17, 2006, do-controls a supported organization of the sup-170(b)(1)(A) (other than a disqualified sup-nor advised funds and certain supporting organi-porting organization.porting organization),zations are considered private foundations.

• The sponsoring organization of the donor Tax on sponsoring organization. A tax ofDonor advised fund. In general, a donor ad- advised fund, or 20% of the amount of each taxable distribution isvised fund is a fund or account separately identi-imposed on the sponsoring organization.• Any other donor advised fund.fied by reference to contributions of a donor or




Tax on fund manager. If a tax is imposed on a For more information on taxes on prohibitedtaxable distribution of the sponsoring organiza- benefits distributed from donor advised funds,tion, a tax of 5% of the distribution will be im- see the Instructions for Form 4720.posed on any fund manager who agreed to thedistribution knowing that it was a taxable distri-bution. Any fund manager who took part in thedistribution and is liable for the tax must pay the Excise Taxes Ontax. The maximum amount of tax on all fundmanagers for any one taxable distribution is Private Foundations 6.$10,000. If more than one fund manager is liablefor tax on a taxable distribution, all such manag- There is an excise tax on the net investmenters are jointly and severally liable for the tax. income of most domestic private foundations.

For more information on the tax on taxable This tax must be reported on Form 990-PF and How To Get Taxdistributions of sponsoring organizations, see must be paid annually at the time for filing thatthe Instructions for Form 4720. return or in quarterly estimated tax payments if

the total tax for the year (section 4940 tax minus Helpcredits) is $500 or more. Report estimated taxeson Form 990-W.

In addition, there are several other rules thatTaxes on Prohibited You can get help with unresolved tax issues,apply to excise taxes on private foundations. order free publications and forms, ask tax ques-These include: Benefits Distributed tions, and get information from the IRS in sev-

eral ways. By selecting the method that is best1. Restrictions on self-dealing between pri-From Donor Advised for you, you will have quick and easy access tovate foundations and their substantial con-tax help.tributors and other disqualified persons,Funds

2. Requirements that the foundation annually Contacting your Taxpayer Advocate. Thedistribute income for charitable purposes,Prohibited benefit. If any donor, donor advi- Taxpayer Advocate Service (TAS) is an inde-

sor, or related party advises the sponsoring or- pendent organization within the IRS. We help3. Limits on their holdings in any businessganization about making a distribution which taxpayers who are experiencing economicenterprise,results in a donor, donor advisor, or related party harm, such as not being able to provide necessi-

4. Provisions that investments must not jeop-receiving (either directly or indirectly) a more ties like housing, transportation, or food; taxpay-ardize the carrying out of exempt pur-than incidental benefit, then such benefit is a ers who are seeking help in resolving taxposes, andprohibited benefit. The tax on prohibited benefits problems with the IRS; and those who believe

applies to distributions occurring in tax years that an IRS system or procedure is not working5. Provisions to assure that expenditures fur-beginning after August 17, 2006. as it should. Here are seven things every tax-ther the organization’s exempt purposes.

payer should know about TAS:Donor advisor. A donor advisor is any person Violations of these provisions give rise toappointed or designated by a donor to advise a • The Taxpayer Advocate Service is yourtaxes and penalties against the private founda-sponsoring organization on the distribution or voice at the IRS.tion and, in some cases, its managers, its sub-investment of amounts held in the donor’s fund stantial contributors, and certain related • Our service is free, confidential, and tai-or account. persons. lored to meet your needs.

For more information on the excise taxesRelated party. A related party includes any • You may be eligible for our help if youimposed on private foundations, see the Instruc-family member or 35% controlled entity. See thehave tried to resolve your tax problemtions for Form 4720 and the Instructions fordefinition of those terms under Disqualified Per-through normal IRS channels and haveForm 990-PF.son.gotten nowhere, or you believe an IRS

Tax on donor, donor advisor, or related per- procedure just isn’t working as it should.son. A tax of 125% of the benefit resulting • We help taxpayers whose problems arefrom the distribution is imposed on both the party Excise Taxes on Black causing financial difficulty or significantwho advised as to the distribution (which might

cost, including the cost of professionalbe a donor, donor advisor, or related party) and Lung Benefit Trusts representation. This includes businessesthe party who received such benefit (whichas well as individuals.might be a donor, donor advisor, or related If your organization makes any expenditures,

party). The advisor and the party who received • Our employees know the IRS and how topayments, or investments other than those de-the benefit are jointly and severally liable for the navigate it. If you qualify for our help, we’llscribed in chapter 4 under 501(c)(21) – Blacktax. assign your case to an advocate who willLung Benefit Trusts, a tax equal to 10% of the

listen to your problem, help you under-amount of such expenditures is imposed on thatTax on fund managers. If a tax is imposed onstand what needs to be done to resolve it,trust. If there are any acts of self-dealing be-a prohibited benefit received by a donor, donorand stay with you every step of the waytween the trust and a disqualified person, a taxadvisor, or related person, a tax of 10% of theuntil your problem is resolved.equal to 10% of the amount involved is imposedamount of the prohibited benefit is imposed on

on the disqualified person. Both of these exciseany fund manager who agreed to the distribution • We have at least one local taxpayer advo-taxes are reported on Schedule A (Formknowing that it would confer a prohibited benefit. cate in every state, the District of Colum-990-BL). See the Form 990-BL instructions forAny fund manager who took part in the distribu- bia, and Puerto Rico. You can call yourmore information on these taxes and what has totion and is liable for the tax must pay the tax. The local advocate, whose number is in yourbe filed, even if the trust is excepted from filing.maximum amount of tax on all fund managers phone book, in Pub. 1546, Taxpayer Ad-

for any one taxable distribution is $10,000. If vocate Service—Your Voice at the IRS,more than one fund manager is liable for tax on and on our website at www.irs.gov/advo-a taxable distribution, all such managers are cate. You can also call our toll-free line atjointly and severally liable for the tax. 1-877-777-4778 or TTY/TDD

1-800-829-4059.Exception. If a person engaged in an excess

• You can learn about your rights and re-benefit transaction and received a prohibitedsponsibilities as a taxpayer by visiting ourbenefit for the same transaction, the person isonline tax toolkit at www.taxtoolkit.irs.gov.taxed under section 4958, and no tax is imposedYou can get updates on hot tax topics byunder section 4967 for a prohibited benefit.

Page 62 Chapter 6 How To Get Tax Help REL 00946

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visiting our YouTube channel www.you- social security number, your filing status, security number, your filing status, and thetube.com/tasta and our Facebook page at and the exact whole dollar amount of your exact whole dollar amount of your refund.www.facebook.com/YourVoiceAtIRS, or refund. If you check the status of your refund andby following our tweets at www.twitter. are not given the date it will be issued,• Download forms, including talking taxcom/YouVoiceatIRS. please wait until the next week beforeforms, instructions, and publications.

checking back.Low Income Taxpayer Clinics (LITCs). • Order IRS products online. • Other refund information. To check theThe Low Income Taxpayer Clinic program • Research your tax questions online. status of a prior year refund or amendedserves individuals who have a problem with the

return refund, call 1-800-829-1040.IRS and whose income is below a certain level. • Search publications online by topic orLITCs are independent from the IRS. Most keyword.

Evaluating the quality of our telephoneLITCs can provide representation before the • Use the online Internal Revenue Code, services. To ensure IRS representatives giveIRS or in court on audits, tax collection disputes,Regulations, or other official guidance. accurate, courteous, and professional answers,and other issues for free or a small fee. If an

we use several methods to evaluate the qualityindividual’s native language is not English, some • View Internal Revenue Bulletins (IRBs)of our telephone services. One method is for aclinics can provide multilingual information published in the last few years.second IRS representative to listen in on orabout taxpayer rights and responsibilities. For • Figure your withholding allowances using record random telephone calls. Another is to askmore information, see Publication 4134, Low

the withholding calculator online at www. some callers to complete a short survey at theIncome Taxpayer Clinic List. This publication isirs.gov/individuals.a v a i l a b l e a t I R S . g o v , b y c a l l i n g end of the call.

1-800-TAX-FORM (1-800-829-3676), or at your • Determine if Form 6251 must be filed byWalk-in. Many products and serviceslocal IRS office. using our Alternative Minimum Tax (AMT)are available on a walk-in basis.Assistant.

Free tax services. Publication 910, IRS• Sign up to receive local and national taxGuide to Free Tax Services, is your guide to IRS • Products. You can walk in to many post

news by email.services and resources. Learn about free tax offices, libraries, and IRS offices to pick upinformation from the IRS, including publications, • Get information on starting and operating certain forms, instructions, and publica-services, and education and assistance pro- a small business. tions. Some IRS offices, libraries, grocerygrams. The publication also has an index of over

stores, copy centers, city and county gov-100 TeleTax topics (recorded tax information)ernment offices, credit unions, and officeyou can listen to on the telephone. The majoritysupply stores have a collection of productsPhone. Many services are available byof the information and services listed in thisavailable to print from a CD or photocopyphone. publication are available to you free of charge. Iffrom reproducible proofs. Also, some IRSthere is a fee associated with a resource oroffices and libraries have the Internal Rev-service, it is listed in the publication. • Ordering forms, instructions, and publica-enue Code, regulations, Internal RevenueAccessible versions of IRS published prod- tions. Call 1-800-TAX FORMBulletins, and Cumulative Bulletins avail-ucts are available on request in a variety of (1-800-829-3676) to order current-yearable for research purposes.alternative formats for people with disabilities. forms, instructions, and publications, and

prior-year forms and instructions. You • Services. You can walk in to your localFree help with your return. Free help in pre- should receive your order within 10 days. Taxpayer Assistance Center every busi-paring your return is available nationwide from

ness day for personal, face-to-face tax• Asking tax questions. Call the IRS withIRS-trained volunteers. The Volunteer Incomehelp. An employee can explain IRS letters,your tax questions at 1-800-829-1040.Tax Assistance (VITA) program is designed torequest adjustments to your tax account,help low-income taxpayers and the Tax Coun- • Solving problems. You can get or help you set up a payment plan. If youseling for the Elderly (TCE) program is designed

face-to-face help solving tax problems need to resolve a tax problem, have ques-to assist taxpayers age 60 and older with theirevery business day in IRS Taxpayer As- tions about how the tax law applies to yourtax returns. Many VITA sites offer free electronicsistance Centers. An employee can ex- individual tax return, or you are more com-filing and all volunteers will let you know aboutplain IRS letters, request adjustments to fortable talking with someone in person,credits and deductions you may be entitled toyour account, or help you set up a pay- visit your local Taxpayer Assistanceclaim. To find the nearest VITA or TCE site, callment plan. Call your local Taxpayer Assis- Center where you can spread out your1-800-829-1040.tance Center for an appointment. To find records and talk with an IRS representa-As part of the TCE program, AARP offers thethe number, go to www.irs.gov/localcon- tive face-to-face. No appointment is nec-Tax-Aide counseling program. To find the near-tacts or look in the phone book under essary—just walk in. If you prefer, youest AARP Tax-Aide site, call 1-888-227-7669 orUnited States Government, Internal Reve- can call your local Center and leave avisit AARP’s website atnue Service. message requesting an appointment to re-www.aarp.org/money/taxaide.

solve a tax account issue. A representa-For more information on these programs, go • TTY/TDD equipment. If you have accesstive will call you back within 2 businessto IRS.gov and enter keyword “VITA” in the to TTY/TDD equipment, call

upper right-hand corner. days to schedule an in-person appoint-1-800-829-4059 to ask tax questions or toment at your convenience. If you have anorder forms and publications.Internet. You can access the IRS web-ongoing, complex tax account problem orsite at IRS.gov 24 hours a day, 7 days • TeleTax topics. Call 1-800-829-4477 to lis- a special need, such as a disability, ana week to: ten to pre-recorded messages covering appointment can be requested. All other

various tax topics.• E-file your return. Find out about commer- issues will be handled without an appoint-cial tax preparation and e-file services ment. To find the number of your local• Refund information. To check the status ofavailable free to eligible taxpayers. office, go to your 2010 refund, call 1-800-829-1954 or

www.irs.gov/localcontacts or look in the1-800-829-4477 (automated refund infor-• Check the status of your 2010 refund. Gophone book under United States Govern-mation 24 hours a day, 7 days a week).to IRS.gov and click on Where’s My Re-ment, Internal Revenue Service.Wait at least 72 hours after the IRS ac-fund. Wait at least 72 hours after the IRS

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a response within 10 days after your request iselectronically). Have your 2010 tax returnfiled electronically). Have your 2010 taxreturn available so you can provide your available so you can provide your social received.

Chapter 6 How To Get Tax Help Page 63REL 00947

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http://www.facebook.com/YourVoiceAtIRS

http://twitter.com/YourVoiceatIRS

http://twitter.com/YourVoiceatIRS

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• Tax law frequently asked questions. • Two releases during the year.Internal Revenue Service – The first release will ship the beginning• Tax Topics from the IRS telephone re-1201 N. Mitsubishi Motorway of January 2011.

sponse system.Bloomington, IL 61705-6613 – The final release will ship the beginning

• Internal Revenue Code—Title 26 of the of March 2011.DVD for tax products. You can order U.S. Code.Publication 1796, IRS Tax Products Purchase the DVD from National Technical• Fill-in, print, and save features for most taxDVD, and obtain: Information Service (NTIS) at www.irs.gov/

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• Internal Revenue Bulletins. 1-877-233-6767 toll free to buy the DVD for $30lications.(plus a $6 handling fee).• Toll-free and email technical support.• Prior-year forms, instructions, and publica-

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Organization Reference Chart

Section of Application Annual return Contributions1986 Code Description of organization General nature of activities Form No. required to be allowable

filed

501(c)(1) Corporations Organized under Act Instrumentalities of the No Form None Yes, if made forof Congress (including Federal Credit United States exclusivelyUnions) public purposes

501(c)(2) Title Holding Corporation For Holding title to property of an 1024 9901 or 990-EZ8 No2

Exempt Organization exempt organization

501(c)(3) Religious, Educational, Charitable, Activities of nature implied by 1023 9901 or 990-EZ8, Yes, generallyScientific, Literary, Testing for Public description of class of organization or 990-PFSafety, to Foster National orInternational Amateur SportsCompetition, or Prevention of Crueltyto Children or Animals Organizations

501(c)(4) Civic Leagues, Social Welfare Promotion of community welfare; 1024 9901 or 990-EZ8 No, generally 2, 3

Organizations, and Local charitable, educational, or recreationalAssociations of Employees

501(c)(5) Labor, Agricultural, and Horticultural Educational or instructive, the 1024 9901 or 990-EZ8 No2

Organizations purpose being to improve conditions ofwork, and to improve products ofefficiency

501(c)(6) Business Leagues, Chambers of Improvement of business 1024 9901 or 990-EZ8 No2

Commerce, Real Estate Boards, conditions of one or more lines ofetc. business

501(c)(7) Social and Recreational Clubs Pleasure, recreation, social activities 1024 9901 or 990-EZ8 No2

501(c)(8) Fraternal Beneficiary Societies Lodge providing for payment of life, 1024 9901 or 990-EZ8 Yes, if for certainand Associations sickness, accident or other benefits Sec. 501(c)(3)

to members purposes

501(c)(9) Voluntary Employees Beneficiary Providing for payment of life, sickness, 1024 9901 or 990-EZ8 No2

Associations accident, or other benefits to members

501(c)(10) Domestic Fraternal Societies Lodge devoting its net earnings to 1024 9901 or 990-EZ8 Yes, if for certainand Associations charitable, fraternal, and other Sec. 501(c)(3)

specified purposes. No life, sickness, or purposesaccident benefits to members

501(c)(11) Teachers’ Retirement Fund Teachers’ association for payment of No Form6 9901 or 990-EZ8 No2

Associations retirement benefits

501(c)(12) Benevolent Life Insurance Activities of a mutually beneficial 1024 9901 or 990-EZ8 No2

Associations, Mutual Ditch or nature similar to those implied by theIrrigation Companies, Mutual or description of class of organizationCooperative Telephone Companies,etc.

501(c)(13) Cemetery Companies Burials and incidental activities 1024 9901 or 990-EZ8 Yes, generally

501(c)(14) State-Chartered Credit Unions, Loans to members No Form6 9901 or 990-EZ8 No2

Mutual Reserve Funds

501(c)(15) Mutual Insurance Companies or Providing insurance to members 1024 9901 or 990-EZ8 No2

Associations substantially at cost

501(c)(16) Cooperative Organizations to Financing crop operations in conjunction Form 1120-C6 9901 or 990-EZ8 No2

Finance Crop Operations with activities of a marketing or purchasing association

501(c)(17) Supplemental Unemployment Provides for payment of 1024 9901 or 990-EZ8 No2

Benefit Trusts supplemental unemploymentcompensation benefits

501(c)(18) Employee Funded Pension Trust Payment of benefits under a No Form6 9901 or 990-EZ8 No2

(created before June 25, 1959) pension plan funded by employees

501(c)(19) Post or Organization of Past or Activities implied by nature of 1024 9901 or 990-EZ8 No, generally7

Present Members of the Armed organizationForces

501(c)(21) Black Lung Benefit Trusts Funded by coal mine operators to No Form6 990-BL No4

satisfy their liability for disability or death due to black lung diseases

Chapter 6 How To Get Tax Help Page 65REL 00949



Section of Application Annual return Contributions1986 Code Description of organization General nature of activities Form No. required to be allowable

filed

501(c)(22) Withdrawal Liability Payment Fund To provide funds to meet the No Form6 990 or 990-EZ8 No5

liability of employers withdrawing from a multi-employer pension fund

501(c)(23) Veterans Organization (created To provide insurance and other No Form6 990 or 990-EZ8 No, generally7

before 1880) benefits to veterans

501(c)(25) Title Holding Corporations or Trusts Holding title and paying over 1024 990 or 990-EZ Nowith Multiple Parents income from property to 35 or fewer

parents or beneficiaries

501(c)(26) State-Sponsored Organization Provides health care coverage to No Form6 9901 or 990-EZ8 NoProviding Health Coverage for high-risk individualsHigh-Risk Individuals

501(c)(27) State-Sponsored Workers’ Reimburses members for losses No Form6 9901 or 990-EZ8 NoCompensation Reinsurance under workers’ compensation actsOrganization

501(c)(28) National Railroad Retirement Manages and invests the assets of the No Form None No11

Investment Trust Railroad Retirement Account

501(d) Religious and Apostolic Associations Regular business activities. No Form 10659 No2

Communal religious community

501(e) Cooperative Hospital Service Performs cooperative services for 1023 9901 or 990-EZ8 YesOrganizations hospitals

501(f) Cooperative Service Organizations Performs collective investment 1023 9901 or 990-EZ8 Yesof Operating Educational services for educational organizationsOrganizations

501(k) Child Care Organizations Provides cares for children 1023 990 or 990-EZ8 Yes

501(n) Charitable Risk Pools Pools certain insurance risks of 1023 9901 or 990-EZ8 Yes501(c)(3)

501(q) Credit Counseling Organization Credit counseling services 1023 102312 No

521(a) Farmers’ Cooperative Associations Cooperative marketing and 1028 990-C Nopurchasing for agricultural procedures

527 Political organizations A party, committee, fund, 8871 1120-POL10 Noassociation, etc., that directly or 990 or 990-EZ8

indirectly accepts contributions ormakes expenditures for politicalcampaigns

1For exceptions to the filing requirement, see chapter 2 and the form 6Application is by letter to the address shown on Form 8718. A copy of theinstructions. Note: For annual tax periods beginning after 2006, most organizing document should be attached and the letter should be signed bytax-exempt organizations, other than churches, are required to file an annual an officer. Form 990, 990-EZ, or 990-PF with the IRS or to submit an annual electronicnotice, Form 990-N (e-Postcard), to the IRS. Tax-exempt organizations failing 7Contributions to these organizations are deductible only if 90% or more ofto file an annual return or submit an annual notice as required for 3 the organization’s members are war veterans. consecutive years, it will automatically lose their tax-exempt status

8For limits on the use of Form 990-EZ, see chapter 2 and the general2An organization exempt under a subsection of Code sec. 501 other than instructions for Form 990-EZ (or Form 990). 501(c)(3) can establish a charitable fund, contributions to which aredeductible. Such a fund must itself meet the requirements of section 9Although the organization files a partnership return, all distributions are501(c)(3) and the related notice requirements of section 508(a). deemed dividends. The members are not entitled to pass through treatment

of the organization’s income or expenses. 3Contributions to volunteer fire companies and similar organizations aredeductible, but only if made for exclusively public purposes. 10Form 1120-POL is required only if the organization has taxable income as

defined in Code section 527(c). 4Deductible as a business expense to the extent allowed by Code section192. 11Only required to annually file so much of the Form 990 that relates to the

names and addresses of the officers, directors, trustees, and key employees,5Deductible as a business expense to the extent allowed by Code section and their titles, compensation, and hours devoted to their positions (Part VII194A. of Form 990) and complete Tax exempt status (Item I in the Heading of Form

990).

12See Code section 501(q) if the organization provides credit counselingservices and seeks recognition of exemption under section 501(c)(4). UseForm 1024 if applying for recognition under Code section 501(c)(4).




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

Contributions, Filing requirements . . . . . . . . . . 9A Hcharitable . . . . . . . . . . . . . 15, 20 Annual informationAcknowledgment of Health coverage

returns . . . . . . . . . . . . . . . . . . . 9Court appeals . . . . . . . . . . . . . . . . 6contributions . . . . . . . . . . . . . 15 organization . . . . . . . . . . . . . . 56Donee informationCredit union . . . . . . . . . . . . . . . . . 53Advance ruling . . . . . . . . . . . . . . . 5 Help (See Tax help)

return . . . . . . . . . . . . . . . . . . . 14Adverse determination . . . . . . . 5 High-risk health coverageDue date . . . . . . . . . . . . . . . . . . 12 organization . . . . . . . . . . . . . . 56Aged, home for . . . . . . . . . . . . . . 27 D Employment tax . . . . . . . . . . . . 11 Home for the aged . . . . . . . . . . 27Agricultural organization . . . . 47

Determination letter . . . . . . . . . . 5 Excise tax . . . . . . . . . . . . . 29, 62 Homeowners’Airport . . . . . . . . . . . . . . . . . . . . . . 46Political organization . . . . . . . . 12Disclosures, required . . . . . . . 14 association . . . . . . . . . . . . . . . 46Alumni association . . . . . . . . . . 24 Private foundations . . . . . . . . . 10Dues used for lobbying . . . . . 19 HorticulturalAmateur athletic Unrelated businessNondeductible organization . . . . . . . . . . . . . . 47organizations . . . . . . . . . . . . . 28 income . . . . . . . . . . . . . . . . . . 11contributions . . . . . . . . . . . . . 18 Hospital . . . . . . . . . . . . . . . . . 26, 30Animals, prevention of cruelty Quid pro quo Form 990-N . . . . . . . . . . . . . . . . . . 10

to . . . . . . . . . . . . . . . . . . . . . . . . . 28 contributions . . . . . . . . . . . . . 14 Forms . . . . . . . . . . . . . . . . . . . . . . . . 3Appeal procedures . . . . . . . . . . . 6 Services available from 990 . . . . . . . . . . . . . . 8, 10, 17, 44 IApplication procedures . . . . 3, 4 government . . . . . . . . . . . . . . 19 990-BL . . . . . . . . . . . . . . . . . . 9, 55 Inactive organization . . . . . . . . 19

Bylaws . . . . . . . . . . . . . . . . . . . . . 4 Dispositions of donated 990-EZ . . . . . . . . . . . . . . . . . . . . 10 Industrial development . . . . . . 46Conformed copy . . . . . . . . . . . . 4 property . . . . . . . . . . . . . . . . . . . 14 990-PF . . . . . . . . . . . . . 10, 29, 62 Instrumentalities . . . . . . . . . . . . 20Description of activities . . . . . . 4 Disqualified persons . . . . . . . . 40 990-T . . . . . . . . . . . . . . . . . . . . . . 11 Insurance, organizationsEmployer identification Domestic fraternal 1023 . . . 3, 6, 7, 17, 21, 22, 24, providing . . . . . . . . . . . . . . . . . 26number . . . . . . . . . . . . . . . . . . . 4 society . . . . . . . . . . . . . . . . . . . . 49 28, 44, 46Integral-part test . . . . . . . . . . . . 41Financial data . . . . . . . . . . . . . . . 4 1024 . . . . . . 3, 4, 17, 45, 47, 48,Donor advised funds:

Organizing documents . . . . . . . 4 49, 50, 52, 54, 55, 56Excess benefitAquatic resources . . . . . . . . . . . 47 1040 . . . . . . . . . . . . . . . . . . . . . . 12transaction . . . . . . . . . . . . . . . 58 LArticles of organization . . . . . 23 1065 . . . . . . . . . . . . . . . . . . . . . . . 9Dues used for political or Labor organization . . . . . . 19, 46

1120–POL . . . . . . . . . . . . . . . . 12Assistance (See Tax help) legislative activities . . . . . . 19, Law, public interest . . . . . . . . . 271128 . . . . . . . . . . . . . . . . . . . . . . 2047Athletic organization . . . . 24, 28 Legislative activity . . . . . . 44, 472848 . . . . . . . . . . . . . . . . . . . . . 5, 6Attorney’s fees . . . . . . . . . . . . . . 27 Listed transaction . . . . . . . . . . . 574720 . . . . . . . . . . . . . . . . . . . . . . 45Attribution, special rules . . . . 42 Literary organizations . . . . . . . 28E 5578 . . . . . . . . . . . . . . . . . . . . . . 25

Loans, organizationsEducational 5768 . . . . . . . . . . . . . . . . . . . . . . 44providing . . . . . . . . . . . . . . . . . 27organizations . . . . . . . . . 24, 29 6069 . . . . . . . . . . . . . . . . . . . . . . 55B

Lobbying expenditures . . . . . . 44Employees’ association . . . . . 49 8274 . . . . . . . . . . . . . . . . . . . . . . 12Black lung benefit trust . . . . . 55Local benevolent life insurance8282 . . . . . . . . . . . . . . . . . . . . . . 14Employment taxes . . . . . . . . . . 11Board of trade . . . . . . . . . . . . . . . 47

associations . . . . . . . . . . . . . . 528283 . . . . . . . . . . . . . . . . . . . . . . 14Endowment fund . . . . . . . . . . . . 30Bureau defined . . . . . . . . . . . . . . 38Local employees’8300 . . . . . . . . . . . . . . . . . . . . . . 16Estimated tax . . . . . . . . . . . . . . . 11Burial benefit insurance . . . . . 52

association . . . . . . . . . . . . . . . 498718 . . . . . . . . . . . . . . . . . . . . . 3, 5Excess benefitBusiness income,Lodge system . . . . . . . . . . . . . . . 498821 . . . . . . . . . . . . . . . . . . . . . . . 6transaction . . . . . . . . . . . . . . . . 58unrelated . . . . . . . . . . . . . . . . . . 11

8871 . . . . . . . . . . . . . . . . . . 12, 17Disqualified person . . . . . 58, 59Business league . . . . . . . . . . . . 478872 . . . . . . . . . . . . . . . . . . 12, 17Controlled entity, 35% . . . . 59 MSS-4 . . . . . . . . . . . . . . . . . . . . . 4, 7Family members . . . . . . . . . 59

Medical researchW–2 . . . . . . . . . . . . . . . . . . . . . . 12Substantial influence . . . . . 59C organization . . . . . . . . . . . . . . 30Fraternal beneficiaryDisregarded benefits . . . . . . . 60Cemetery company . . . . . . . . . . 52 Medicare and Medicaidsociety . . . . . . . . . . . . . . . . . . . . 49Donor advised funds . . . . 58, 59Chamber of commerce . . . . . . 47 payments . . . . . . . . . . . . . . . . . 33Fraternal societies . . . . . . 19, 49Excise tax . . . . . . . . . . . . . . . . . 58Change in legal Membership fee . . . . . . . . . 32, 38Initial contracts . . . . . . . . . . . . . 61 Free tax services . . . . . . . . . . . . 62structure . . . . . . . . . . . . . . . . . . 19 Modification of exemption . . . . 5Reasonable Funeral benefitCharitable contributions . . . . 15, More information (See Tax help)compensation . . . . . . . . . . . . 60 insurance . . . . . . . . . . . . . . . . . 5220Mutual financialRebuttable presumption . . . . 60Charitable organization . . . . 20, organization . . . . . . . . . . . . . . 53Excise tax:26 G Mutual or cooperativeBlack lung benefit trust . . . . . 55Charitable risk pools . . . . . . . . 26 Gifts and contributions, public association . . . . . . . . . . . . . . . 52Lobbying expenditures . . . . . . 45

Child care organization . . . . . . 20 charity . . . . . . . . . . . . . . . . . . . . 37Political expenditures . . . . . . . 45Children, prevention of cruelty Private foundations . . . . . 29, 62 Governmental unit . . . . . . . . . . 30

to . . . . . . . . . . . . . . . . . . . . . . . . . 28 NExempt function . . . . . . . . . . . . . 12 Grant:Church . . . . . . . . . . . . . . . . . . . . . . 27 Nursing bureau . . . . . . . . . . . . . 27Distinguished from grossExempt purposes . . . . . . . . . . . 20

Integrated auxiliaries . . . . . . . 27 receipts . . . . . . . . . . . . . . . . . . 38Exemption for terroristCivic leagues . . . . . . . . . . . . . . . . 45 Exclusion for unusualorganization . . . . . . . . . . . . . . . 3 OClinic . . . . . . . . . . . . . . . . . . . . . . . . 27 grant . . . . . . . . . . . . . . . . 33, 36Extensions of time . . . . . . . . . . 21 One-third support test . . . . . . . 30College bookstore, From public charity . . . . . 33, 38

Organization assets . . . . . . . . . 23restaurant . . . . . . . . . . . . . . . . . 24 Grantor and contributor,Dedication . . . . . . . . . . . . . . . . . 23Comments . . . . . . . . . . . . . . . . . . . 3 F reliance on ruling . . . . . . . . . 43

Community association . . . . . 46 Distribution . . . . . . . . . . . . . . . . 23Facts and circumstances Gross receipts fromCommunity nursing test . . . . . . . . . . . . . . . . . . . . . . . 30 nonmembership Organization Reference

bureau . . . . . . . . . . . . . . . . . . . . 27 sources . . . . . . . . . . . . . . . . . . . 48 Chart . . . . . . . . . . . . . . . . . . . . . . 65Fair market value, estimateCommunity trust . . . . . . . . . . . . 35 of . . . . . . . . . . . . . . . . . . . . . . . . . 15 Group exemption letter . . . . . . . 7 Organizational changes . . . . . 19

Publication 557 (October 2010) Page 67REL 00951



Section 509(a)(4) . . . . . . . . . . . 43 Charitable . . . . . . . . . . . . . . . . . 26 Taxpayer Advocate . . . . . . . . . . 62PSupport test . . . . . . . . . . . . 30, 36 Educational . . . . . . . . . . . . . . . . 24 Technical advice . . . . . . . . . . . . . 6Penalties . . . . . . . . . . . . . . . . . . . . 11

Literary . . . . . . . . . . . . . . . . . . . . 28Public inspection:Failure to allow public Testing for public safety . . . . . 43Prevention of cruelty . . . . . . . . 28Annual return . . . . . . . . . . . . . . 17inspection . . . . . . . . . . . . . . . 18 Title-holding corporation . . . . 55Private foundations . . . . . . . . . 28Exemption applications . . . . . 16Failure to disclose . . . . . . 15, 19 TTY/TDD information . . . . . . . . 62Public charities . . . . . . . . . . . . . 29Forms 8871 and 8872 . . . . . . 16Failure to file . . . . . . . . . . . . . . . 11Qualifications . . . . . . . . . . . . . . 20Publications (See Tax help)Perpetual care UReligious . . . . . . . . . . . . . . . . . . 27organization . . . . . . . . . . . . . . 53 Public-interest law firm . . . . . . 27

Unemployment benefitScientific . . . . . . . . . . . . . . . . . . . 28Political activity . . . . . . 19, 21, 46 Publicly supportedtrust . . . . . . . . . . . . . . . . . . . . . . 50Single entity . . . . . . . . . . . . . . . . . 35organization . . . . . . . . . . . . . . 30Political organization:

Unrelated businessSocial clubs . . . . . . . . . . . . . 19, 48Attraction of publicIncome tax return . . . . . . . . . . 12income . . . . . . . . . . . . . . . . . . . . 11Social welfaresupport . . . . . . . . . . . . . . . . . . 30Taxable income . . . . . . . . . . . . 12

Unusual grants . . . . . . . . . . 33, 36organization . . . . . . . . . . 19, 45Ten-percent-of-support . . . . . 30Power of attorney . . . . . . . . . . . . 5User fee . . . . . . . . . . . . . . . . . . . . 3, 5Specified organizations . . . . . 40Preferred stock . . . . . . . . . . . . . . 53

Sports organization,Prevention of cruelty to children Ramateur . . . . . . . . . . . . . . . . . . . 28 Vor animals . . . . . . . . . . . . . . . . 28 Racial composition . . . . . . . . . . 24

State-sponsored . . . . . . . . . . . . 56 Veterans’ organization . . . . . . 54Private delivery service . . . . . 21 Racially nondiscriminatoryHigh-risk health coverage Voluntary employees’Private foundations . . . . . . . . . 28 policy . . . . . . . . . . . . . . . . . . . . . 24

organization . . . . . . . . . . . . . 56 beneficiaryPrivate operating Real estate board . . . . . . . . . . . 47 Workers’ compensation association . . . . . . . . . . . . . . . 50foundation . . . . . . . . . . . . . . . . 43 Recognition of exemption, reinsurance Volunteer fire company . . . . . 46Private school . . . . . . . . . . . . . . . 24 application . . . . . . . . . . . . . . . . 21 organization . . . . . . . . . . . . . 56Prohibited tax shelter Religious organizations . . . . . 27 Stock or commodity

transactions: Requests other than Wexchange . . . . . . . . . . . . . . . . . 47Entity managers . . . . . . . . . . . . 57 applications . . . . . . . . . . . . . . . . 5 War veterans’Suggestions . . . . . . . . . . . . . . . . . 3Entity managers excise Responsiveness test . . . . . . . . 41 organization . . . . . . . . . . . . . . 54Supplemental unemploymenttax . . . . . . . . . . . . . . . . . . . . . . 57 Revocation of exemption . . . . . 5 Withdrawal of application . . . . 4benefit trust . . . . . . . . . . . . . . . 50Listed transaction . . . . . . . . . . 57 Ruling letter . . . . . . . . . . . . . . . . . . 5 Withholding information fromSupport . . . . . . . . . . . . . . . . . 32, 33Prohibited reportable public . . . . . . . . . . . . . . . . . . . . . . 4Support test . . . . . . . . . . . . . . . . . 30transactions . . . . . . . . . . . . . 57

Workers’ compensationFacts andSSubsequently listedreinsurancecircumstances . . . . . . . . . . . 30transaction . . . . . . . . . . . . . . . 57 Scholarship:organization . . . . . . . . . . . . . . 56One-third . . . . . . . . . . . . . . . . . . 30Tax-exempt entities . . . . . . . . 57 Private school . . . . . . . . . . . . . . 25

Public charity . . . . . . . . . . . . . . 36Public charity: Scholarships . . . . . . . . . . . . . . . . 26 ■Supporting organization . . . . . 58Gifts and contributions . . . . . . 37 School, private . . . . . . . . . . . . . . 24

Grant from . . . . . . . . . . . . . . . . . 38 Scientific organizations . . . . . 28Section 509(a)(1) . . . . . . . . . . . 29 TSection 501(c)(3) organizations:Section 509(a)(2) . . . . . . . . . . . 35 Amateur athletic . . . . . . . . . . . . 28 Tax help . . . . . . . . . . . . . . . . . . . . . 62Section 509(a)(3) . . . . . . . . . . . 38




Appendix. Sample Articles of OrganizationThe following are examples of a charter (Draft A) and a declaration of trust (Draft B) that contain the required information asto purposes and powers of an organization and disposition of its assets upon dissolution. You should bear in mind thatrequirements for these instruments may vary under applicable state law.

See Private Foundations and Public Charities for the special provisions required in a private foundation’s governinginstrument in order for it to qualify for exemption.

Draft A

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

First: The name of the Corporation shall be .

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

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

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

Fifth: No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees,officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonablecompensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in ArticleThird hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwiseattempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing ordistribution of statements) any political campaign on behalf of or in opposition to any candidate for public office.Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to becarried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or thecorresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible undersection 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.If reference to federal law in articles of incorporation imposes a limitation that is invalid in your state, you may wish tosubstitute the following for the last sentence of the preceding paragraph: “Notwithstanding any other provision of thesearticles, this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that arenot in furtherance of the purposes of this corporation.”

Sixth: Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within themeaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, orshall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not sodisposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of thecorporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shalldetermine, which are organized and operated exclusively for such purposes.In witness whereof, we have hereunto subscribed our names this day of ,20 .




Appendix. Sample Articles of Organization, continued

Draft B

The Charitable Trust. Declaration of Trust made as of the day of, 20 , by , of , and

, of , who hereby declare and agree that they have received this dayfrom , as Donor, the sum of Ten Dollars ($10) and that they will hold and manage thesame, and any additions to it, in trust, as follows:

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

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

Third:

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

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




C. In this Declaration of Trust and in any amendments to it, references to “charitable organizations” or “charitableorganization” mean corporations, trusts, funds, foundations, or community chests created or organized in the United Statesor in any of its possessions, whether under the laws of the United States, any state or territory, the District of Columbia, orany possession of the United States, organized and operated exclusively for charitable purposes, no part of the netearnings of which inures or is payable to or for the benefit of any private shareholder or individual, and no substantial partof the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which do notparticipate in or intervene in (including the publishing or distributing of statements) any political campaign on behalf of or inopposition to any candidate for public office. It is intended that the organization described in this paragraph C shall beentitled to exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the correspondingsection of any future federal tax code.

D. In this Declaration of Trust and in any amendments to it, the term “charitable purposes” shall be limited to and shallinclude only religious, charitable, scientific, literary, or educational purposes within the meaning of those terms as used insection 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, but only suchpurposes as also constitute public charitable purposes under the law of trusts of the State of .

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

Fifth: Any trustee under this Declaration of Trust may, by written instrument, signed and acknowledged, resign his office. Thenumber of trustees shall be at all times not less than two, and whenever for any reason the number is reduced to one, thereshall be, and at any other time there may be, appointed one or more additional trustees. Appointments shall be made by thetrustee or trustees for the time in office by written instruments signed and acknowledged. Any succeeding or additionaltrustee shall, upon his or her acceptance of the office by written instrument signed and acknowledged, have the samepowers, rights, and duties, and the same title to the trust estate jointly with the surviving or remaining trustee or trustees as iforiginally appointed.

None of the trustees shall be required to furnish any bond or surety. None of them shall be responsible or liable for the acts oromissions of any other of the trustees or of any predecessor or of a custodian, agent, depositary, or counsel selected withreasonable care.

The one or more trustees, whether original or successor, for the time being in office, shall have full authority to act eventhough one or more vacancies may exist. A trustee may, by appropriate written instrument, delegate all or any part of his orher powers to another or others of the trustees for such periods and subject to such conditions as such delegating trusteemay determine.

The trustees serving under this Declaration of Trust are authorized to pay to themselves amounts for reasonable expensesincurred and reasonable compensation for services rendered in the administration of this trust, but in no event shall anytrustee who has made a contribution to this trust ever receive any compensation thereafter.

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

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




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

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

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

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

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

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

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

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

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


Group Exemptions Tax Exempt and Government Entities Division

What is a group exemption letter?

The IRS sometimes recognizes a group of organizations as tax-exempt if they are affiliated with a central organization. This avoids the need for each of the organizations to apply for exemption individually. A group exemption letter has the same effect as an individual exemption letter except that it applies to more than one organization.

What is the reason for group exemptions?

Group exemptions are an administrative convenience for both the IRS and organizations with many affiliated organizations. Subordinates in a group exemption do not have to file, and the IRS does not have to process, separate applications for exemption. Consequently, subordinates do not receive individual exemption letters.

What types of organizations can qualify for group exemptions?

Exempt organizations that have or plan to have related organizations that are very similar to each other may apply for a group exemption.

What are central and subordinate organizations?

Groups of organizations with group exemption letters have a "head" or main organization, referred to as a central organization. The central organization generally supervises or controls many chapters, called subordinate organizations. The subordinate organizations typically have similar structures, purposes, and activities.

Example: X is a national, fraternal organization exempt under Internal Revenue Code ("IRC") section 501 (c)(8). X has several state and hundreds of local chapters that have nearly identical articles of incorporation, by-laws, purposes, and activities. As the national organization, X is considered the central organization: the state and local chapters are subordinate organizations and are covered under X's group exemption.

What criteria must organizations meet to be included in a group exemption?

To qualify for a group exemption, the central organization and its subordinates must have a defined relationship. Subordinates must be:

Affiliated with the central organization; Subject to the central organization's general supervision or control; and Exempt under the same paragraph of IRC 501 (c), though not necessarily the paragraph under which the central organization is exempt.

Rev. Proc. 80-27, 1980-1 C.B. 677 sets forth additional criteria.

Must the central organization be recognized by the IRS as tax-exempt before the organization can obtain a group exemption?

No. A central organization may submit its request for a group exemption at the same time it submits its exemption application on Form 1023 or Form 1024. Although churches are not required to apply for recognition of their own status in order to be tax-exempt, under the procedures for group rulings, a church

REL 00957

must request recognition of its own exempt status in order to be the central organization in a group ruling.

Are there any special rules for churches?

With limited exceptions, churches are subject to the same general requirements relating to group rulings as other organizations. However, churches are not required to file annual updates notifying the IRS of changes in the composition of the group.

Where does a central organization apply for exemption and submit a request for a group exemption?

A central organization sends its application for exemption, the request for a group exemption, and the required user fee, to:

Internal Revenue Service� PO. Box 192� Covington, KY 41012-0192�

Or, if using express mail or a delivery service, to:

Internal Revenue Service 201 West Rivercenter Blvd. Attn: Extracting Stop 312 Covington, KY 41011

What must a request for a group exemption contain?

The central organization submits a letter to the IRS on behalf of itself and its subordinates. The letter includes:

a.� Information verifying the existence of the required relationship;

b.� A sample copy of a uniform governing instrument (such as a charter, trust indenture, articles of association, etc.) adopted by the subordinates;

c.� A detailed description of the purposes and activities of the subordinates including the sources of receipts and the nature of expenditures;

d.� An affirmation by a principal officer that, to the best of the officer's knowledge, the purposes and activities of the subordinates are as set forth in (b) and (c) above;

e.� A statement that each subordinate to be included in the group exemption letter has furnished written authorization to the central organization;

f.� A list of subordinates to be included in the group exemption letter to which the IRS has issued an outstanding ruling or determination letter relating to exemption;

g.� If the application for a group exemption letter involves IRC 501(c)(3), an affirmation to the effect that, to the best of the officer's knowledge and belief, no subordinate to be included in the group exemption letter is a private foundation as defined in IRC 509(a);

h.� For each subordinate that is a school claiming exemption under IRC 501(c)(3), the information reqUired by Rev. Proc. 75-50, 1975-2 C.B, 834 and Rev. Rul. 71-447, 1971-2C.B. 230; and

i.� A list of the names, mailing addresses (inclUding zip code), actual addresses (if different), and employer identification numbers of subordinates to be included in the group exemption letter. A current directory of subordinates may be furnished in lieu of the list if it includes the required information and if the subordinates not to be included in the group exemption letter are identified.

The rules for applying for a group exemption are set forth in Rev. Proc, 80-27, 1980-1 C,B. 677.

REL 00958

How does the group exemption process work?

Upon receipt of an application Form 1023 or 1024 and a request for group exemption, the IRS first determines whether the central organization and the existing subordinates qualify for tax exemption. Once the IRS grants the exemption, the central organization is responsible for: (1) ensuring that its current subordinates continue to qualify to be exempt; (2) verifying that any new subordinates are exempt; and (3) updating the IRS on an annual basis of new subordinates, subordinates no longer to be included, and subordinates that have changed their names or addresses.

What is included in an annual update?

Annual updates must contain the following information:

a.� Information about changes in purposes, character, or method of operation of subordinates included in the group exemption letter.

b.� Lists of :

1.� subordinates that have changed their names or addresses during the year;

2.� subordinates no longer to be included in the group exemption letter because they have ceased to exist, disaffiliated, or withdrawn their authorization to the central organization; and

3.� subordinates to be added to the group exemption letter because they are newly organized or affiliated or have newly authorized the central organization to include them.

Each list must show the names, mailing address (including zip codes), actual address if different, and employer identification numbers of the affected subordinates.

An annotated directory of subordinates will not be accepted for this purpose. If none of these changes occurred, the central organization must submit a statement to that effect.

c.� The same information about new subordinates that was required in the initial request. If a new subordinate does not differ in any material respects from the subordinates included in the original request, however, a statement to this effect may be submitted in lieu of detailed information.

Where does a central organization submit an annual update?

Annual updates go to the Ogden Service Center, Mail Stop 6271, Ogden, UT 844044749. Six months before the update is due, the IRS sends the central organization a list of currently listed subordinates, sometimes called List of Parent and Subsidiary Accounts.

What are the filing requirements for organizations that hold group exemptions?

A group exemption letter does not change the filing requirements for exempt organizations. The central organization and the subordinates must file Forms 990 (or 990-EZ), unless they meet a filing exception. If it is required to file an annual return, the central organization must file its own separate return but may also file a group return on behalf of some or all of its subordinates. If the central organization files on behalf of some of its subordinates, rather than all, it must attach a list of the subordinates included in the return.

REL 00959

How do I verify that an organization is included as a subordinate in a group exemption ruling?

The central organization that holds a group exemption (rather than the IRS) determines which organizations are included as subordinates under its group exemption ruling. Therefore, you can verify that an organization is a subordinate under a group exemption ruling by consulting the official subordinate listing approved by the central organization or by contacting the central organization directly. You may use either method to verify that an organization is a subordinate under a group exemption ruling.

How do donors verify that contributions are deductible under section 170 with respect to a subordinate organization in a section 501(c)(3) group exemption ruling?

Donors should consult IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, or obtain a copy of the group exemption letter from the central organization. The central organization's listing in Publication 78 will indicate that contributions to its subordinate organizations covered by the group exemption ruling are also deductible, even though most subordinate organizations are not separately listed in Publication 78 or on the EO Business Master File. Donors should then verify with the central organization, by either of the methods indicated above, whether the particular subordinate is included in the central organization's group ruling. The subordinate organization need not itself be listed in Publication 78 or on the EO Business Master File. Donors may rely upon central organization verification with respect to deductibility of contributions to subordinates covered in a section 501 (c)(3) group exemption ruling.

Where can an organization get additional information?

You can get more information about group exemptions and the group ruling process from the IRS Exempt Organizations Division:

EO Web Site [www.irs.gov/eol

Publication 557, Tax-Exempt Status for Your Organization.

EO Customer Account Services

You may direct questions about group exemptions to the IRS Tax Exempt and Government Entities Customer Account Services at (877) 829-5500 (toll-free number).

If you prefer to write, you may write us at:

Internal Revenue Service Exempt Organizations Determinations P.O. Box 2508� Cincinnati, OH 45201�

~IRS Department of the Treasury Internal Revenue Service

www.lrs.gov

Publication 4573 (Rev. 6-2007) Calalog Number 49351 Q

REL 00960

-------------------------------

--------------------------------

Governance Check Sheet This check sheet is to be IIsed by EO Reve/ll/e Agents in the examination ofI. R. C. 50! (c)(3) public charities. Please complete all parts of this check sheet.

Part 1 - Revenue Agent and Exempt Organization Information

I. Agent Name I� Group Number

2. Organiz?ltion Name I r------------------------------

3. EIN I 4. Tax Pericd(s) Examined I 5. Form Being Examined I 6. Foundation Code 1----------------------------------------

Part 2 - Governing Body and Management

7.� Does the organization have a written mission statement that articulates its current I.R.C. ~ 50 I(c)(3) purpose(s)? Select on e of the options.

8.� Do the organization's bylaws set forth the following information for the members of the governing body and the organization's� officers? Select one of the options from each of the drop down boxes.�

Compositi on 1 Duties I� Qualifications I Voting Rights I 9. Have copies of the most recent versions of the organization's articles and bylaws been provided to the following? Select all that apply.

I All Board Members I Only Voting Board Members I General Public (by request) I General Public (online) 1- Not Provided

10. At the beginning of the primary year under examination, what was the number of board members with voting� rights? Enter a whole number.�

I Ia.� How often did a quorum of voting board members meet during the primary year under examination? Enter a� whole number.�

II b. How often did the full board meet during the primary year under examination? Select one of the options.

12.� Did the n umber of meetings referred in Ita and 11 b meet or exceed the meeting requirements set forth in the organization's bylaws? Select one of the options.

Part 3 - Compensation

13.� Are compensation arrangements for all officers, directors, trustees, and key employees approved in advance by an authorized body of the organization composed of individuals with no conflict of interest with respect to the compensation arrangement? Select one of the options.

14a. Does the authorized body rely upon comparability data in making compensation determinations? Select one of the options.

14b. If "Always" or "Sometimes" for 14a, select the comparability data considered by the organization? Select all that apply. r- .. Non-Profit Entities Not ../� Exempt OrganizatIOns I EFT I Governmental Entities I For-Profit EntIties I Other

xempt rom ax

14c. 1f the "Other" box is checked for 14b, provide a brief explanation of the other source. I 15. Is the basis for all compensation determinations contemporaneously documented. Select one of the options.

Part 4 - Organizational Control

16a. Did any of the organization's voting board members have a family relationship and/or outside business relationship with any other voting or non-voting board member, officer, director, trustee, or key employee? Select one of the options.

16b. If YES to 16a, list the number of relationships between the officers, directors, trustees, or key employees.

16c. Numher with Family Relationships I Number with Business Relationships I Number with Both Relationships

Total Number of Relationships (should equal the amount listed in 16b) 10

17. Does effecti ve control of the organization rest with a single or select few individuals? Select one of the options.I Form 14114 (12-2009) Catalog Number 54282M pUblish.no.irs.gov Department of the Treasury - Internal Revenue Service

REL 00961

Part 5 - Conflict of Interest

18a. Does the organization have a written conflict of interest policy? Select one of the options.�

18b. If YES to 18a, does the policy address recusals? Select one of the options.�

18c. If YES to I8a, does the policy require annual written disclosures of conflicts of interest? Select one of the� options.�

ISd. If YES to 18a, during the primary year under examination, if any actual or potential conflicts of interest were� disclosed, was the organization's conflict of interest policy adhered to? Select one of the options.�

Part 6 - Financial Oversight

19. Are there systems or procedures in place intended to make sure assets are properly used, consistent with the� organization's mission? Select one of the options.�

20a. How often did the organization provide board members with written reports of the organization's financial activities? Select one of the options.

20b. How often did the board discuss/consider reports of the organization's financial activities? Select one of the options.

21. Prior to filing, was the Form 990 reviewed by the full board and/or a designated committee? Select one of the options.

22a. During the primary year under examination, was an independent accountant's report prepared? Select one of the options.

22b. If YES to 22a, was the accountant's report discussed/considered by the full board and/or a designated committee? Select one of the options.

23a. Was a management letter prepared by the independent accountant? Select one of the options.

23b. If YES to 23a, was the management letter reviewed by the full board and/or a designated committee? Select one of the options.

23c. If YES to 23a, did the organization adopt any of the recommendations contained in the management letter? Select one of the options.

Part 7 - Document Retention

24a. Does the organization have a written policy for document retention and destruction? Select one of the options. I 24b. If YES to 24a, does the organization adhere to its written policy for document retention and destruction?

Select one of the options.

25. Does the board contemporaneously document its meetings and retain this documentation? Select one of the options.

26. Was your examination hindered by a lack of necessary documentation? Select one of the options.

Part 8 - Disposition

27. Examination Disposal Code for Primary Retum

28. Principal Issue Codes for Primary Return

First Issue

Second Issue�

Third Issue�

Fourth Issue�

Submit Form .I Form 14114 (12-2009) Catalog Number 54282M pUblish.no.irs,gov Department of the Treasury - Internal Revenue Service

REL 00962

Table 3. Form 990 Returns of 501 (c)(3)-(9) Organizations: Balance Sheet and Income Statement Items, by Code Section, Tax Year 2008 [All figures are estimates based on samples·-money amounts are In thousands of dollarsl

Internal Revenue Code Section Ilem

501(e){3) PI 501(eX4) 501(e)(5) 501(eX6) 501(e)(7) 501(eX6) 501(e)(9)

(1) (2) (3) (4) (5) (6) (7)

Number of return. .. 148,821 9,316 8,618 13,076 7,851 2,471 4,813

Total a...ta 2,464,425,896 90,215,515 28,054,220 57,293.124 22,227,439 98,601,263 125,383.807

Cash non-Interest bearing 56,150.449 2.601.059 1.741.005 2.672,141 909,619 370.119 2,690,268

SaVings and temporary cash ,nvestments 179,666,433 9,190.332 6.439,311 10.066.417 1,501,271 3,459.722 16.696,633

Pledges and grants receIvable 66.577.163 303.746 • 13.124 497.164 12.276 '13,249 161.035

Accounts recelvabl-e 126.843,041 5.883.244 1.062.202 2.860.622 1.187.488 225.989 6.594.270

ReceIVables from officers, etc. 734.481 168.483 1.735 86.453 3.302 • 9,187 • 3,263

Recer ....ables from disqualified persons 500.628 0 • 112 • 441 • 5 0 0

Notes and loans receivables 103.760,470 28.962,038 386,172 1,956,376 147,777 1.660,523 96,274

InventOries ror sale or use 15.073.566 1.036.919 47,649 229,834 261,172 27,729 7,650

PrepaId expenses or deferred charges 16.916,696 996.142 125,641 749.090 201,129 50.758 280,373

Land. bUildings, & equlpmenl (nel) 769.169,220 12.146.992 4,316,373 5.493,550 16,941,062 1,901,213 414,768

Investments In publiC secuntl6S 531.835.544 17,190,688 10,289,351 25,209,964 401,659 6O,639,9'0 75,299,518

Investments In other securities 392,925.886 5,400,872 2,748,858 4,444.283 185,147 19,858.213 16.816.492

Program.relaled Investments 39,332,526 766,544 103,779 912,415 33.574 8.735,479 805.567

Intangible assets 4,881,915 394,605 • 19.348 93,563 53.264 • 999 0

Other assels 172.037,654 5,171,846 755.360 1.820.769 366.675 1.448.173 5.315.457

TolaIU.bllltl•• 1,078,229,&45 50,527,149 7,181,024 34,201,749 7,910,358 87,284,136 26,935,283

Accounts payable and accrued expenses 201,321.306 11,603.305 3,401.189 6.280,499 1.034.972 528.965 12.574,402

Granls payable 16.060.289 706.160 56,092 57.674 • 499 • 1.329 50.079

Deferred revenue 55,668.321 3.739.109 266.818 4.720.223 871.449 115.733 472.722

Tax-exempt bond liabilities 359.498,224 5.125,062 0 • 58.961 • 1.350 • 393.933 0

Escrow account liability 4,723.411 371.615 124.582 174.849 • 2.251 • 260 27.615

Payables to officers, dIrectors, etc 764.581 • 30,615 0 • 1.692 • 7.356 0 • 6.388

Secured mortgages and notes payable 160.396.667 9.692.083 990,776 3.216.671 4.805,574 283.286 1,623.907-Unsecured .....Ot95 and loans payable 24,696,469 12.172,819 169.796 279,044 254.752 • 647 56.625

Other habllihes 235,080.377 7.086,381 2.169.770 19,412.136 932.152 85.959.985 12.123.545

Tota' fevenUI 1,352,265,885 83,773,550 19,690,361 35,134,454 10,931,202 14,100,009 130,348,787

Total contributions 306,824.811 5.223.096 3.626,482 7.063,619 1,455,411 220,640 200,649

Federated campaIgns 3.392.058 • 1,544 • 13.445 • 41,755 '14.966 • 129 0

Membership dues 3,794.038 1.044,959 3.004.625 3,509,661 1,331.053 113,165 • 129,140

Fundralsing events 5,919.225 60,886 • 19,046 41.521 36,844 4,672 • 795

Related organizatIons 17.533.250 379.063 83.147 62,922 2,291 • 5,226 - • 35,007

Government granls (contnbullons) _. 130.976,527 1.580.906 109,221 1,978,852.. • 4,275 • 45,164 - • 9,832

All other contributions. giftS, etc. 145.209.711 2.155.737 396,999 1,428,910 65,982 52,264 • 26,075

Program service revenue 1,029,516,081 75,525,794 14,900,594 25,197.892 7,086,404 10,474,486 133,829,043

Investment Income 24,664,299 1,240,047 594,524 1,408,768 54,555 3,773,170 3,280,710

Ta)(~e)(empt bond proceeds 350,669 29,240 • 364 • 708 • 460 • 36.778 • 2.502

RoyaltIes 2,638,738 722,113 103,109 433,479 10,705 • 1,407 • -761

Total net rental Income 2,804,250 203,950 82,263 33,897 69.180 22,167 -24.120

Net rent .• Real estate 2,775,472 221,022 81.779 33,679 62.619 20.099 -24.120

Gross rents - Real estate 6,523,431 324,802 194.908 178,648 99.542 37.717 52,697

Renlal expense •• Real estate 3.747,960 103.760 113,130 144,769 36.722 17.618 76,817

Net rent -- Personal property 28,779 -17.072 • 484 • 18 6.361 • 2.068 0

Gross rents - Personal property 60,366 -16.252 • 1.716 • 1,229 8,138 • 2,068 0

Rental expense - Personal property 31.587 • 820 • 1,232 • 1.211 1,777 0 0

Tatal net gain from sales of assets -40.092,904 -373,569 -523.902 -580.418 -5,865 -640.175 -2.826.223

Net gain from sales .- Secunt,es -41.839,585 .420.462 -529.728 -643,266 2,387 -859.260 -2.850.235

Gross sales -. Securttles 657,763,029 25,864,592 8.616.935 18.683,699 358,244 3.491,345 112.672.494

Sales expense - SecUfltWlS 699.602,614 26,285.054 9.146.664 19.326.965 355.857 4,150,604 115,522.729

Net gaIn from sales _. Other assets 1.746.680 46.893 5.826 62.648 -6.253 19,084 24.012

Gross sales -- Other assets ',.472,722 307.840 173.177 151.883 22.906 47,308 1,187,707

Sales expense - Other assets 9.726.041 260.947 167.351 89.035 31.158 • 28.223 1,163.695

Nttl fundralsing Income 1.618.222 50.823 ·1.610 83,565 21.380 2 1 .767 • 451

Gross fund raising 4.672,291 113.508 20.386 273.933 93,444 45,724 • 480

Fundrslslng expenses 3,054,069 62.684 21,996 190.368 72,064 23,957 • 29

Net gaming Income 397,711 17,355 • 421 • 13 ·'7,600 18,355 0

Gross Income from gamIng 3.263.220 '59,228 • 1,316 • 13 • 66,647 111,583 0

Gaming expenses 2.865,509 141,873 • 895 0 • 49.248 93,229 0

Net Income from sales of Inventory 5,382,581 136,010 31.777 199,612 1,860,923 54.546 • -1.099

Gross sales of Inventory 14,977,492 453,304 89,193 311.638 3.541.057 149.105 • 25.976

Cosl of goods sold (lnvenlory) 9,594,911 317,294 57,417 112.026 1.680.134 94.559 • 27.075

Other revenue 18,141,426 996,689 876,341 1.293.320 360.449 116.867 -4.114.566

Total expenses 1,370,874,288 81.761,325 19.789,969 37,162,253 10,818,431 14,668,075 138,242,830

Program services 1,191,052,391 74,589,249 [2) [2] (2) [2) (21

Management and general 164.483,477 6,949,273 [2] (2] 121 (2) [2J

FundralSlng 15,338,419 222,803 (2) [2J [2) [2] 12]

E-.cesl at revenue over expenses (net) -18,6118,402 2,012,224 ·99,607 -2,027,799 112,771 -566,066 -7,896,063 • ~~limale shoufd be U-!loQ WIth Cliubon tUK..iItIlJfOe ot the small numbel of sampIe lolu(l'\S on wt>Jeh 'liS c,)s/fO

(11 Ell"cludO$ pfNSle loun(lOJllOns, most churchoa. and CCf131n other lypos ol/AllQlQUS Of9i'nlUlllOl'I~

1:11 Nol rBQU'frtd 10 be ropOl'1oo

NOTES Data exdvdo most ofgantZ<JtlOt,!!.......lh lacetOts \4,85 lhan $25.000 001&11 may nOI aIM \0 1010'115 bec..aUl>9 of round'~

SQU'Ctl IRS. SIAhSh~ 01 Jncon'l6 DIVISion. JUl~ 2011

REL 00963

-- - - -- - --

- - - -

-- -- - -

--

Table 4. Form 990·EZ Returns of 501(c)(3)-(9) Organizations: Selected Items, by Code Section, Tax Year 2008

[All figures are esti mates based on samples--money amounts are In thousands of dollars]

Internal Revenue Code Section Item

501(cX3) [1J 501(cX4) 501(cX5) 501(c)(6) 501(cX7) 501(cX8) 501(c)(9)

(1) (2) (3) (4) (5) (6) (7)- -- -- - --- -. ...- _._.. ,_.---~_

Number of returns 166,363 19,819 13,538 18,596 14,570 4,692 1,336

Total assets 36,790,465 3,238,884 3,029,980 3,057,738 2,562,525 1,530,423 397,58.4

Cash, savings, and Investments 17,568,580 1,832,012 2,196,452 2,333,937 950,057 560,124 342,396

Land and buildings (net) 12,095,262 932,357 618,834 358,777 1,239,139 856,998 • 206

Other assets 7,126.623 474,516 214,694 365,024 373,328 113,300 54,982

Total liabilities 8,246,422 833,620 244,202 523,195 700,383 224,709 • 17,978

Total revenue 26,003,541 2,042,167 2,225,321 3,120,534 1,711,907 635,193 330,240

Contnbutlons, g,fts, and grants 13,851,212 697,985 181,056 385.971 101,921 53,147 • 93,417

Program service revenue 8,498,388 564,041 153,400 1,079,340 437,940 247,646 18~,3(3

Membership dues and assessments 1,339,956 406,482 1,569,752 1,244,741 904,597 78,519 • 34,910 .. _. Investment income (loss) 538,821 63.431 78,726 53,563 33,312 26,217 12,376-- -.

Gam (loss) from sales of assets -147,465 11,222 -234 2,616 6,116 10,356 • 55

Gross amount from sales 1,362,026 120,797 66,241 78,600 27,227 46,867 • 4,022

Cost or other basis and sales expense 1,509,490 109,575 66,474 75,984 21,111 36,511 • 3,967 . - •.. ., - .

Net income (loss), special events and activities 1,002,284 164,176 21,019 112,789 41,564 77,657 • 2,187 .0_- - . . -- - - -' - -'- -

Gross revenue 2,650,356 585,156 68,919 347,733 156,987 216,025 • 3,829

Direct expenses 1,648,070 420,979 47,900 234,944 115,423 138,368 • 1.642

Gross profit (loss), sales of Inventories 283,738 52,825 1,891 40,435 94,598 95,425 0 ~.- - -- - -- - -- - -"- -- - - -.. - - -_... -~-.. _._

Gross sales minus relurns and allowances 765,522 129,080 4,953 59,370 217,652 303,429 0-Cost of goods sold 481,783 76,255 3,062 18.935 123,053 208,004 0

O1her revenue (loss) 636,592 82,002 219,710 201,077 91,858 46,225 • 1,923 ~... .. ...- ..... - -

Total expenses 25,490,287 2,029,672 2,101,361 3,023,018 1,630,234 637,202 277,095 ~

.. - .., , .. --- - .._._-~---' - --- - --- -- -- Grants and similar amounts paid 3,444,088 208,523 393,782 120,552 29,012 40,717 • 3,270

- - .- . .. Benefits paid to or for members 155,142 58,718 108,475 53,279 50,110 4,932 211,482

Salaries, other compensation, and benefits 8,240,226 266,460 655,767 871.732 301,493 105,773 • 7,177

ProfeSSional fees 1,888,808 224,003 89,280 287,985 67,476 17,998 31,330 - .. .... -- '-- .. - .. ,.. ---, - ---_._- --

Occupancy, rent, and utilities -~

2,542,383 324,733 168,661 169,216 454,750 ... __.n___ • 2,188 178,472 _~. . - . - - --

Printing, publications, and postage 714,187 75,609 49,303 154,338 43,424 14,060 2,720

Other expenses 8.505,439 871,625 636,090 1,365,917 683,967 275,249 18,928

Excess of revenue over expenses (net) 513.253 12,495 123,960 97,516 81,673 -2,009 '53,1451

'Eatlmate 8hould be used IMth cauhon because 01 the small number of sample retume on \N'hlch It I!I based

[1 J Excludee pnvate foundations, most church&!, 8nd certain othEtf types of religious orgamzallons

NOTES For T8;l Year 2008. organizations ""th end-()f·year tolal assets under $2.500.000 and gr08s receipts under $1.000,000 could elect to me Forms 990-EZ rather then Forms 990 Data e;lclude most organizations 'oMth receIpts lesa than $25,000 Detail may not add to lolale because of roundIng

Source IRS, StallsflC8 or Income OtvtelOn. July 2011

REL 00964

Table 1. Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Unrelated Business Taxable Income (less Deficit), Unrelated Business Taxable Income, and Total Tax, by Type of Tax-Exempt Organization, Tax Year 2008 [All figures are estimates based on samples-money amounts are in thousands of dollars]

Unrelated business

Type of tax-exempt organization, as defined by Intemal Revenue Code Section Number of

returns Gross

unrelated Total deductions [1,2]

taxable income (less deficrt) [3)

Unrelated business taxable income [4J Total tax [5J

business income (UBI)

Number of retums

Amount Number of

retums Amount

Numberof retums

Amount Number of

returns Amount

(1 ) (2) (3) (4) (5) (6) (7) (8) (9) (10l

All organizations 42,066 10,300,903 41,806 10,218,223 34,234 82,682 20,371 1,209,470 20,311 336,314 220(e) Archer Medical Savings Accounts 0 0 0 0 0 0 0 0 0 0 401(a) Qualified pension, profit-sharing, or stock bonus plans 417 140,835 410 73,997 412 66,838 379 73,196 381 23,408 408(e) Traditional Individual Retirement Accounts 6,279 49,205 6,245 16,393 5,780 32,812 5,577 33,650 5,577 9,082 408(A) Roth Individual Retirement Accounts 171 8.569 171 760 138 7,809 138 7,809 138 2,231

501 (c)(2) Title-holding corporations for exempt organizations [6J 311 53,541 311 51,092 270 2,449 179 6.222 179 1,667 501 (c)(3) Religious. educational, charitable, scientific, or Irterary organizations 14,057 6,418,708 13,970 6.614,711 11,331 -196,003 5,276 572,933 5,254 167,022 501 (c}(4) Civic leagues and social we~are organizations 1,356 540,059 1,356 527,916 999 12,143 439 42,439 441 13,228 501(e)(5) Labor, agricu~ural, and horticu~ral organizations 2,171 265,624 2,171 260,643 1,731 4,982 811 25,560 811 6,716 501 (e)(6) Business leagues, chambers of commerce. and real estate boards 5,352 1,009,264 5,352 1,014,260 3,836 -4,995 1,752 78,893 1,821 23,356

501(e)(7) Social and recreational clubs 6,102 649,284 6,035 601,135 4,987 48,149 3,577 93,699 3,540 23,894 501(e)(8) Fraternal beneficiary societies and associations 1.027 85,478 1,027 84,635 784 843 427 6,632 427 1,139 501(e)(9) Voluntary employees' beneficiary associations 550 434,174 550 245,523 372 188.651 343 229,327 343 55,179 501 (e)(10) Domestic fraternal beneficiary societies and associations 306 26,104 273 27,352 241 -1.248 125 676 125 101 501(c)(11) Teachers' retirement fund associations 0 0 0 0 0 0 0 0 0 0

501(c)(12) Benevolent life insurance associations and certain mutual companies 278 75,961 278 71,789 218 4,172 156 10,245 156 2,416 501 (c )( 13) Cemetery companies d d d d d d d d d d 501(c)(14) StatEH:hartered credrt unions 1.637 312,529 1,637 395,367 1,392 -82,837 361 16,659 326 4.515 501(c)(15) Mutual insurance companies 0 0 0 0 0 0 0 0 0 0 501(c)(1,6) Corporations organized to finance crop operations 0 0 0 0 0 0 0 0 0 0

501 (c)(17) Supplemental unemployment benefit trusts 0 0 0 0 0 0 0 0 0 0 501 (c )(18) Employee-funded pension trusts 0 0 0 0 0 0 0 0 0 0 501(c)(19) War veterans' pests or organizations 1,986 219,486 1,953 219.557 1,683 -71 797 11,243 757 2,297 501(c)(21) Black Lung Benefit Trusts [7] 0 0 0 0 0 0 0 0 0 0 501 (c)(22) Wrthdrawalliabilrty payment funds 0 0 0 0 0 0 0 0 0 0

501 (c)(23) Veterans' associations founded before 1880 0 0 0 0 0 0 0 0 0 0 501(c)(24) Trusts described in section 4049 of ERISA 0 0 0 0 0 0 0 0 0 0 501 (c)(25) Title-holding companies with no more lt1an 35 shareholders 0 0 0 0 0 0 0 0 0 0 501(c)(26) High-risk hea~ insurance plans 0 0 0 0 0 0 0 0 0 0 501(c)(27) Workers' compensation reinsurance plans d d d d d d d d d d

529(a) Qualified State Turtion Plans d d d d d d d d d d 530(a) Coverdell Education Savings Accounts 0 0 0 0 0 0 0 0 0 0 d - Dn1n deleted to avoid dl&Ck>$ure of WormatlOn lor ~ tax pe~ 1-\0W'evef, data is IOCluded in appropnale totals.

(lJ EuJuct.. c:o:Jt of sales and ~es, which was ,ubtracted from groa.s re<::!!;pts from sales and $8T"\IIClJS in oornputhg gross profit from sales and set'W:e:3. Gross prof( from sales and Hrvic.e:s was a component of gro93 unrelatoo buslfl8SS ncome (UBI). Cost of sales and Soe1"kct5 CSIn nclude amounts a~ble to de~tion. salariM and wag~. and certain othOf ded1JCti)le 18ms For all axempl: organizations reportng gross US!. Q::)$ of sal_ and services wa" S2 -4 billion. [2] Includes both expemes and dedUcbons.-.ported on Form 900-T. hnes 13{B), 29, 31, and 33.

{3] Exch.d1!t:5 da'tlI from 7.832 returns with equal amounts of gross UBI snd Ioral deduc:tt;ms (4J Inch..rl«ll data from returns with posliYe amounts of unre\aled buMless ta..qbie ~me only [SJ Totel tax is ltle regular unrelated busrles.s income tax after reductaon by any la1 credb (foreign tax Cledl., genenll busi:ness credit. prof·year mf1rmum tax credJ.. and other allowable credits), plus !he "ahernati...e mln"'urn tax.. ~ the ~pn»:f taxon nondeductible lobby;ng and ~Ilical e;r;pendltures. and ~omer~

t:a~ The proxy tax wa"5 reported on Form goo..T and was ncluded in total tax.. but I. had no oonnecti:>n to the tax on unrelated bUSiness income or an organizaoon'~ irr.otvemen1 n unrelated bUUlMS actr..cies For exern~ organczatiom rvporbng 9r05.1 USlabove rtle S1.000 filing th",shold. totll PT01:'flaX W815 $14mflllon.�

16J Corporab:>1l$ that are oryentzed under an Ad of Congrea.s and lire instTumeru.lbe5 of the Un«.ed StalO$. dGSCCbed.,.s.ectt>n 501{cX1} of ttlelnt!!mal Re...enue Cod!!. are not 5UbJed to unrelated busnMs income taxation.� [7] PrepUt '~I set'Vice ful"lli.!o. prew,usly described., Secbon 501(cX20) of the ln1emal R0'f'8nue Code. were no longer 18x~.em~, beglming W'f11 tu: yeal"!lsftel June 30.'992 ThereJore. Ihese 0l"98l"l'lZati::>ns are not liBted iJ'l this table�

NOTE Ofr'bW may no! add to total5 becaUSol!l of rounding For mom complete descriptJonsof tt'Ie types oflB"'~~orgamzab:lns fin; Form Q9O-T, by the Internal RfWel'lUe Code seemn describulg them see the AppendIX to the rnost {ec~nt Unrelated B~ Income Tax (UBfT) amcle listed under PubllC*t..)rm _nd Papen; 00 the Exernpt 0l"98ntzaborL3' UBrr StstssOC$ page of [he IRS"""bsle (http.ltwww.o go~xst:rtsIcharitablestatsl8rticle1O"ij=97210.00html) SOURCE. fRS, St.atiIIticI of h::ome OMsion. October 201 1.

REL 00965

Royalty Income Reported by Tax-Exempt Organizations. Tax Year 2008

All figures are estimales based on samples. Money amounts are in thousands of dollars.

501(c)(3) [1) 501(c)(4) 501(c)(5) 501(c)(6) 501(c)(7) 501(c)(8) 501(c)(9)

Number of returns

Amount Number of

returns Amount

Number of returns

Amount Number of

returns Amount

Number of returns

Amount Number of

returns Amount

Number of returns

Amount

Total Royalty income 2,794 2.638.738 68 722.113 101 103,109 636 433,479 116 10,705 "8 "1,407 " 9 " (761)

Royalty income Related or exempt 589 355,137 " 3 " 5,291 "19 " 8,336 89 50,408 • 15 " 261 "5 " 600 "2 " (773)

Royalty income Unrelated business 71 3,588 " 2 " 264 " 2 "187 42 6,070 82 9,825 0 0 "4 "0

Royalty income Excluded 2,017 2,272,875 63 713,813 80 94,586 543 376,266 "18 "619 "3 " 807 " 7 " 13

[1] Excludes private foundations, which do not report royalty Income as a separate line item on Form 990-PF .

• Estimate Should be used WIth caution due to the small number of sample returns On whIch it is based

Source: Intemal Revenue Service. Statistics of Income DiviSion. October 2011.

Net Rental Income Reported by Tax-Exempt Organizations (including Private Foundations). Tax Year 2008

All figures are estimates based on samples. Money amounts are in thousands of dollars.

501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6) 501(c)(7) 501(c)(8) 501(c)(9)

Number of returns

Amount Number of retums

Amount Number of

returns Amount

Number of retums

Amount Numberof

returns Amount

Numberof returns

Amount Number of

returns Amount

Total Net Rental Income 23,239 3,226,363 1,645 203,950 1,082 82,263 1.392 33.897 1,754 69,180 1,074 22.167 74 (24.120)

Net rental income Related or exempt 7.788 749,641 942 154,191 393 25,748 318 8,545 912 34.086 386 12.530 37 (1,577)

Net rental income Unrelated business 2,931 84,479 114 1,090 225 8,587 420 (11,908) 769 31,629 " 236 "1,508 " 5 "877

Net rental income Excluded 12,531 2,301,434 398 38,816 385 48.588 727 37,479 137 1,036 275 6,339 32 (23,420)

• Estimate should be used With caution due to the small number of sample retums on which it tS based.

Source" Intemal Revenue Service, Statistics of Income Division. October 2011.

REL 00966


LETTER FROM THE DIRECTOR

Dear Colleagues:

Exempt Organizations (EO) respects the nonprofit sector's work and supports its efforts by helping to ensure that the public maintains trust in the exempt sector. Over this past year, our leadership and staff have continued to support these efforts through a robust educational program, a more efficient determination process, and a comprehensive compliance program. We also have continued to communicate the importance of organizational governance and its expected impact on compliance with the tax law.

As we move forward into a new year, we view Fiscal Year 2011 as an opportunity to build on our recent efforts, fine-tune certain projects and programs, and prepare for the inevitable changes in the landscape of exempt organizations. Our work for this year comes together around three major themes:

• EO Integrates. In recent years, EO initiated several projects focusing on specific segments of the sector, as well as particular compliance issues affecting a cross-section of exempt organizations. We believe it is now appropriate to incorporate these projects and lessons learned into the overall EO processes, rather than keeping these efforts as separate projects.

• EO Supports and Collaborates. In the coming year, IRS leadership will focus agency-wide attention on certain critical issues, including international activities and compliance with the passage of recent legislation. These important efforts require significant resources from EO. Other key projects will involve collaborative work with the National Research Program and non-filer initiatives.

• EO Invests. In order to keep up with the ever-changing exempt organization sector, EO will invest time and resources in a wide array of initiatives, which will touch a broader audience.

This report provides updated statistics and discussions of our accomplishments in FY 2010, as well as a preview of our programs in FY 2011. We look forward to working with the exempt community and our stakeholders and continuing to share what we learn.

Respectfully yours,

Lois G. Lerner

INSIDE THIS REPORT SPOTLIGHTS ON THE:

Compliance 2 Filing Relief Program.......8

Applications for Tax Exemption 3 Redesigned 2008

Form 990 Filings 10 Education & Formal Guidance 4

Organizational Information 6 Lois G. Lerner

Director, Exempt Organizations

FY 2011 Workplan ..... 16

REL 00967

Co pliance� This graph displays the combined total EO Examinations

. number of returns examined through the traditional examination process and the less EO Examinations is responsible for r~source~intensive compliance checks. enforcement activities, including both

compliance checks and audits of exempt organizations. EO Examinations is

Compliance checks inquire about an item ona . made up of field exam groups; the return or solicit information about an Exempt Organization Compliance Unit

, organization's operations, enabling us to (EOCU), which conducts compliance touch more organizations than we could by checks; Review of Operations (ROO), using an eXfJusiyely exam-based strategy~ which does follow-up reviews of

organizations; and Compliance Total number of returns examined Strategies Critical Initiative (CSCI), which

18000 coordinates EO's strategic planning,

16000 monitors progress of critical initiatives, and analyzes the results of these

14000 projects. r;==========;]

12000

10000

8000

6000

4000 Nan Downing

2000 Director, EO Examinations

0 FY04 FY07 FY08 FY09 FY10

(Baseline)

o Traditional Examinations III Compliance Checks

EO's traditional examinations, coupled with less resource-intensive compliance checks, continue to deliver impressive compliance results. * By expanding our collaboration with outside agencies including the Social Security Administration and the states - we obtained valuable electronic data that allowed us to more readily identify potential nonfilers and to focus our exam resources on noncompliant organizations. Our methods of case selection for examinations resulted in a higher percentage of cases selected involving significant issues and agents securing a considerably higher number of delinquent returns than in any recent year.

*2010 legislation provisions necessitated a higher ratio of traditional exams to compliance checks than in the past, resulting in fewer overall closures.

2

REL 00968

70

Applications for Tax Exemption

Rulings and Agreements EO Rulings and Agreements (R&A), made up of Determinations and Technical, is responsible for reviewing applications for exemption, issuing private letter rulings, providing technical advice, and collaborating with Chief Counsel's office and the Department of the Treasury to deliver formal guidance.

Rob Choi, Director EO Rulings & Agreements

EO Determinations Closures 200~2010

I· Saeemng e Full Development

In 2008, the revision of the Form 990 eliminated the need for the advance ruling process for section 501(c)(3) organizations. Under the former ~roces~,

an applicant organization was granted public chanty status conditionally for its first five years, after which it had to come back and demonstrate it had sufficient public support to be classified as a public charity rather than a private foundation.

Under the new process, in lieu of coming back in five years, an organization shows that it has met and continues to meet the public support test on either Schedule A (Public Charity Status and Public Support) of Form 990 or Form 990-EZ.

The new process eliminated about 20,000 follow-up cases from the workload, which traditionally were disposed of through the screening process. While the number of cases went down, those remaining were more complex.

This chart compares the number of cases closed through the screening process I and cases closed after in-depth developmentin FY 2003-2010.

Despite a more difficult caseload, experience gained and efficiencies initiated to the v

screening program over the last several years have enabled

2010 us to continue to maintain a -high level of screening.

Full Development

3

REL 00969

d cation &� ormal Guidance�

With the expanded responsibilities imposed by new legislation and a growing customer base, EO continued its extensive education and communication efforts in FY 2010.

•� Provided an online toolkit to internal and external stakeholders to alert the tax-exempt community of the filing relief program available to small organizations at risk for losing their tax exemption for failure to file

•� Prepared and distributed information about new legislation, including the American Recovery and Reinvestment Act and Affordable Care Act, to the tax-exempt community

•� Hosted the inaugural joint workshops with Seton Hall University, West Virginia University and Lawrence Technological University to kick off the work of the Academic Institution Initiative

•� Hosted 18 Small & Midsize 501(c)(3) Workshops nationwide, which offered guidance on a variety of topics such as EO filing requirements, unrelated business income, and public inspection and disclosure requirements

•� Released an updated gaming publication, TaxExempt Organizations and Gaming, which helps organizations understand how their activities impact their tax-exempt status by describing the unique reporting and filing responsibilities of each type of exempt organization

Customer Education and Outreach

Customer Education and Outreach (CE&O) offers specialized education and outreach programs to help exempt organizations understand their tax responsibilities. CE&O oversees the Charities and Nonprofits pages of IRS.gov, develops publications and web-based materials, manages the Academic Institution Initiative, and offers face-to-face workshops and seminars on EO tax laws. In addition to CE&O core staff, subject-area experts from Examinations and R&A support EO outreach efforts and augment CE&O's mission.

Bobby larin, Director EO Customer Education & Outreach

The taQI~ bel.ow shows FY 2010 outreacheffqrts, as well as the changes from FY 2009.

EO Education and Outreach Efforts Outreach Efforts FY 2008

Total (Baseline)

EO Update subscribers 75,473

Speeches, Tax Forums and Workshops* 289

HIRS.gov/eoH website

FY 2009 Total

FY 2010 Total*

Change from

FY 2009

101,730 130,176 28%

305 194 -36%

4,960,256 4,994,022 5,333,380 7%views *The number of outreach events, most of which are generated externally, reached an all-time high in FY2008/2009, due to presentations describing the redesigned Form 990, a major EO initiative.

4

REL 00970

ducation & Formal Guidance (cant.)

EO makes technical interpretations of the laws and procedures publicly available through regulations, revenue rulings, revenue procedures,

. announcements, and notices. In FY 201 O,J>\jblishedguidance highlights included:

One-Time Filing Relief for Small Organizations

May 17, 2010, was the first filing deadline to trigger revocation under the Pension Protection Act (PPA) for organizations that failed to file for three consecutive years.

On July 26, 2010, IRS Commissioner Doug Schulman announced a one-time, two-part filing relief program to provide an additional opportunity for small organizations at risk for revocation to file.

The IRS posted a list of names and last-known addresses of possible at-risk organizations on the IRS.gov website and provided guidance on coming back into compliance. This guidance included details about completing filing requirements, along with frequently asked questions.

The guidance extended that the deadline to file to October 15, 2010, for the smallest organizations. Those with gross receipts of $25,000 or less could retain exemption by filing the simple Form 990-N, the e-Postcard, by the October 15 date.

Organizations eligible to file the Form 990-EZ for the past three years could save their tax-exempt status by filing their three delinquent returns and pay a small compliance fee by October 15, 2010.

5

Notice 2010-39

The Affordable Care Act (ACA) imposed four additional requirements for hospitals to qualify as section 501(c)(3) organizations. Notice 2010-39 explained the new requirements and additional reporting and excise taxes enacted in the ACA, and requested comments from the public on how the IRS should provide guidance on the new provisions.

Regulation 4965 - Prohibited Tax Shelter Transactions

Section 4965 imposes an excise tax on tax-exempt organizations and associated employees who engage in prohibited tax shelter transactions. These regulations explain the tax and the associated disclosure rules. The regulations finalized temporary regulations issued in 2007.

Announcement 2010-19

The announcement explains procedures that a trust may use to request a ruling that it was-- and continues to be-- a Type III supporting organization. It further describes how to request a refund for private foundation excise taxes paid in 2008.

This announcement also describes the procedure under which a private foundation can terminate its private foundation status by operating as a public charity for 60 months.

REL 00971

Organizational Informat·on�

EO Staffing

The EO Rulings and Agreements office (R&A) processes applications for tax exemption and provides direction through private letter rulings and technical guidance.

The EO Examinations office (Exam) promotes compliance by analyzing operational and financial activities of exempt organizations. These activities include developing processes to identify areas of noncompliance, developing corrective strategies and assisting other EO functions in implementing these strategies.

The EO Customer Education and Outreach office (CE&O) coordinates, assists and supports the development of internal and external communications, forms and publications and external education and outreach efforts.

EO continues to grow in order to meet the needs of the tax-exempt community.

Table of EO On-Roll Employees over a 3-Year Period

Customer Rulings & Education Director's TotalExaminationsAgreements & Office

Outreach 2008 364 449 12 12 837 2009 366 525 8 11 910 2010 366 549 14 13 942

EO On-Roll Employee Growth over a 3-Year Period

I ,CR&A

... 2010 jlElExamtil ell I DCE&O> 2009

I o Director's Office 2008

.-1

o 200 400 600 800 1000

Total On-Roll Employees

6

REL 00972


I '~,,~----------,,~_._-~ 1-:" CUSTOMER

EDUCATION & OUTREACH (CE&O)

Determinations

1-.....J

Determinations & Quality Assurance

Exempt Organization Compliance Unit

(EOCU)

Technical

2 Determinations Field Areas

DIRECTOR'S PROGRAM STAFF

Exempt Organizations Compliance Area

(EOCA)

Compliance Strategies Critical Initiative (CSCI)

Examination Program & Review (EPR)

5 Examination Field Areas

REL 00973

Spotlight: Filing Reref Progra

Background: The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007. First, it requires all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS. That includes small taxexempt organizations with gross receipts of $25,000 or less and had not previously had a filing requirement. They now are required to submit a Form 990-N, also known as an e-Postcard. Second, it mandates that any tax-exempt organization that fails to file for three consecutive years automatically loses it federal tax-exempt status.

Current Efforts: The first three-year filing deadline that could trigger revocation for failure to file was May 17, 2010. Despite an extensive outreach effort for the past three years, once the filing date arrived, the IRS realized that many organizations continued to be unaware of the tax law changes. On May 18, Commissioner Shulman announced that the IRS would provide additional guidance to help these small organizations maintain their tax-exempt statuseven if they had missed the filing deadline. The Commissioner encouraged them to continue filing and reassured them that the IRS would do what it could to help them avoid losing their tax-exempt status.

On July 26, 2010, the IRS announced a one-time two-part relief program to bring these small nonprofit organizations back into compliance. First, the program extended the filing deadline to October 15 for the smallest organizations, those eligible to file the Form 990-N, the e-Postcard. Second, it provided for a voluntary compliance program for those eligible to file the Form 990-EZ for the past three years. Under this program, an organization had to file its three delinquent returns and pay a small fee by October 15. Form 990 and 990-PF filers were not eligible to participate in this program.

The IRS posted a list of the names and last-known addresses of more than 300,000 at risk organizations with filing due dates from May 17 through October 15, 2010, and no record of having filed a required annual return or notice for 2007, 2008 or 2009.

Immediately following the Commissioner's announcement, the IRS expanded its outreach efforts to alert the tax-exempt sector of the relief program. As a result, during the Filing Relief Program (between May 18 and October 15), more organizations filed 990-Ns than during the previous five-month period.

8

REL 00974

'These figures only reflect the number I!ilJanuary 1- May 17, of 990-Ns filed, not the number of

2010 organizations that have filed or the number that originally were not filed

£1 May 18- October 15, 2010 timely and took advantage of the filing

relief program. In addition, 4,621 organizations filed the 990-EZ form during the at-risk period. Total: 335,952 990-Ns filed by October 15,2010

Post-October 15: Eligible organizations that properly filed according to the Filing Relief Program will remain tax exempt.

Revocation: By operation of law, organizations that failed to file annual information returns for three consecutive years, and organizations eligible to participate in the filing relief program that failed to do so by the October 15 deadline, automatically will be revoked as of the original due date of their third return. In early 2011, the IRS will notify these organizations, and will publish their names by posting a list of revoked organizations on IRS.gov.

Each month, as subsequent filing due dates pass, the IRS will expand the list to include the names of additional organizations that are revoked for failure to file for three consecutive years.

Contributions and tax deductions: Donors who contribute to organizations otherwise eligible to receive tax-deductible contributions can continue to take a tax deduction until the IRS publishes the name of the organization on the list of revoked organizations. A contribution to an organization listed on the IRS site as having lost its tax-exempt status is not tax deductible.

Reinstatement: An organization that wishes to retain its tax-exempt status must apply to have its tax-exempt status reinstated, even if it was not originally required to file an application for exemption. To do so, it must:

• File either Form 1023 or 1024, as appropriate; • Pay the appropriate user fee; and • Write automatically revoked on the top of the application and envelope.

EO Determinations will review the applications received in the normal course of business.

On-going Education: EO will continue its aggressive educational program to alert tax-exempt organizations of their annual filing requirements and the consequences of not filing.

Compliance Review: EO will conduct a compliance review of organizations that filed a Form 990-N but previously reported financial activity indicated they were ineligible to do so.

9

REL 00975

Spotlight: Redesigned 2008� Form 990 Filings�

Statistics and Demographics for Redesigned 2008 Form 990 Filings

The IRS significantly redesigned Form 990, Return of Organization Exempt From Income Tax, for tax year 2008. Now that the filing season for tax year 2008 is nearly complete, the IRS has compiled the following demographic and statistical information on 2008 Form 990 (along with certain statistics on Forms 990-EZ and 990-N) filings and filing organizations, based on data available through September 30, 2010:

Demographics of Filing Population

AGE OF ORGANIZA nONS

Age of Tax-Exempt Organizations Filing 2008 Form 990-Series Returns·

100%

90%

33% 80%

47%

70%

60% DOver 25 years old

50% II1II5-25 years old

40% IliI Less than 5 years old

30%

20%

10%

0%

Form 990 Form 990·EZ

* Age reflects the date on which the organization's federal Employer Identification Number (EIN) was assigned. This does not necessarily reflect the date on which the organization was formally organized, received recognition of exemption by the IRS or filed its first return with the IRS.

10

REL 00976

SIZE OF ORGANIZATION by Gross Annual Receipts, as Reported by 2008 Filers of:

Form 990-EZForm 990

32%

I!lI Less than $200,000 iii Less than $200,000

.. $200,000 to $499,999 .. $200,000 to $499,999

0$500,000 to $999,999 0$500,000 to $999,999

0$1,000,000 to $4,999,999

0$5,000,000 or rmre

SIZE OF ORGANIZATION by End of Year Total Assets, as Reported by 2008 Filers of:

Form 990 Form 990-EZ

12%

10% 47%

CI Less than $500,000

I!lI Less than $500,000• $500,000 to 1,249,999.

• $9.:10,000 to $1,249,999o 1,250,000 to $2,499,999

0$1,250,000 to $2,499,9990$2,500,000 to $9,999,999

o $10,000,000 or rmre

11

REL 00977

GEOGRAPHY OF ORGANIZA TlONS by U.S. Regions, Tax Year 2008:

Geography by U.S. Regions*


% %

Northeast 18% 19%

Mid Atlantic 22% 22%

Gulf Coast 21% 19%

Great Lakes 18% 16%

Pacific Coast 21% 24%

Total 100% 100%

For more information on identification of U.S. states in the geographical regions, go to: http://www.irs.gov/charities/articie/0 .. id=137767.00.html

12�

REL 00978

2008 Forms 990 and 990-EZ Statistics

paper v. Electronic FIi ing' * Form 990 Form 990-EZ Form 990-N

(electronically filed) 2007 2008 2007 2008 2007 2008

Paper 327,579 160,362 147,960 266,008 Returns -Electronic 59,664 57,975 11,864 44,362 242,614 292,002 Returns Note: 52% of the organizations that filed the Form 990 for tax year 2008 could have filed the Form 990-EZ, based on assets and gross receipts thresholds for filing Form 990-EZ.

'Number of returns posted to IRS Business Master File as of September 30, 2010

Percentage of Forms 990 and 990-EZ Bectronicatly-Filed Versus Paper-Filed, Tax Years 2007 and 2008

100% 93%

90% 85%

80% 73%

70% .

60%

50%

40%

30%

20%

10%

0%


13

REL 00979

Most Commonly Filed Form 990 and 990-EZ Schedules for Tax Year 2008*

100%

90% 19%

80% 71%

70% 1%

60%

50% l3 Form 990

40% • Form 990-EI 40%

30% 23% 19·~

20%

10%

0% 0 D A B R J G

Schedule Type"

Note: To date, approximately 90 percent of 2009 Form 990 filers have filed Schedule 0, as compared to 79.4 percent for tax year 2008. All Form 990 filers are required to file Schedule O.

*� Number of returns posted to IRS Business Master File as of September 30, 2010 **� This chart includes the most commonly filed of the 16 Form 990 schedules:

Schedule A: Public Charity Status and Public Support Schedule B: Schedule of Contributors Schedule D: Supplemental Financial Statements Schedule G: Supplemental Information Regarding Fundraising or Gaming Activities Schedule I: Grants and Other Assistance to Organizations, Governments, and Individuals in the United States Schedule J: Compensation Information Schedule 0: Supplemental Information to Form 990 Schedule R: Related Organizations

Schedules D, I, J, R, and 0 apply only to Form 990 filers.

14�

REL 00980

Preparer Statistics

Paid-Prepared v. Self-Prepared


2007 2008 2007 2008

Paid-Prepared 81% 87% 50% 68% Self-Prepared 19% 13% 50% 32%

Internet resources available to help with preparation of Form 990

To help filers complete the Forms 990, 990-EZ and 990-N, the IRS offers the following free, web-based resources available on www.irs.gov/charlties and www.stayexempt.org:

• Interactive virtual workshops and mini-courses on multiple topics, including Form 990

• Compiled FAQs listing annual reporting requirements for tax-exempt organizations

• Case Study videos featuring a hypothetical tax-exempt organization and step-by-step instructions for completing that organization's Form 990

• The NEW Form 990. What Tax-Exempt Organizations Need to know: publication and related checklist

• EO Update, a periodic newsletter with information of interest to tax-exempt organizations and tax practitioners who represent them, including Form 990-related updates

The IRS encourages comments and suggestions on how to improve the Form 990, schedules, and/or instructions. Please send to: [email protected]

15

REL 00981

FY 2011 WORK LAN� EO Integrates - Project to Process

Through our project work, EO has developed extensive knowledge and improved skills on a wide range of subjects, allowing us to develop training materials and tools to help our staff effectively address these issues when they encounter them. It is now time to take a "project to process" approach by winding down these separate, formal projects, and assimilating them into our general casework. Below are the brief descriptions and reporting results of some of the projects that we are merging into our overall process.

•� Combined Annual Wage Reporting - The "CAWR" Project. In FY 2007-2010, EO took a close look at employment tax reporting by exempt organizations using CAWR data, which compares information reported to the Social Security Administration (SSA) on Form W-2 with information reported to the IRS by employers on Form 941. EO CAWR populations consisted of approximately 4,000 organizations each year. Using CAWR, EO was able to identify organizations that reported wages on their W-2s but had not filed Form 941; other organizations showed officer compensation on Form 990, but had not filed Forms W-2 or 941, and non-501 (c)(3) organizations that had not filed Form 940 to report and pay federal unemployment tax. (Section 501(c)(3) organizations are exempt from this tax.)

This project helped EO improve case selection and focus examination� resources on organizations with high potential for non-compliance.�

•� Consumer Credit Counseling Project. One of EO's most complex and wideranging efforts has been its multi-year focus on consumer credit counseling organizations. Throughout the course of this project, the IRS developed enhancements to its tax-exempt Examination program and refined its Determinations program to better identify potential abuses.

During the initial phase of the project, the IRS examined the 63 largest credit counseling organizations, based on their revenues. The IRS revoked, terminated or proposed revoking the exemptions of 41 of these organizations.

In light of high levels of abuse, we sent questionnaires to the remaining organizations that appeared to be involved in credit counseling activities. EO examined the most egregious, and has revoked, terminated, or proposed revocation of over 59 percent of the group to date. This project helped to stimulate the Pension Protection Act law change, in which Congress strengthened the tax rules governing exempt credit counseling organizations.

16

REL 00982

Our experience in this area and the lessons learned prepared us to deal with a new type of organization that increased in numbers as a result of the economic downturn in the area of mortgage foreclosure assistance organizations.

• Down Payment Assistance Project. Traditional down-payment assistance (OPA) programs provide financial and educational assistance to low-income homebuyers who cannot afford to make the minimum down payment on a home or to pay the closing costs involved in obtaining a mortgage. Traditionally, these tax-exempt homeowner assistance programs are funded through grants or contributions from the general public, use accepted eligibility criteria to ensure that recipients are low-income individuals, and conduct financial counseling and educational activities to prepare potential homebuyers for the responsibilities of home ownership.

The IRS began to see a rise in applications for tax exemption from organizations that varied from the traditional OPA model by relying solely on service fees and payments - often referred to as "donations" - from builders and homesellers to fund their activities. In 2006, the IRS issued a revenue ruling holding that such seller-financed OPA programs primarily serve the private interests of home sellers by funneling down-payment assistance from sellers to buyers through self-serving arrangements. The revenue ruling further held that OPA organizations structured in this manner do not accomplish a primary charitable purpose and should not receive or be able to maintain 501(c)(3) tax exemption.

EO examined those OPA organizations that were funded solely by homesellers, and revoked, terminated or proposed revocation for 87 of 91 organizations.

To prevent additional seller-financed OPA organizations from obtaining taxexempt status, EO initiated a screening program to identify applicants that planned to conduct OPA activities, and required them to answer detailed questions about their proposed activities to determine whether they were eligible for tax exemption. Of the nearly 600 OPA applications reviewed, over half were denied, closed for failure to respond, or withdrawn.

In 2008, Congress passed legislation prohibiting the use of down-payment assistance programs funded by those who have a financial interest in the sale in order to qualify for FHA insured mortgages.

• Executive Compensation Compliance Initiative: Loans Project. In 2004, the Internal Revenue Service, through the Exempt Organizations Office of the Tax Exempt and Government Entities Division (EO), implemented the Executive Compensation Compliance Initiative (the Project). A report

17

REL 00983

discussing the results was issued in March 2007. That report raised concerns about substantial loans to officers, directors, trustees and key employees with issues involving proper reporting and potential excess benefit issues. Consequently, we opened the Loans Project; the report is what follows.

The loan project began with 200 compliance checks and 50 single-issue examinations. Based upon the results of the compliance checks, additional organizations were selected for single-issue examinations for a total of 169 examinations.

The issues identified in these examinations include the following:

o� Assessment of over $5.5 million in section 4958 taxes. o� Assessment of over $480 thousand in employment taxes reported on

Form 941 and Form 945 for items of income not previously reported for disqualified persons and other employees.

o� Assessment of over $400 thousand in discrepancy adjustments for� omitted income on Form 1040.�

o� Agents determined that loans to officers were not correctly reported on Form 990 in 91 instances. The errors were predominantly due either to misclassification on the balance sheet or to section 4958 adjustments.

The results of the 169 examinations were as follows:

Examination Results # of Orgs� %of Total

No Chanqe 37� 22% Written Advisory Issued 75� 44% Change or Delinquent Return Secured (InclUding Related 39� 23% Returns) Proposed Revocation or Termination� 18 11% Total 169� 100%

The information gained from the Loans Project will be valuable as we� continue to evaluate compensation in future projects.�

•� Investment Income -IRC 501 (c)(7) Compliance Project. Investment income - interest on bank deposits, stock dividends, royalties and the like - is generally non-taxable for many types of exempt organizations. This is not true for section 501(c)(7) organizations (social clubs), whose income is taxed unless it comes directly from a member of the club, or has been "set aside" for certain charitable purposes.

EO reviewed Form 990 filings from section 501 (c)(7) organizations to determine whether some were reporting investment income, but not reporting income on Form 990-T or paying the tax, and examined over 80 organizations. We secured delinquent Forms 990-T and collected the tax,

18

REL 00984

revoked the tax-exempt status or changed the subsection of 60 percent of the examined organizations.

• Non-Exempt Charitable Trust Project. Although not exempt under section 501(a), a non-exempt charitable trust (NECT) must devote all of its assets and income to charitable purposes, according to the terms of its trust document. The grantor can claim a charitable deduction for contributions of money or other assets placed into the trust.

A NECT has unique filing requirements. Because it is a trust, it must file Form 1041 and pay tax on its taxable income. However, because of its charitable purpose, it is subject to many of the same restrictions and excise taxes as section 501(c)(3) organizations, and it must file either a Form 990 or 990-PF.

Because some organizations were filing Forms 990 or 990-PF but not Form 1041, EO sent compliance check letters, seeking the missing returns or an explanation as to why they were not required.

Some older NECTs proved that they were established before 1969, when the regulations permitted "setting aside" amounts earmarked for charitable contributions, eliminating the Form 1041 filing requirement. Others were determined to have been misclassified in IRS records or had applied for and received tax exemption. The remaining entities filed the required returns and paid the delinquent tax, or were referred for further examination.

The chart below details the findings of the compliance check letters:

Number

Eligible for set-aside deduction 125

Filed correct returns 10 Required examinations 15 IRS classification corrected 20

• Political Activities Compliance Initiative (PACI). This initiative addressed allegations of prohibited political campaign activities by 501(c)(3) organizations.

Treasury and the IRS issued a revenue ruling to educate section 501(c)(3) exempt organizations about permissible and impermissible activities in the political arena. Additionally, EO updated Publication 1828, Tax Guide for Churches and Religious Organizations. EO also provided guidance about

19

REL 00985

political activities in public presentations, including the IRS Nationwide Tax Forums and Tax Talk Today, the IRS web-based program for practitioners.

In addition to guidance and education, EO has examined over 250 organizations based on allegations of political activity during the 2004, 2006 and 2008 federal election years. EO substantiated the allegations in over half of the examinations and closed most of these with a warning to comply with the ban on political activities in the future. EO revoked the tax-exempt status of seven non-compliant organizations.

The chart below tracks the most common types of PACI allegations: *

ALLEGATION� 2004 2006 2008 1. Exempt organization distributed printed documents supporting 24 14 24 candidates. 2. Church official made a statement during normal services endorsing 19 14 47 candidates. 3. Candidate spoke at an official EO

11 16 2function. 4. Organization distributed improper

14 8 3voter guides or candidate ratinqs. 5. Organization posted a sign on its

12 13 11property endorsinq a candidate. 6. Organization endorsed candidates on its website or through links on its 15 11 16 website. 7. Organization official verbally

8 5 2endorsed a candidate. 8. Organization made a political

7 11 12contribution to a candidate. 9. Organization allowed a non-candidate to endorse a candidate during a speech 4 2 1 at the organization function. 10. Other 0 16 15 TOTAL 114 110 133

* Because the majority of complaints for the 2010 election year came in during the later part of the year, they are still going through the classification process, so they are not included in the chart.

As we move review of allegations of political campaign intervention from project to process, the guidance and expertise developed over the past few election cycles will enable us to continue to handle these allegations appropriately, both at the classification stage and through the examination process.

•� Qualified State and Local Political Organizations (QSLPO) Project. In 2002, Congress enacted legislation creating a sub-category of IRC section 527

20

REL 00986

political organizations known as Qualified State and Local Political Organizations, or QSLPOs. These organizations were required to notify the IRS of their "QSLPO" status by electronically filing Form 8871. This status exempts them from the requirement to file Form 8872.

After the law change, approximately 3,600 organizations identified themselves as QSLPOs and stopped filing Forms 8872.

In response, EO launched the QSLPO project to ascertain the accuracy of these organizations' claims. EO identified a statistically valid sample of QSLPOs and sent each one a compliance questionnaire.

Overall, our findings indicate that organizations are correctly identifying themselves as QSLPOs and therefore have no Form 8872 filing requirements.

• Supporting Organizations- The 509(a)(3) Compliance Project. Supporting organizations (SOs) are charities that carry out their exempt purposes by assisting other exempt organizations, usually other public charities. The key feature of an SO is a strong relationship with the organization that it supports.

Prior to the Pension Protection Act of 2006, some promoters encouraged individuals to establish and operate SOs for their own benefit. Some of these scenarios involved purported charitable contributions made to the supporting organization, which were then returned to the donor, often in the form of a loan. To disguise this abuse, the transaction was sometimes routed through intermediary organizations controlled by the promoter.

EO took a two-pronged approach to combat this abuse. First, EO issued new instructions to Determinations agents to identify potentially noncompliant SOs at the application stage. Then, over the span of the project, EO selected over 300 organizations for examination; of the 280 examinations closed thus far, 30 were terminated, 72 had their exempt status revoked and 59 were reclassified as either private foundations or public charities.

The Pension Protection Act drastically changed the legal landscape and rules regarding the operation of supporting organizations. Congress imposed additional restrictions on certain types of SOs and addressed certain abuses.

In light of what we have learned through the various enforcement activities discussed above, the resources we have developed for our staff and the public, and changes resulting from legislation, we are winding down separate projects and incorporating them into overall compliance processes.

21

REL 00987

EO Supports and Collaborates

Support of IRS Initiatives - This year, EO will support five overarching IRS focus areas: •� Impact of Recent Legislation. With the passage of several pieces of

legislation, EO is working with the whole of IRS to implement effective changes and laws.

o� The Affordable Care Act (ACA) was enacted on March 23, 2010. It contains certain tax provisions that take effect this year and more that will be implemented during the next several years.

Several provisions, primarily those involving tax-exempt hospitals and exempt organizations as employers, fall under the purview of EO.

Each of the EO offices has a role in putting together a comprehensive program to implement the changes and fulfill ACA requirements. Customer Education and Outreach (CE&O), working with the other IRS Communication offices, will educate the public on those aspects of the ACA impacting exempt organizations; Rulings & Agreements will analyze new legal issues raised by the legislation, work with Chief Counsel and Treasury on related guidance, and coordinate with other IRS offices to implement appropriate form changes; Determinations anticipates an increase in tax-exempt applications; and Examinations will establish a separate EOCA group to focus on healthcare-related compliance issues.

o� The Hiring Incentives to Restore Employment (HIRE) Act was signed into law on March 18, 2010. The legislation identified tax-exempt organizations as employers eligible to claim the payroll tax exemption and new hire retention credit for eligible newly-hired employees.

Beginning in July 2010, the EOCA began conducting examinations of these credits claimed under the HIRE Act.

o� The American Recovery and Reinvestment Act (ARRA) established a 65 percent subsidy on COBRA health insurance premiums to help workers who lost their jobs as a result of the recession maintain their employer sponsored health insurance.

The Continuing Extension Act of 2010, enacted April 15, reinstated the ARRA COBRA subsidy, which had expired on March 31.

Employers, including tax-exempt organizations other than churches and some religious organizations, were required to provide COBRA coverage to eligible individuals who pay 35 percent of the COBRA

22

REL 00988

premium. Employers were reimbursed for the other 65 percent by claiming a credit for the subsidy on their Form 941 or Form 944. Employers, including tax-exempt organizations, are required to maintain supporting documentation for the claimed credit.

EO will be examining the employment tax returns of organizations claiming the credit for the subsidy.

• International Focus. International tax enforcement is an ongoing priority for the IRS. Taxpayers with international activities, transactions and accounts pose unique compliance issues for the IRS. Globalization of markets, taxpayers and transactions affect all segments of our economy, including the exempt sector.

EO's concern in this area is whether charitable assets of exempt organizations are being diverted internationally for non-charitable purposes. We have efforts underway that will explore:

o foreign entities receiving IRS recognition of exemption from US tax; o information referred from the Joint International Tax Shelter

Information Center (JITSIC); o charities reporting foreign addresses on Forms 990; o charities that participate in "Gifts-in-Kind" programs, where

valuation issues surface when charities send non-cash items to foreign organizations; and

o large private foundations with international operations or international transactions.

To help educate the sector, EO is developing new publications describing the special rules that apply to both foreign charities and domestic charities that conduct activities abroad.

• Medical Residents. IRS worked with Government Entities, the Chief Counsel's Office, Wage & Investment, Small Business/Self-Employed and the

. Social Security Administration to develop a comprehensive program to except medical residents from FICA (Social Security and Medicare tax) taxes based on the student exception for certain tax periods.

Beginning in May 2010, the Service began contacting hospitals, universities and medical residents who filed FICA refund claims, in order to provide them with additional information and procedures for obtaining their refunds.

• National Research Program - Study of Employment Tax Returns. IRS estimates employment tax misreporting constitutes a large part of the tax gap-close to $54 billion per year. In light of this sizeable amount, the Service has updated its understanding of compliance in this area and has implemented a comprehensive IRS-wide study to measure compliance,

23

REL 00989

improve IRS ability to detect and reduce non-compliance, and ensure the fairness of the tax system. Specifically, the National Research Program (NRP) project looks at employment tax on both taxable and tax-exempt organizations, large and small businesses, and the government sector.

Because tax-exempt organizations have the same responsibilities as for-profit businesses to properly classify workers and report and pay employment taxes, EO has been participating with other IRS operating divisions in the NRP.

EO's portion of the project involves examining the employment tax returns of 1500 organizations, with 500 selected randomly each year over a three-year period. Specific areas of interest during the examinations are worker classification, fringe benefits, officer compensation, employee expense reimbursements, and non-filers. Tax year 2008 returns are currently being examined, and examinations of tax year 2009 returns will begin in early FY 2011.

The results of this project will contribute toward developing and refining Servicewide procedures for auditing, processing and resolving employment tax return cases.

•� Non-filer Initiatives. The goals of the IRS' Servicewide Non-filer Strategy are to:

o� Help taxpayers understand and meet their filing obligations; o� Improve voluntary compliance by reducing taxpayer burden; o� Leverage technology to identify non-filers; and o� Effectively use enforcement resources to deter non-filers.

EO will pursue several avenues to help support this Servicewide effort. Working with the TE/GE Research Office, we are collecting data about organizations with erratic filing patterns. To begin this effort, the EOCA will conduct compliance checks on intermittent filers in early FY 2011.

Collaboration With External Stakeholders - Collaborating with external stakeholders and leveraging their resources makes us more efficient and improves the final product. For FY 2011, we have planned the following joint efforts:

•� Academic Institutions Initiative. In 2009, EO established its Academic Institutions Initiative to work with educational entities that work to develop, cultivate and promote professionals who shape the non-profit sector. Our goal is to help prepare the non-profit leaders of the future by providing consistent training about federal tax law responsibilities.

24

REL 00990

A September 2009 kick-off meeting generated a number of helpful ideas from educational institutions. In FY 2010, EO began implementing those recommendations by placing resources for educators on StayExempt.lRS.gov, co-sponsoring workshops for small and mid-size exempt organizations with universities, and identifying and collaborating with existing educational networks, such as the National Association of Schools of Public Affairs and Administration (NASPAA) and the Nonprofit Academic Centers Council (NACC).

In FY 2010, CE&O hosted its first-ever workshop for small and mid-size 501(c)(3) organizations in conjunction with an academic host institution. In FY 2011, CE&O will continue to expand its partnerships with existing educational networks across the country. At least eight additional similar workshops have been scheduled for the first half of FY 2011.

Also in FY 2011, CE&O will develop a page on IRS.gov specifically geared toward educators. Additionally, we will begin offering an internship program for graduate students whose concentration lies in nonprofit leadership and management. The graduate student internship program will broaden our reach to interact with a new generation of non-profit leaders. EO hopes to gain a better understanding of current nonprofit education while offering students the chance to deepen their knowledge base and become familiar with Federal tax provisions that govern exempt organizations.

•� Gaming Non-Filer Project. Beginning in 2007, EO secured information from 17 state gaming regulatory tax agencies to cross-reference with its own Form 990 database. We discovered a large number of organizations had filed at the state level in order to maintain eligibility to continue gaming activities, but had not filed Form 990 with the IRS.

In response, we initiated examinations and have thus far secured over 1,300 delinquent returns in the cases closed. These include information, tax and employment returns.

EO will continue to expand its cooperative efforts with state regulators to identify organizations conducting gaming activities that may have federal filing requirements, and educate these organizations about their filing obligations

25�

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EO Invests

EO will continue to invest time in both new and ongoing initiatives in order to keep up with the ever-changing exempt organization sector. With these initiatives, EO will touch a broader audience of exempt organizations.

•� Controlling Organizations- The IRe §512(b)(13) Project. The tax treatment of payments between controlled entities and their controlling tax-exempt parent organizations touches on several areas of tax law including unrelated business income, the allocation of income and deductions among taxpayers, and the transfer of property to controlled organizations.

PPA 2006 made changes to the tax treatment of certain payments from a controlled entity to its exempt parent. The IRS is gathering information on this issue through the Colleges and Universities project and other exam initiatives. The information collected will give us a better understanding of the prevalence of 512(b)(13) and related issues.

•� Charitable Spending Initiative. This is a study to learn more about sources and uses of funds in the charitable sector and their relationship to the accomplishment of charitable purposes. Under the first phase of this project, organizations selected for examination include those with high levels of fundraising expenses, organizations reporting unrelated trade or business activity with relatively low levels of program service expenditures, organizations with high ratios of officer compensation in comparison to program service expenditures, and organizations with low levels of program service expenditures in comparison to total revenue. These examinations began in FY 2010 and will continue into FY 2011.

•� Colleges and Universities. In September 2008, EO sent 400 questionnaires to public and private four-year colleges and universities asking about their unrelated business income, endowments and executive compensation practices. The goal is to gain a better understanding of one of the largest, most complex segments in our sector and identify issues and areas that may need more outreach and education or further scrutiny. EO analyzed the responses and an interim report was published in May 2010. The interim report contained preliminary information on the respondents' organizational structures, demographics. exempt and unrelated business activities, endowments, executive compensation and governance practices.

In addition, over 30 entities are undergoing examinations that focus on unrelated business income and compensation practices. Because some of the issues under consideration may affect other areas of TE/GE (specifically, Employee Plans and Federal State and Local Governments), we are coordinating with those offices when appropriate, along with utilizing engineering assistance.

26

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•� Exempt Organizations Services and Assistance (EOSA). The objective of EOSA research project is to study the communications preferences and educational needs of small tax-exempt organizations and to develop a targeted multi-year outreach plan to provide improved education and outreach services to these organizations.

CE&O, working with TE/GE Research, initiated this project which involves three phases: 1) focus groups; 2) a quantitative analysis based on telephone surveys; and 3) a cost-benefit analysis.

•� Form 990-N Mis-filers. The Pension Protection Act of 2006 added the Form 990-N filing requirement to ensure that the IRS and potential donors have current information about exempt organizations. Small tax-exempt organizations whose annual gross receipts are normally $25,000 or less may be required to electronically submit Form 990-N, also known as the ePostcard, unless they choose to file a complete Form 990 or Form 990-EZ. The failure of an organization that is required to file a Form 990 series return for three consecutive years results in automatic revocation of the organization's exempt status.

The objective of this project is to identify organizations that incorrectly file the Form 990-N.

•� Form 990 as a Compliance Tool. The Form 990 is the IRS' primary tool to increase transparency and to promote and enforce compliance with Federal tax law. The recent design brings the Form 990 into the 21 st century, reflecting changes in the tax-exempt sector and the tax law. It helps secure fuller, more relevant compliance data and provides a more comprehensive picture of each filing organization.

As more organizations file the redesigned Form 990, EO Examinations will use the updated form to identify non-compliant and potentially non-compliant organizations for examination, to develop targeted compliance projects and to inform and supplement educational efforts.

In FY 2011, EO will continue to work with our research office to develop more robust risk models and refine compliance queries to promote a more finelytuned compliance approach and more tailored education efforts.

•� Governance. Starting in FY 2010, EO began using a check sheet to capture governance practices and the related internal controls of the organizations being examined. EO will analyze the data over the long term to gain a better understanding of the intersection between governance practices and tax compliance.

27

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•� Mortgage Foreclosure Assistance. Over the past few years, there has been an increase in foreclosures, as well as exempt organizations that have become involved in foreclosure assistance activities. This project is modeled after the successful EO credit counseling project that took place several years ago. EO is developing enhancements to its examinations program and refining its determinations program to better identify potential abuses in the system.

The focus of the project will be to determine whether organizations are engaged in foreclosure assistance activities, whether their activities are fulfilling their exempt purpose in accordance with the Internal Revenue Code section under which they are recognized as tax-exempt, and whether they are complying with the requirements of section 501 (q) of the Code (when applicable).

•� "Mutual" Organizations- The IRe §501 (c)(12) Project. Organizations exempt under section 501(c)(12) include benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, or cooperative telephone companies. An organization that performs any comparable service can also qualify.

These organizations must use their income solely to cover losses and expenses, with any excess being returned to members or retained for future losses and expenses. They must collect at least 85 percent of their income from members for the sole purpose of meeting losses and expenses. The results of the member-income "test" determine the organization's yearly filing requirement. An organization should file Form 990 for the years in which it meets the 85 percent member-income test, and it should file Form 1120 for the years in which it fails to meet the test.

The Forms 990 filed by some section 501(c)(12) organizations indicate that these organizations are not meeting the 85 percent member-income test every year. To address this issue, questionnaires were mailed to affected organizations in early FY 2010, and 40 percent of the questionnaire respondents were selected for examination. In FY 2011, we will begin conducting these examinations.

•� Section 501 (c)(4) , (5) and (6) Organizations. In recent years, our examination program has concentrated on section 501 (c)(3) organizations. Beginning in FY 2011, we are increasing our focus on section 501(c)(4), (5) and (6) organizations. With the additional information available on the new Form 990, we will look at issues including political activity, inurement and the extent of compliance with the requirements for tax exemption by organizations that self-identified themselves as a section 501 (c)(4), (5) or (6) organization

28

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•� Voluntary Employees' Beneficiary Associations (VEBAs). A voluntary employees' beneficiary association is defined under Internal Revenue Code section 501(c)(9) as an organization designed to pay life, sick, accident and similar benefits to members, their dependents or designated beneficiaries as long as no part of the net earnings of the association inures to the benefit of any private shareholder or individual.

Working with EP and IRS Counsel, EO developed a project to learn more about VEBAs and their compliance under this section of the code. In FY 2010, EO developed training materials and initiated its training program. These activities will continue during FY 2011. EO Examinations will begin a statistically valid sample of 100 organizations with assets greater than $100,000 in FY 2011.

29�

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Table 1. Excise Taxes Reported by Charities, Private Foundations, and Spllt.lnterest Trusts on Form 4720, Calendar Year 2010

Tolal Organizations [1 J Individuals [2] Item Number of Number of Number of

relurns [3) Amount returns 13) Amount returns [3) Amount

(1) (2) (3) (4) (5) (6)

Tolall'"� 2,158 14,408,724 1,911 12.561,479 247 1,847,245

Tax on undistributed income 1,614 7.806,681 1,614 7,806,681 NIA N/A

Tax on self-<leallng 201 1,005,447 NtA N/A 201 1,005,447

Tax on taxable expendnures 105 248,894 105 238,989 16 9,905

Taxon excess lobbying expendnures 84 271.604 84 271,604 NIA NlA

Tax on charnHbIe remainder trusts' urrelated taxable income 79 1,103,521 79 1,103,521 N/A NlA

Tax on eX(;8SS benefillransacliOns 26 831,052 NlA NlA 26 831,052

Tax on poInical expendnures .. 32 .. 41,254 .. 31 .. 40,413 "10 00841

Tax on excess business holdings� 6 3,100,271 6 3,100,211 N/A NlA .. 0' .. .. .. ..Taxon taxable distributions .. .. ..Tax on premiums paid on personal benefrt contracts� o• N/A NlA .. .. .. ..Tax on being party to prohibned lax shB/ler transactions� 0 0 .. ..� .. ..Tax on prohlbned beneflls from donor advised funds N/A NIA

Tax on disqualifying lobbying expendnures 0 0 0 0 0 0

Tax on investments thai jeopardize charnable purposes 0 0 0 0 0 0

•• 0.0.. """'binOdlO__d-'"'....,._.

N/A - Nol .ppIIcoblo.�

(11 0'1l"....."'n .._ ........... by c""_,I'ri-I.rotnl_, on:! "'*........ ~.

(2) IndMdtal"...re r8POf1.t by fotnWlon~. omc..., d~.IIUM_, arwoi olt_ inlIMdu*.

(3) ThiloCIil"...,'" 01 returre nuy rIJI 8qUlllhe Itn d lhe runbet oIl"11lurN'or..m tI.... .n OfQlIr1Ulion Of nlMdual may ('..,art rnorw u.n onII type 0( "'. ptW f1Illm. AddIklndy, hI_uu may be inc\.ded on ,...... 'ledby~.

fl«lfIe: Fonn 472015 l!If1IltIId"ReIun of C...... Exc:_ fa..U..... CNipt.. C1 .nd 42 of the 1~IR....Code,·

_.IRS, S""" d ,,,,,,,,,,,,0_. Jdt2011.

REL 00996

Table 1. Excise Taxes Reported by Charities, Private Foundations, and Split-Interest Trusts on Form 4720, Calendar Year 2009

Total Organizations [1] Individuals [2) lIem Number of. Number of Number of

returns [3) Amount returns [3] Amount returns [31 Amount

(1) (2) (3) (4) (5) (6)

TOI8I tax 2,031 15,414,533 1,757 12,026,527 303 3.388,006

Tax on undistributed income 1,454 7,764,403 1,454 7,764,403 N/A N/A

Individual tax on self-dealing 261 3.097,030 N/A N/A 261 3,097,030

Tax on taxable expenditures 104 770,354 104 758,756 20 11,598

Tax on excess lobbying expenditures 59 360,922 59 360,922 N/A N/A

Tax on excess benefit transactions 13 275,835 N/A N/A 13 275,835

Tax on charitable remainder trusts' unrelated taxable income 92 1,771,270 92 1,771,270 N/A N/A

Tax on political expenditures ··48 ··1,374,719 ··48 ··1,371,176 ··9 ··3,543

Tax on Investments that jeopardize charitable purposes 0 0 0 0 0 0 .. .. .. ..Tax on excess business holdings 0 0 .. .. .. ..Tex on prohibited 18K shelters 0 0...h.•.... - .. .. .. ..Tax on taxable.d.lstrib.utlons of Sponsoring organlzat.ions .. .. .. .. .. ..Tax on_~llItlua.llfyi.~g.lobbylngexpen~lturllS .. _....... .. .. ..Tax on premiums paid on personal benefit contracts 0 0

•• Oalll combined to prwwent dildoeuJII 01 Indlvidu.1 blJlpa~ datil.

NlA Nol .ppt_. (1JOrgUriz.tkm taa...,. reported b~ ch.-ttiee, priv." foundallonl. and sphl.in',,' trueta.

(2) Individual tuea .r. r.paned by found_han manllQ". office directofll, trw.... and olttef IndivkjUllhi

(31 The tobl' number of return. may not equ.-l the lum of the number of retum. for Hdl tu., II an 0'Vlnizatian Of Individual may ~ more than one type of tu per r.un. AdlWon.tty. InOIvidueil may be included on ,.tuma filed by organlationa.

Note" Form 4720 .. ended "Relum or C.-n Eaelae T....Un_ Ch.p1era 41 and 42 or the Intern.l Revenue Code:

Soulee: IRS. St.tl.tice of Income Dlvlaion, AUQUIII 2010.

REL 00997

Excise Taxes Reported by Charities, Private Foundations, and Split-Interest Trusts on Form 4720. Calendar YE IMoney .mount. Itrw ,n -.::.1. doW.,. J

Item

Total tax

Tax on undistributed income

Individual tax on self-<leallng

Tax on taxable expenditures

T~x one~cl!.~s lo~byini e~pendltures

Ta,x .()n llxces.~ b~slness holdings

Tax on excess benefit transactions

Tax on charitable remainder trusts' unrelated taxable income

Ta~ .~n pollt~al. ex~ltu~s ,A__ ',..� " ..Tax. oninvestnlllnts th.atj':()pardlzll charita.ble purpose .�

Tax on prohibited tax shelter�

Tax ~n ta~able dlst.~~.LJtl0nsofsponSOri"Qorganlzations

!a,~_(Jn.~~sgu.aIl~.n~I(J}~)!lt':'i llxpe.'!~~t~~s_ •.�

Total Organizations [1 ) Indiv

Number of retums [3J

(1)

1,858

1,328

178

137

50 12

26

97 .. 30

0 ,.,.. , .. ..

Number of

Amount retums (3J

(2) (3)

12,269,330� 1,654

5.391,365 1.328

1.146.999 N/A

1.870.351� 137

409,974 50

1.938.303� 12

158,004 NlA

1.265.665 97

•• 88!6!2� .. 30

0 0 .. .. .. .. ...... ..... I· .... .. ..�

Number of

Amount retums (3)

(4) (5)

10.~~.242 229 -

5.391.365 N/A -.

N/A 178

1.865.273 19

409.974 N/A

1.938.303� N/A

N/A 26

1.265.665 N/A

•• 84.~~5 "6 0 0 ... .. 0 .. .. .. ..

"~'-~ ~ ~<A'. ..� ...._. .. ~. ,... • ¥ ••• _~-" • ' .. -, "_ ..,,. _ ••• ,,·_v .-. ·· ...·u_, •__ ._~ ..... _··••·_N_~_n·' •.~<-.. ..� ..Tax on premiums paid on personal benefit contracts 0 0 ... Date combln" to prevent d.ao.u... of IndlvAdUlillupaver dete.

NlA - Not o",,_le.

(1) Organization (alii.. ara reported by charitl_, ptfvale roundlltiona, lind aptit-inlera' 1Nl1a,

(2J Indhl'ldu.lw... are r~ by foundation rnllnag... office direc""', truat.... and orherlndrviduata.

(3) Th. total numb_ of returN m8Y not equ. the.urn of ttl. number of retuma for ..ch 'a., ...n org.Olution or IndivtdUIII may report mof. th.n one type of tax pM ...tum. Addlbon8lly, indlvldu.1 rlftume 'ned by org8nlation8.

,..,..: Fonn ..720 • enbd.s -Return of Cwtain ExclM Tu_ Under Ch.p" 41 and 42 of !he Intern" Rev8nue Cod8.

Sou,,,,,: IRS. Stollob 01 IncomoC.vIOIon. 0c10M' 2009.

REL 00998

2007 Excise Taxes Reported by Charities, Private Foundations, and Split-Interest Trusts on Form 4720. Calendar Year

[Money amounts Ire in whoe dOla'" J

Total Organizations [1] Individuals [2]

Number of Number of Number of

Item retums [3] Amount retums [3] Amount returns [3] Amount

(1) (2) (3) (4) (5) (6)

Total ta:K 1,788 5,459,045 1,594 3,693,116 223 1,765,934

Tax on undistributed income 1,432 3,166,994 1,432 3,166,994 N/A N/A Individual tax on self-dealing 203 1,721,285 N/A N/A 203 1,721,285

Tax on taxable expenditures 94 154,053 94 151,834 9 2,219

Tax on excess lobbying expenditures 37 182,932 37 182,932 N/A NiA

Tax on excess business holdings 5 132,052 5 132,052 N/A N/A

Tax on excess benefit transactions 10 42,372 N/A N/A 10 42,372

Tax on political expenditures

Tax on investments that jeopardize charitable purpose

Tax on prohibited tax sheller

Tax on disqualifying lobbying expenditures

Tax on premiums paid on personal benefit contracts

·38 .. .. .. ..

"59,374.. .. .. ..

"37 .. .. .. ..

59,316.. .. .. ..

"6 .. .. .. ..

"58 .. .. .. .. "" Data combined to p....ent d1_ure d individual taxpayer dlta.

NJA - Noleppllcable.

(11 OrganlzeUon tax...... reported by chlritles, private foundationl, lind ",,1~·lnt""llN!ts.

(2] Indlvidueltall.. are reporled by loundltlon monagere, oIIIee dlrectDrll, trull2tls, and other Individual•.

(3) The totel nurnbe< 01 returns mlY n<ll equal the sum d the nurnbe< of returns lor each tall, IS .n organization f1I indlvldull may report more than one type of ta. per relurn. A_"lly, Indivldua18 may be Included on returns filed byorganlutlon•.

Nola: Form 472018 entlUed "Return ofC_n Excise r .... Und8r ChaplefS 41 Ind 42 of the IntemlIl Revenue Code."

SouraJ: IRS, Stati.tics of Income Division, August 2008.

REL 00999

Excise Taxes Reported by Charities, Private Foundations, and Split-Interest Trusts on Form 4720, Calendar Year 2006 [Money amounts a", in whole dollars J

Total Organizations [1] Individuals [2] Item Number of Number of Number of

Amount Amount Amount returns [3) returns [3) returns (3)

(1 ) (2) (3) (4) (5) (6)

Total tax.......................................................................................... 1,840 5,808,220 1,663 3,538,096 217 2,270,124�

Tax on undistributed income ...................................................... 1,532 2,994,453 1,532 2,994,453 N/A N/A�

Individual tax on self-dealing....................................................... 186 2,248,367 N/A N/A 186 2,248,367�

Tax on taxable expenditures ...................................................... 77 145,874 76 139,826 22 6,048�

Tax on excess lobbying expenditures......................................... 36 214,771 36 214,771 N/A N/A�

Tax on political expenditures...................................................... 23 2,992 17 2,831 5 161�

Tax on excess business holdings .............................................. 8 186,215 8 186,215 N/A N/A�

Tax on excess benefit transactions............................................. 7 15,548 N/A N/A 7 15,548�

Tax on investments that jeopardize charitable purpose.............. 0 0 0 0 0 0� Tax on disqualifying lobbying expenditures................................ 0 0 0 0 0 0� Tax on premiums paid on personal benefit contracts................. 0 0 0 0 0 0�

N1A - not applicable.

(1 JOrganization taxel a", ",ported by chanlJee, private foundatlonl, and spln-int_t trultl.

(2J Indlvtdual taxel I'" ",ported by foundatiOn managers, office directors, trultees, and other Individuall.

[3J The total number of ",tuml may not equal the lum of the number of ",turns for each tax, as an organizatiOn or Individual may ",port more than one type of tax per ",tum. Additlonally, individuals may be included on ",tuml filed by organizations.

Note: Form 4720 JI entitlad "Retum of Certain Exciu Taxel UnderChapiers 41 and 42 of the Intamal Revenue Code."

SOURCE: IRS, Statilllca of Income Ohllslon. October 2007.

REL 01000REL 01000

REL 01001REL 01001

REL 01002REL 01002

REL 01003REL 01003

REL 01004REL 01004

REL 01005REL 01005

REL 01006REL 01006

REL 01007REL 01007

REL 01008REL 01008

REL 01009REL 01009

REL 01010REL 01010

REL 01011REL 01011

REL 01012REL 01012

REL 01013REL 01013

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REL 01015REL 01015

REL 01016REL 01016

REL 01017REL 01017

REL 01018

b(3) IRC 6103

b(3) IRC

REL 01019

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REL 01021

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REL 01023



COMMISSIONER November 18, 2011 TAX EXEMPT AND


The Honorable Charles Boustany, Jr., MD Chairman Subcommittee on Oversight Committee on Ways and Means U.S. House of Representatives Washington, DC 20515

Dear Mr. Chairman:

I am responding to your letter to Commissioner Shulman dated October 6, 2011, requesting information about the tax-exempt sector. We appreciate your interest and support for the IRS efforts in the administration of the exempt organizations tax law.

Reports of the IRS data you requested are created and published by our Statistics of Income (SOl) Division. SOl publishes a wide range of tables, articles, and data that describe and measure elements of the U.S. tax system and are available to the public at http://www.irs.gov/taxstats/index.html. Unless otherwise indicated, SOl data i~ current through FY 2010 and is generally based on valid statistical samples.

Also, unless otherwise stated, any data compiled from the annual filings of Form 990 returns and supplementary schedules or forms will be provided only for the 2008 tax year, the most recent year in which all voluntarily reported information has been processed.

1) Overview of the Tax-Exempt Sector

a) Provide a detailed breakdown of the number of active tax-exempt organizations in good standing with the IRS, broken down by type (e.g., 501(c){4),501(c){10».

Enclosed as Exhibit 1(a)-1 is Table 25: Tax-Exempt Organizations and Nonexempt Charitable Trusts, Fiscal Years 2007-2010 from the 2010 IRS Data Book. The FY 2010 totals do not take into account organizations automatically revoked under Internal Revenue Code section 6033U) beginning in June 2011, organizations that terminated or whose tax-exempt status was revoked through the examination process during FY 2011, or new organizations recognized as tax-exempt in FY 2011. Data Book information is updated annually, with the FY 2011 information expected in March 2012.

REL 01024

2

b) Provide a detailed breakdown of the IRS Tax Exempt and Government Entities Division's budget for 2008 through 2011. Specify the total number of employees dedicated to tax-exempt organization work and how these resources are allocated across the division.

Pursuant to clarification from Legislative Affairs that this question is intended to reflect the TE/GE budget for FY 2008 - FY 2011 and the staffing information for only the EO division, we offer the following information. The enclosed Exhibit 1(b)-1 provides a breakdown of TE/GE budget data for FY 2008 - FY 2011. Exhibit 1(b)-2 provides EO staffing information as of the last day of each fiscal year.

c) How many tax-exempt organizations have been audited since 2008? Provide a breakdown of all audits opened for each type of tax-exempt entity, the issues identified for audit, and the current status of such audits. What was the average length of a tax-exempt audit during this period?

Our systems track examination information by return rather than by organization, and information is entered into the system at the time each return is closed. Enclosed as Exhibit 1(c)-1 is IRS FY 2008, FY 2009 and FY 2010 Data Book Table 13: Returns of Tax-Exempt Organizations, Employee Plans, Government Entities, and Tax-Exempt Bonds Examined, by Type of Return. According to the Table 13 data, IRS TE/GE, EO examined the following numbers of tax-exempt organization returns and related taxable returns during FY 2008 - FY 2010:

• FY 2008: 7,861 • FY 2009: 10,187 • FY2010: 11,449

With respect to the issues identified for audit, the enclosed Exhibit 1(c)-2 contains a list of all the Principal Issue Codes (PIC codes) used for closed examinations involving taxexempt organizations for FY 2008 - FY 2011. The Internal Revenue Manual proVisions governing the use of PIC codes are located at section 4.75.16.9. 1 There are 96 PIC codes for agents to use as part of the process of closing a case. PIC codes are designed to proVide historical data to create a model to distinguish compliant from noncompliant returns. In no-change cases, agents are instructed to select the PIC code that captures the issues on which the agent spent time during the examination. In a change case, the agent is instructed to select the PIC code that captures the issue or issues resulting in the change. Agents may choose up to four PIC codes, and if more than one PIC code is chosen, the agent is to list them in order of priority, beginning with the most important. In both the no-change and change cases, the determination of which PIC codes are applicable to a particular case is a judgment made by the agent.

I The Internal Revenue Manual is available at http://www.irs.govlinnlindex.html.

REL 01025

3

The enclosed Exhibit 1(c)-2 shows the ten most frequently employed PIC codes:

• 42: Delinquent 940/941 Returns • 83: Employment Tax - Other Issues • 39: Delinquent 990/990-EZ Returns • 21: Operational Test • 34: Other • 78: Employment Tax - Worker Classification Issues • 65: Claim for Refund • 5: Delinquent Filing of Return (Other) • 57: Gaming - Pull Tabs • 79: Employment Tax - 1099 Issues

The average length of time for completing examination returns that were closed in FY 2011 is 210 days.

d) How many new tax-exempt organizations did the IRS recognize in each of the last three years for which data is available? Provide a breakdown of all new applications for tax-exempt status by organization type and year for those years. Describe the process by which an entity is granted taxexempt status. What is the IRS procedure for conducting periodic reviews of an organization's tax-exempt eligibility?

Enclosed as Exhibits 1(d)-1 is Table 24: Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section, for FY 2008 through FY 2010 from the 2008,2009 and 2010 IRS Data Book. The information in Table 24 for each fiscal year is tracked at the end of the determination process; that is, the information reflects the number of cases closed in each fiscal year, not the number of applications received.

Process for IRS Tax-Exempt Recognition

With regard to recognition for tax-exempt status, enclosed for your general reference as Exhibit 1(d)-2 is IRS Publication 557, Tax-Exempt Status for Your Organization. Most organizations seeking recognition of exemption from federal income tax must use specific applications forms prescribed by the IRS; primarily, Form 1023, Application for Recognition of Exemption Under Section 501 (c)(3) of the Internal Revenue Code, and Form 1024, Application for Recognition Under Section 501(a). Some organizations do not have to use specific application forms and apply for tax-exempt status by letter to the address shown on Form 8718, User Fee for Exempt Organization Determination Letter Request. A copy of the organization document should be enclosed and the letter should be signed by an officer of the applicant organization. All applications for exemption are sent to EO Determinations, headquartered in Cincinnati, Ohio.

If an application for exemption does not contain the required information, it may be returned with a letter of explanation without being considered on its merits.

REL 01026

4

Alternatively, if the application is substantially complete, the IRS may retain the application and request additional information as needed. If an application for exemption raises issues on qualification for exemption or foundation status for which no published precedent exists or for which nonuniformity may exist, EO Determinations will refer the application to EO Technical in Washington, D.C.

If the IRS receives information sufficiently establishing that an organization meets the requirements for exemption from federal income tax, the IRS will issue a determination letter recognizing the organization's exempt status and providing its public charity classification, if applicable. A proposed adverse determination letter will be issued to an organization that has not provided sufficiently detailed information to establish that it qualifies for exemption or if the information provided establishes that it does not qualify for exemption.

The IRS also grants group exemptions to organizations that have or plan to have related organizations that are very similar to each other. Groups of organizations with group exempt letters have a "head" or main organization, referred to as a central organization. To qualify for a group exemption, the central organization and its subordinates must be affiliated with the central organization, subject to the central organization's general supervision or control, and exempt under the same paragraph of section 501 (c), through not necessarily the paragraph under which the central organization is exempt.

A central organization seeking a group exemption request follows the same application format as a single organization - it sends its Form 1023 or Form 1024 application exemption to the IRS. Upon receipt of an application Form 1023 or 1024 and a request for group exemption, the IRS first determines whether the central organization and the existing subordinates qualify for tax exemption. Once the IRS grants the exemption, the central organization is responsible for: (1) ensuring that its current subordinates continue to qualify to be exempt; (2) verifying that any new subordinates are exempt; and (3) updating the IRS on an annual basis of new subordinates, subordinates no longer to be included, and subordinates that have changed their names or addresses. Enclosed for your additional reference as Exhibit 1(d)-3 is IRS PUblication 4573, Group Exemptions, TE/GE Division.

In terms of follow-up and as a regular part of its annual workplan, the Review of Operations (ROO) performs follow-up compliance reviews of a statistical sample of organizations that were granted tax-exempt status in the past 3-5 years. Based upon results of reviews, organizations may be referred for examination where appropriate.

In addition to the statistical sample, ROO performs compliance reviews on organizations that have recently gone through the determination process, including organizations that are recognized as tax-exempt because their applications meet all the legal requirements for tax-exempt status, but the agent has concerns about future activities of the organization so follow up is appropriate.

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5

2) Compliance

a) Provide a detailed explanation of how the IRS is using the new information obtained from the new Form 990 to improve current enforcement efforts and future compliance.

We undertook a comprehensive redesign of Form 990, Return of Organization Exempt from Income Tax, that was effective beginning with tax year 2008. One element of the redesign was to provide a structured format for reporting information - both the additional information being requested and the information that previous versions of the form had required without specifying the format to be used. By providing that structure, the information reported on the Form 990 is more readily comparable, which enables us to use data analytic techniques to identify areas of potential noncompliance. The redesigned Form 990 also offers the taxpayer a better understanding of what information to provide and the public with a more accurate picture of an organization's activities.

As organizations have had an opportunity to transition into and provide information using the new reporting requirements, we are now developing and testing risk models to improve our examination case selection process. For instance, such risk models include analyzing issues related to: compliance practices of self-declared section 501 (c)(4), section 501(c)(5) and section 501(c)(6) organizations; unrelated business income and filings of Form 990-T; and governance, particularly composition of boards. This effort is in line with TE/GE's wider strategy of using data-driven tools to target highrisk areas.

b) Provide a detailed explanation of how the redesigned Form 990 increased transparency

The redesigned Form 990 proVides a structure for providing information that makes it more readily comparable across different organizations. By adopting the format of a core form with a series of schedules, the redesigned Form allows the public, press and others to more easily locate the information they are interested in. The redesigned core form also allows an organization to describe its exempt accomplishments and mission up front and provides more opportunities throughout the form for the organization to explain its activities.

For the 2010 Form 990, examples of our efforts to refine the Form to increase transparency include changes to the following Schedules:

• Schedule C, Political Campaign and Lobbying Activities: Instructions for Part II-A clarify that this Part needs to be completed by all Form 990 filers for which the 501 (h) lobbying expenditure election was valid and in effect during the 2010 tax year, whether or not the organization engaged in lobbying activities during that tax year.

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• Schedule F, Statement of Activities Outside the United States: Schedule F and its instructions were revised to:

Clarify that the number of independent contractors in a foreign region should be reported, along with the number of employees and agents in that region. Require reporting of the total book value of investments in a foreign region. Clarify how to report total number of foreign offices, agents, employees and independent contractors. Clarify that types of indirect expenditures for foreign activity that do not have to be reported if they are not separately tracked include expenses for listing study abroad programs on a school website or in a paper catalog. Clarify that foreign program related investments are reportable in Part" of Schedule F. Part II instructions state that a filer should report not only grants and other assistance to foreign organizations or entities, but also to U.S. organizations or entities for foreign activity. Parts" and III instructions clarify that organizations using the accrual method of accounting that make foreign grants to be paid in future years should report the grants' present value in Part" and report any accruals of additional value in future years. Parts II and III instructions clarify that the filing organization should report foreign grants regardless of the source of the grant funds (whether restricted or unrestricted) or whether the filing organization selected the grantee. A new Part IV requires reporting of whether the organization engaged in foreign activities that require filing of other IRS forms.

• Schedule R, Related Organizations: New column (g) in Part" asks whether each related tax-exempt organization is a section 512(b)(13) controlled entity of the filing organization. New column (k) in Part III asks for the filing organization's percentage ownership interest in each related partnership. New column (d) in Part V asks how the organization determined the amount of each type of related party transaction reported in Part V. Instructions provide examples to illustrate how the filing organization can control or be controlled by multiple persons, and how multiple nonprofit organizations can be directly and indirectly related to one another.

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c) Have taxpayers expressed concerns to the IRS regarding the compliance burden associated with the redesigned Form 990? If so, describe the primary compliance issues identified by taxpayers and what the IRS has done, or plans to do, to address taxpayer concerns.

The IRS extensively redesigned Form 990 for tax year 2008 to promote tax compliance and increase transparency. The redesign was a comprehensive, collaborative process that included meetings with taxpayer groups and feedback from the EO sector (including the public, state charity regulators, the media, and policymakers) during conferences and speeches. 'Also, based on feedback from the over 800 formal public comments on drafts of the 2008 Form 990, schedules, and instructions, the IRS recognized that the transition from the old to the redesigned Form 990 would change the way some organizations capture and track data for them to complete the Form.

Thus, to help all filers become familiar with the Form, we released two drafts of the 2008 Form 990 in the year and a half prior to publication of the final Form, along with multiple educational resources on how the Form had changed and tips for completing it. To give small and mid-sized organizations with fewer legal, accounting, and administrative resources more time to adapt to the reporting transitions, we also implemented a 3-year phase-in period I raising the asset and gross receipts thresholds for Form 990 filing by ten-fold (from $100,000 in gross receipts and $250,000 in assets to $1 million and $2.5 million, respectively) for tax year 2008, by five-fold for tax year 2009 ($500,000 and $1.25 million), and ending at $200,000 and $500,000 for tax years 2010 and later. The transition period allowed hundreds of thousands of smaller and mid-sized organizations that would have been required to file the Form 990 for tax years 2008 and 2009 to file the shorter Form 990-EZ for one or both of those years. This transition period also gave organizations time to progressively enable their internal systems to respond to the new requirements.

The major redesign of the Form 990 is complete. The IRS redesigned the Form to make it more streamlined and better organized. We eliminated unstructured attachments, replacing them with structured schedules to promote uniformity and reduce ambiguity over how to report supplemental information. We also added many tools to the instructions, including a Glossary, Appendices, examples and illustrations, and a sequencing list, to help filers complete the Form more easily.

The IRS continues to refine the Form, schedules, and instructions based on public comment. We have made clarifications, corrected errors, and added examples to make the Form easier to understand and complete. As recently as June 2, 2011, we requested public comment on 11 transitional issues and frequently asked questions involving the redesigned Form 990 in Announcement 2011-36. We have received just over 100 comments in response to Announcement 2011-36, which we are in the process of analyzing. Any changes in response to the comments will be made as appropriate. We will do so on an ongoing basis to minimize any potential burdens where consistent with our objectives to increase compliance and transparency.

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In response to the Affordable Care Act (ACA), the IRS added a new Part V, Section B to the 2010 Form 990, Schedule H (Hospitals) to gather information related to new requirements for tax-exempt hospital facilities and to related policies and practices. Further, in response to meetings with EO stakeholders that more time was needed for the hospital community to familiarize itself with the new questions and to adjust their systems to gather the information needed as well as public comments on ambiguities in the questions, the IRS issued Announcement 2011-37 that made the entire Part V, Section B optional for the 2010 tax year. The IRS continues to solicit and review public comments on Schedule H revisions and implementation of the ACA requirements for tax-exempt hospitals.

We have posted on our website, IRS.gov/eo, many audio, visual, and written tools to assist filers in understanding and completing the Form 990 and schedules. We also speak at dozens of conferences, seminars, and webinars throughout the year to reach thousands of representatives of tax-exempt organizations and answer their questions about Form 990 preparation. We will also continue to accept comments through the IRS Form 990 comment mailbox.

d) Is the IRS contemplating any additional changes to Form 990 to further compliance goals? If so, describe the planned modifications and their estimated effect on compliance.

While the major redesign is complete, we continue to refine the Form 990, schedules, and instructions in response to public comment received informally and through our comment mailbox and request for clarification. See response to question 2(c), above, for a description of the IRS's ongoing efforts to solicit and respond to pUblic comment on the Form 990. In addition, the IRS Exempt Organizations (EO) division seeks and coordinates input from its various operating units, including EO Rulings and Agreements, EO Examinations, and EO Determinations in considering changes to the Form 990, schedules, and instructions. EO also consults with its Chief Counsel's office in considering and drafting such changes.

e) How is the IRS using the related organization information from the Schedule R? What type of compliance problems is this schedule designed to curb? Is the information reported on the Schedule helpful in improving compliance? If not, are further changes to the schedule contemplated? If so, please describe the planned modifications and their estimated effect on compliance.

The redesigned Form 990 for tax years beginning in 2008 provides more comprehensive information about an organization than the prior Form 990 in all areas, including the organization's activities, the compensation of its officers and key employees, and relationships with other entities. For instance, the Schedule R is designed to increase transparency by proViding a more complete picture of the filing organization's structure, relationships with related organizations, types of transactions with related organizations, and involvement in joint ventures with non-exempt entities.

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This disclosure also serves our compliance purposes, as it may suggest potential inurement, private benefit, or non-exempt activity.

We are using this new information, including information on the related organizations reported in Schedule R. to design adaptable risk models to allow us to identify organizations with higher potential for noncompliance. We plan to use these tools to identify organizations that we may contact through specific compliance projects and through our regular examination program. For instance, we may look at compensation from related organizations as part of our determination whether the compensation of certain officers, directors, and key employees is reasonable.

No changes to the Schedule R are presently underway, but we may make modifications to the Schedule R and/or instructions based on comments submitted in response to

. Announcement 2011-36.

f) Has the IRS identified any specific governance issues based on the additional information provided on the redesigned Form 990? If so, provide a detailed description of the new issues identified.

Based on feedback from the regulated community, we have learned that exempt organizations' governing boards have become more involved in Form 990 preparation and review since the Form 990 was redesigned and questions were added in Part VI (Governance) on governance policies and board review of the Form 990. Similarly, we have learned of greater adoption of sound risk management policies by exempt organizations' governing boards in response to Part VI questions.

We also have learned that governing boards of exempt organizations are making greater efforts to add independent board members, and to more carefully scrutinize transactions with board members to ensure that such transactions do not compromise their independence.

In 2010, we initiated a long-term study on the intersection of governance practices and tax compliance. To gather data, we began using a checksheet, enclosed as Exhibit 2(f)-1, at the end of every examination of a return associated with a section 501(c)(3) organization. We are using the checksheet data to better understand how the composition of governing bodies and general governance practices impact tax compliance. In addition, we are using responses to Form 990 to continue developing and testing risk models to improve our examination case selection process. As we compile sufficient information, we plan to work with our research function to analyze long-term data and publicly report the findings.

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g) The IRS recently revoked the tax-exempt status of thousands of organizations across the country for failure to file tax returns as part of the automatic revocation program.

i) What is the current status of this program?

Pursuant to the Pension Protection Act of 2006, Pub. L. No.1 09-280, 120 Stat. 780, section 1223 (2006) (Pension Protection Act), the IRS is implementing the revocation, which occurs by operation of law, of the tax-exempt status of any organization that fails to file a required annual return or Form 990-N e-Postcard for three consecutive years.

In June 2011, the IRS first sent notices to and published the names of approximately 275,000 organizations whose tax-exempt status was automatically revoked because they did not file legally required annual reports for three consecutive years. The IRS believes the vast majority of these organizations are defunct, but also announced special steps to help any eXisting organizations to apply for reinstatement of their taxexempt status. As of October 7,2011, around 385,000 organizations have been automatically revoked. As of October 14,2011, about 5,500 organizations have applied for reinstatement.

The IRS continues to send notices, reminding organizations of their filing reqUirements, and publishes the names of additional organizations whose exempt status has been automatically revoked every month. The IRS already is processing applications from those organizations that request reinstatement of their tax-exempt status (the only administrative remedy allowed under section 6033(j)(2)). The IRS recognizes that many small organizations were disproportionately affected by the law change, and is administering a transition relief program for certain small tax-exempt organizations that were made subject to the new Form 990-N e-Postcard filing requirement by the Pension Protection Act. The organizations eligible for the transition relief program pay a reduced user fee with their application. If the application is approved for meeting the requirements for exemption, they automatically regain their tax-exempt status retroactive to the date of revocation.

ii) How many taxpayers reinstated their tax-exempt status using the procedures in Revenue Procedures 2011-8, 2011-36, and 2011-43?

iii) How many taxpayers are currently in the process of being reinstated?

On June 8, 2011, the same day we published the first Auto-Revocation List (List) on IRS.gov, we also published several pieces of guidance to proVide organizations on the List with information regarding reinstatement of their tax-exempt status. Transition relief was offered to certain small organizations under Notice 2011-43. The transition relief included a reduced user fee offered in Rev. Proc. 2011-36 and, if the organization's application for exemption was approved, retroactive reinstatement. All other organizations on the List that applied for reinstatement of tax-exempt status are reqUired to pay the user fee provided in Rev. Proc. 2011-8.

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In response to questions 2(g)(ii) and (iii) above, as of October 14, 2011, the IRS has received about 5,500 applications seeking reinstatement and closed about 2,000 (includes approvals and a small number of applications that were withdrawn or closed for failure to provide information substantiating exemption). About 1,550 of the applications were approved for reinstatement under the transition relief proVided in Notice 2011-43 (and Rev. Proc. 2011-36), and the remainder came in with the regular user fees provided in Rev. Proc. 2011-8.

iv) What is the average length of time for the processing of a reinstatement request?

We do not track reinstatement requests separately from other requests for determinations. The average length of time for processing all types of EO Determinations cases was 104 days for FY 2011.

v) Is the IRS planning to issue any further guidance related to the automatic revocation program?

The IRS continues to send notices to organizations to remind them of their filing responsibilities. In addition, the IRS continues to update its customer outreach and educational materials to offer ongoing informal guidance and address new issues relating to the automatic revocation program, such as updating applicable FAQs on the IRS website (www.irs.gov).

3) Unrelated Business Income

a} In 2009, the Congressional Research Service estimated that revenues from tax-exempt organizations were $1.4 trillion and the value of assets held by tax-exempt organizations totaled $2.6 trillion.2 Provide IRS data regarding the revenue and assets of tax-exempt organizations for 2008, 2009, and 2010.

The SOl Division publishes the balance sheet and income statement items for sections 501 (c)(3)-(9) tax-exempt organizations only, based on information received on Forms 990 and 990-EZ. The most recent SOl data is from tax year 2008. All figures are based on statistically valid samples, and money amounts are in thousands of dollars. Enclosed as Exhibits 3(a)-1 and 3(a)-2 are Table 3: Form 990-Returns of 501 (c)(3-(9) Organizations: Balance Sheet and Income Statement Items, by Code Section, Tax Year 2008, and Table 4: Form 990-EZ Returns of 501 (c)(3)-(9) Organizations: Selected Items, by Code Section, Tax Year 2008.

2 See An Overview ofthe Nonprofit and Charitable Sector, Congressional Research Service (Nov. 17,2009).

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b) How does the IRS identify unrelated business taxable income issues for audit? Provide a breakdown of the total number of tax-exempt audits opened by the IRS in 2009 and 2010 that involved unrelated business taxable income issues.

The IRS identifies unrelated business taxable income (UBTI) issues for audit in two main ways:

• By using Form 990 data to develop data analytics and risk models from the reported information, including unrelated business income; and

• Through the strategic planning working group, which looks at data analytics trends in exam and applications for exemption, newspaper articles, websites, and other public information to identify potential areas of noncompliance and develops projects to address such noncompliance.

As of October 19, 2011, our systems show 874 closed returns with at least one UBTI PIC code for FY 2009, and 1,028 returns had at least one UBTI PIC code for FY 2010. Limitations in PIC code data are discussed in the response to question 1(c). See enclosed Exhibit 1(c)-2, which contains a list of all the Principal Issue Codes (PIC codes) used for closed examinations to identify issues involving tax-exempt organizations for fiscal years 2008 - 2011.

c) Provide the following figures concerning all 501(c) organizations for the 2009 and 2010 tax year, identifying each type separately.

i) How many organizations reported unrelated business taxable income and income exempt from the unrelated business income tax?

ii) How many organizations reported both unrelated business taxable and income exempt from the unrelated business income tax?

In response to questions 3(c)(i) and (ii) above, the SOl Division publishes information on unrelated business income attributed to tax-exempt organizations based on information received on Form 990-T. The most recent SOl data is from tax year 2008. The information requested is shown on SOl Table 1: Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Unrelated Business Taxable Income (Less Deficit), Unrelated Business Taxable Income, and Total Tax, by Type of Tax-Exempt Organization, Tax Year 2008, and is enclosed as Exhibit 3(c)(i)-1.

iii) What is the total amount of tax-exempt royalty income, and tax-exempt rental income reported? What is the average amount of those sources of income among the entities that reported receiving at least some such income?

Although not published in an annual SOl table or IRS Data Book, sal does track information relating to royalty income reported on Form 990 and rental income reported

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on Form 990 and Form 990-EZ. Please note that Form 990-~Z does not ask for information on royalty income. Attached as Exhibit 3(c)(iii)-1 is the following SOl data: Royalty Income Reported by 501(c)(3)-(9) Organizations on Form 990, Tax Year 2008. and Net Rental Income Reported by 501(c)(3)-(9) Organizations on Forms 990 and 990-PF, Tax Year 2008.

iv) What are the most common tax-exempt organization errors related to reporting trade or business income?

As noted in the response to question 1(c), PIC codes are used to provide historical data to create a model to distinguish compliant from non-compliant returns. The specific PIC codes that relate to UBTI are listed in the order of frequency on the enclosed Exhibit 1(c)-2, which lists all used PIC codes for closed examinations involving taxexempt organizations for fiscal years 2008 - 2011. The specific PIC codes that describe UBTI issues are:

• 33: Unrelated Trade of Business (Other) • 35: UBI - Expense Allocation Issues • 36: UBI- NOL Adjustment • 37: UBI-Income from Controlled Corp. under IRC 512(b)(13) • 38: UBI - Other

v) Describe IRS procedures for reviewing returns by tax-exempt organizations that report unrelated business taxable income.

When agents are assigned any return for a full-scope audit, they look at all issues on the return, including unrelated business taxable income (UBTI). The Internal Revenue Manual contains procedures for conducting examinations involving UBTI issues. See, e.g., IRM 4.76.2.8, enclosed as Exhibit 3(c)(v)-1.

4) Audits

a) What percentage of the Tax Exempt and Government Entities Division's budget is allocated towards audits and examinations?

Pursuant to clarification from Legislative Affairs that the question is intended to reflect only the EO budget in FY 2011,60.27 percent of EO's budget is allocated towards audits and examinations.

b) Explain how the IRS reviews allegations of excessive political campaign activity by tax-exempt organizations.

All referrals from Whatever source that alleges that a tax-exempt organization is in potential noncompliance with the tax law, including political campaign intervention, are sent to EO Examinations' Classification in Dallas, Texas. Classification staff reviews each allegation to determine whether the referral falls under EO Examination's

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jurisdiction. If it does, Classification staff initiates "case building", which includes pulling transcripts of Form 990 and performing other research as appropriate to allow the IRS to make a decision based on a "reasonable belief standard" that further action is warranted. If it is not an EO case, the referral is forwarded to the appropriate IRS Operating Division to be worked through their referral process.

All EO Examination referrals are entered into a database for tracking purposes. Not all referrals entered into the database will be selected for examination.

Procedures exist to ensure that no single individual makes case selection determinations when sensitive issues are potentially involved. All referrals involving political activities are sent to an EO referral committee made up of experienced, career civil servant Exam managers. If the referral committee determines that there is examination potential, the referral is assigned to a field group. When a referral is received by a field group for examination, the Group Manager generally reviews the case and assigns it to an agent with the appropriate level of experience.

c) What issues does the IRS prioritize when conducting audits of tax-exempt organizations, or reviewing the returns of such organizations?

Our strategic planning process influences how we focus our Examination resources. The process includes reviewing Form 990 data, Exam trending data, Determinations trending data, input from other IRS functional areas, referrals from the public, news media, and other public information. As also described in the response to question 3(b), our strategic planning working group uses data from the Form 990 returns to review data analytics trends and develop risk models to identify potential areas of noncompliance. This allows the IRS to determine how to allocate resources and to develop projects that focus on areas where we see a need to gather more information. This also allows us to determine types of outreach warranted to assist tax-exempt organizations in their compliance efforts. Enclosed as Exhibit 4(c)-1 is a copy of the most recently published EO workplan (FY 2011), which lists some of the projects initiated through our strategic planning working group.

d) The redesigned Form 990 requires additional information on related and subsidiary organizations. Has the new information prompted an audit or been of assistance during the course of an audit? If so, please describe the manner in which the information has been used.

See the response to question 2(e) regarding related organization information.

5) Current Tax-Exempt Enforcement Initiatives

a) In addition to the Hospitals and Universities projects (referenced in sections (c) and (d», are there any tax-exempt compliance projects that the IRS is currently undertaking? Does the IRS have plans to launch any such

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projects in the upcoming year? If so, please describe the anticipated compliance project.

Each year the EO Division puts out its workplan that includes accomplishments from the previous fiscal year and compliance priorities for the upcoming fiscal year, and also provides updated statistics. Enclosed as Exhibit 4(c)-1 is a copy of the most recently published EO workplan (FY 2011). Some of the workplan highlights include the following:

• Filing demographics and statistical information on the redesigned 2008 Form 990 • Implementation of the ACA legislation • Colleges and Universities study and related examinations project that asked

questions relating to their executive compensation, endowments, and unrelated business income

• International-focused tax enforcement efforts, such as the Gifts-in-Kind examination project, that explore whether charitable assets of exempt organizations are being diverted internationally for non-charitable purposes

• Non-filer Initiatives to help taxpayers comply with their voluntary filing obligations and to improve enforcement

b) Excise Taxes/Penalties

i) How many disqualified persons or organization managers were subject to penalties under IRC § 4958 for violating the excess benefit rules between 2006 and 20101

ii) How many donor advised funds or supporting organizations were subject to the excess benefit rules of IRC § 4958 between 2006 and 2010? Have any of these organizations lost their tax~exemptstatus?

iii) How many tax-exempt organizations have been subject to the excise tax under IRC § 4911 between 2006 and 2010 for failure to comply with the lobbying rules?

In response to questions 5(b)(i) - (iii) above, all supporting organizations and donor advised funds, as well as any disqualified persons and organization managers, are subject to the various rules and applicable excise taxes under Chapter 41 (including section 4911) and Chapter 42 (including section 4958).

Our automated examinations systems track excise tax returns of organizations or individuals who were found to have violated Chapters 41 or 42 filed as a result of examinations. However, our examinations systems only capture the aggregate of Chapter 41 and Chapter 42 excise tax assessments and do not separately break down the different types of excise taxes described within the subsections of Chapter 41 and Chapter 42. Thus, our automated examinations system does not separately track or report sections 4911 or 4958 assessment data.

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In addition to Examination data, the SOl Division analyzes data from estimates based on statistically valid samples of excise tax returns (Forms 4720) filed voluntarily, not as a result of an examination. Although the SOl Division provides some data on Chapters 41 and 42 excise taxes, they also do not differentiate or separate the data further among the various types of taxes within each chapter. The SOl estimates, based on self-initiated Forms 4720 filed during a particular calendar year, may include Chapter 41 or Chapter 42 violations occurring in various tax years.

Enclosed as Exhibit 5(b)1 - 5 is SOl Table 1: Excise Taxes Reported by Charities, Private Foundations, and Split-Interest Trusts of Form 4720 for calendar years 2006 - 2010. During this time period, SOl estimates that Form 4720 filers selfassessed approximately $1,440,203 in section 4911 excise taxes and $1,322,811 in section 4958 excise taxes.

iv) How many tax-exempt organizations has the IRS found to be engaged in tax shelter transactions between 2006 and 2010? Provide a breakdown of the type of transaction and the results of the audit/investigation.

The IRS Office of Tax Shelter Analysis (OTSA) captures TE/GE-wide information on tax shelter activities that are subject to the disclosure requirements under section 6011 and section 6033.

Pursuant to Treasury Regulations section 1.6011-4, a taxable party that has participated in a listed transaction must file a Form 8886 to meet its disclosure requirements. OTSA data shows 68 Listed Transaction Form 8886 Disclosures from 2006 - 2010. The following table summarizes the number of disclosures by shelter type. OTSA's database does not track the results of the audit/examinations.

#of tE/GE

Description of Listed Tr.3nsaction Disclosures IRC 419A(f)(6) - Multi Employer Welfare Plans 6 Intermediary Transactions 5 Contingent Liabilities * Roth IRAs 26 IRC 4 I2(i) - Retirement Plans 8 SC2 - S-Corp Stock Transaction 15

IRC 419A - Abusive Trust using Life Insurance Plans 6 Notional Principal Contracts/Swaps *

Total 68

* 3 or fewer

Also, pursuant to Treas. Reg'. section 1.6033-5, certain tax-exempt entities that are subject to section 4965 taxes are required to file Form 8886-T, Disclosure by Tax

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Exempt Entity Regarding Prohibited Tax Shelter Transaction, to disclose information with respect to each prohibited tax shelter transaction to which the entity is a party. OTSA data shows 42 Listed Transaction Form 8886-T Disclosures from 2006 - 2010. The following table summarizes the number of disclosures by shelter type. OTSA's database does not track the results of the audiUexaminations.

#of TE/GE

Description of Li~ted Transaction Disclosures VEBA Welfare Benefit Fund - 419A(f)(5) * Retirement Plans - 412(i) * Notional Principal Contracts and Swaps 34

Abusive Trusts providing welfare benefits 4

Unknown * Total 42

* 3 or fewer

Further, beginning in 2008, the redesigned Form 990 expands the questions relating to tax shelter reporting. The Form asks whether an organization was a party to or were notified by a taxable entity that they were a party to a prohibited party transaction, and whether Form 8886-T was filed, unlike in previous years. In tax year 2008,87 organizations indicated they were a party to or were notified by a taxable entity that they were a party to a prohibited party transaction on their Form 990. Of these 87 organizations, 28 reported filing a Form 8886-1.

c) Hospitals

i) Describe the IRS's current plans to comply with the new requirement in IRC § 4959 to review, at least once every three years, the community benefit activities of each hospital organization that is subject to the requirements under IRC § 501(r).

The IRS formed and trained a dedicated group to conduct the community benefit activities review of each hospital organization that is subject to the requirements under section 501(r). This group was formed in October 2010, and reviews started in March 2011. Approximately one third of the required hospital reviews will be conducted each year.

ii) What steps are the IRS taking to comply with the requirement under IRe § 9007(e) of Pub. L. 111-148, Patient Protection and Affordable Care Act, to submit an annual report to Congress, including the Ways and Means Committee, regarding the level of charity care provided by all hospitals (taxable, charitable, and government)?

The IRS is coordinating with the Department of Treasury (Treasury) and Health and Human Services (HHS) to develop and gather the information necessary for the report

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all examinations looked at both issues regardless of why the entity was selected. As noted, many of these examinations are still ongoing and we will be reporting our findings in the final report.

I hope this information is helpful. If you have any questions, please contact me or have your staff contact Mary Jo Salins at (202) 283-8791.

Sincerely,

~. J sep . Grant

ting Commissioner Tax Exempt & Government Entities

Enclosures

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Responsive Documents - IRS: CREW: Regarding Regarding 501c Correspondence and Work Plan - 3/18/14

Documents

Transcript of Responsive Documents - IRS: CREW: Regarding Regarding 501c Correspondence and Work Plan - 3/18/14