501(c)(3)

[Asdrubal Dagreat]

Theexempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization's net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.

Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct. For a detailed discussion, see Political and Lobbying Activities. For more information about lobbying activities by charities, see the article Lobbying Issues PDF; for more information about political activities of charities, see the FY-2002 CPE topic Election Year Issues PDF.

Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging if not fatal to a charity's continued operation, as many foundations and corporate matching funds do not grant funds to a charity without such status, and individual donors often do not donate to such a charity due to the unavailability of tax deduction for contributions.[8]

The basic requirement of obtaining tax-exempt status is that the organization is specifically limited in powers to purposes that the IRS classifies as tax-exempt purposes. Unlike for-profit corporations that benefit from broad and general purposes, non-profit organizations need to be limited in powers to function with tax-exempt status, but a non-profit corporation is by default not limited in powers until it specifically limits itself in the articles of incorporation or nonprofit corporate bylaws. This limiting of the powers is crucial to obtaining tax exempt status with the IRS and then on the state level.[12] Organizations acquire 501(c)(3) tax exemption by filing IRS Form 1023.[13] As of 2006[update], the form must be accompanied by an $850 filing fee if the yearly gross receipts for the organization are expected to average $10,000 or more.[14][15] If yearly gross receipts are expected to average less than $10,000, the filing fee is reduced to $400.[14][15] There are some classes of organizations that automatically are treated as tax exempt under 501(c)(3), without the need to file Form 1023:

There is an alternative way for an organization to obtain status if an organization has applied for a determination and either there is an actual controversy regarding a determination or the Internal Revenue Service has failed to make a determination. In these cases, the United States Tax Court, the United States District Court for the District of Columbia, and the United States Court of Federal Claims have concurrent jurisdiction to issue a declaratory judgment of the organization's qualification if the organization has exhausted administrative remedies with the Internal Revenue Service.[19][20]

Prior to October 9, 1969, nonprofit organizations could declare themselves to be tax-exempt under Section 501(c)(3) without first obtaining Internal Revenue Service recognition by filing Form 1023 and receiving a determination letter.[21] A nonprofit organization that did so prior to that date could still be subject to challenge of its status by the Internal Revenue Service.[21]

Individuals may take a tax deduction on a charitable gift to a 501(c)(3) organization that is organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.[22]

In the case of tuition fees paid to a private 501(c)(3) school or a church school, the payments are not tax-deductible charitable contributions because they are payments for services rendered to the payee or the payee's children.[24][25][26] The payments are not tax-deductible charitable contributions even if a significant portion of a church school's curriculum is religious education.[27][28] For a payment to be a tax-deductible charitable contribution, it must be a voluntary transfer of money or other property with no expectation of procuring financial benefit equal to the transfer amount.[29]

Before donating to a 501(c)(3) organization, a donor can consult the searchable online IRS list of charitable organizations to verify that the organization qualifies to receive tax-deductible charitable contributions.[30]

Most 501(c)(3) must disclose the names and addresses of certain large donors to the Internal Revenue Service on their annual returns, but this information is not required to be made available to the public,[32]unless the organization is an independent foundation.[33] Churches are generally exempt from this reporting requirement.[34]

All 501(c)(3) organizations must make available for public inspection its application for tax-exemption, including its Form 1023 or Form 1023-EZ and any attachments, supporting documents, and follow-up correspondence with the Internal Revenue Service.[35] The same public inspection requirement applies to the organization's annual return, namely its Form 990, Form 990-EZ, Form 990-PF, Form 990-T, and Form 1065, including any attachments, supporting documents, and follow-up correspondence with the Internal Revenue Service, with the exception of the names and addresses of donors on Schedule B.[35][36] Annual returns must be made publicly available for a three-year period beginning with the due date of the return, including any extension of time for filing.[35][36]

WikiCharities, a nonprofit organization, is a growing global database that allows nonprofits and charities to be searchable by name, location, and topic.[43] WikiCharities also gives each nonprofit a personalized webpage where nonprofits can improve transparency by listing updated contact information, leadership, board members, financials, annual reports, project activities, and more.[44]

Section 501(c)(3) organizations are prohibited from supporting political candidates, as a result of the Johnson Amendment enacted in 1954.[45] Section 501(c)(3) organizations are subject to limits on lobbying, having a choice between two sets of rules establishing an upper bound for their lobbying activities. Section 501(c)(3) organizations risk loss of their tax-exempt status if these rules are violated.[46][47] An organization that loses its 501(c)(3) status due to being engaged in political activities cannot subsequently qualify for 501(c)(3) status.[48]

Churches must meet specific requirements to obtain and maintain tax-exempt status; these are outlined in "IRS Publication 1828: Tax Guide for Churches and Religious Organizations".[49] This guide outlines activities allowed and not allowed by churches under the 501(c)(3) designation.[49]

In 1980, the United States District Court for the District of Columbia recognized a 14-part test in determining whether a religious organization is considered a church for the purposes of the Internal Revenue Code:

Having an established congregation served by an organized ministry is of central importance.[50] Points 4, 6, 8, 11, 12, and 13 are also especially important. Nevertheless, the 14-point list is a guideline; it is not intended to be all-encompassing, and other relevant facts and circumstances may be factors.[50]

Although there is no definitive definition of a church for Internal Revenue Code purposes, in 1986 the United States Tax Court said that "A church is a coherent group of individuals and families that join together to accomplish the religious purposes of mutually held beliefs. In other words, a church's principal means of accomplishing its religious purposes must be to assemble regularly a group of individuals related by common worship and faith."[51][52] The United States Tax Court has stated that, while a church can certainly broadcast its religious services by radio, radio broadcasts themselves do not constitute a congregation unless there is a group of people physically attending those religious services.[53] A church can conduct worship services in various specific locations rather than in one official location.[54] A church may have a significant number of people associate themselves with the church on a regular basis, even if the church does not have a traditional established list of individual members.[54]

An organization whose operations include a substantial nonexempt commercial purposes, such as operating restaurants and grocery stores in a manner consistent with a particular religion's religious beliefs does not qualify as a tax-exempt church.[57]

Organizations described in section 501(c)(3) are prohibited from conducting political campaign activities to intervene in elections to public office.[58] The Internal Revenue Service website elaborates on this prohibition:[58]

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