Introduction to Public Charities

Georgetown University Law Center

Continuing Legal Education

22nd Annual Representing & Managing Tax-Exempt Organizations

Primer on Public Charities

Introduction to Public Charities

April 27, 2005

I. Overview of Federal Tax Law Concerning Public Charities

A. Concept of charitable (IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(d)) – term embraces the following purposes:

1. Charitable:

a. Relief of poor
b. Relief of distressed
c. Promotion of health
d. Lessening burdens of government
e. Promotion of social welfare
f. Advancement of:

(1) Education
(2) Religion
(3) Science

g. Promotion of arts
h. Amateur sports promotion
i. Cruelty prevention
j. Promotion of patriotism
k. Environmental protection

2. Educational
3. Religious
4. Scientific
5. Testing for public safety


B. Concept of public charities and private foundations:

1. Universe of charitable (IRC § 501(c)(3)) organizations comprised of:

a. Public charities
b. Private foundations

2. A public charity is a charitable organization that is not a private foundation; a private foundation is a charitable organization that is not a public charity
3. Rebuttable presumption: every charitable organization is a private foundation (IRC § 508(b))
4. Presumption rebutted by demonstrating that charitable entity qualifies as a public charity


C. Private foundation defined:

1. Standard private foundation (IRC § 509(a)):

a. Is a charitable entity
b. Is initially funded from one source (e.g., individual, family, business corporation)
c. Receives ongoing funding from investment income
d. Is a grant-making entity

2. Private operating foundation (IRC § 4942(j)(3)):

a. Basically, is a private foundation with one or more programs
b. Income test
c. Assets, endowment, or support test

3. Exempt operating foundation (IRC § 4940(d)(2))
4. Pass-through foundation (IRC § 170(b)(1)(E)(ii))


D. Public charity is:

1. An institution (IRC §§ 170(b)(1)(A)(i)-(v), 509(a)(1)):

a. Church or other place of worship
b. Convention or association of churches
c. University, college, school
d. Health care institution
e. Medical research organization
f. Supporting organization for public college or university
g. Governmental unit

2. A publicly supported charity:

a. Donative-type entity (IRC §§ 170(b)(1)(A)(vi), 509(a)(1))
b. Service-provider organization (IRC § 509(a)(2))

3. A supporting organization (IRC § 509(a)(3))
4. A public safety testing organization (IRC § 509(a)(4))


E. David A. Shevlin presentation

F. Disadvantages of private foundation status:

1. Entities are subject to regulatory requirements:

a. Self-dealing rules (IRC § 4941)
b. Mandatory payout rules (IRC § 4942)
c. Excess business holdings rules (IRC § 4943)
d. Jeopardizing investments rules (IRC § 4944)
e. Taxable expenditures rules (IRC § 4945)
f. Charitable trust, split-interest trust rules (IRC § 4947)
g. Foreign foundation rules (IRC § 4948)
h. Termination rules (IRC § 507)

2. Investment income tax (IRC § 4940)
3. Disadvantageous charitable giving rules
4. More complex annual return (Form 990-PF)
5. Lack of private foundation funding


II. Organizational Test

A. Charitable status:

1. Statement of purpose (Reg. § 1.501(c)(3)-1(b)(1))
2. Dissolution clause (Reg. § 1.501(c)(3)-1(b)(4))
3. Other requirements
4. Consideration of name:

a. Quality Auditing Company
b. At Cost Services
c. Salvation Navy
d. Westward Ho
e. Vigilant Hose Company
f. Southern Church of Universal Brotherhood Assembled
g. Amend16RobertWirengard

5. Failure to execute organizational documents is violation of test (e.g., IRS Private Letter Rulings 200508019, 200508020, 200508022, 200509031, 200509028-200509031)

B. Private foundation requirements (Reg. § 1.508-3)

C. Supporting organization requirements (Reg. § 1.509(a)-4(c))

III. Operational Test

A. Charitable status (Reg. § 1.501(c)(3)-1(c))

B. Primary purpose rule (Reg. § 1.501(c)(3)-1(c)(1))
C. Commensurate test

D. Insubstantial activities

E. Indeterminate activities (e.g., Priv. Ltr. Rul. 200506024)

F. Action organizations (Reg. § 1.501(c)(3)-1(c)(3))

G. Private benefit rule (Reg. § 1.501(c)(3)-1(c)(2))

H. Interrelationship with unrelated business rules (IRC §§ 511-514)

I. Private foundation rules (see I F 1)

J. Supporting organization rules (Reg. § 1.509(a)-4(e))

K. Aggregate approach rule (Rev. Rul. 98-15, 1998-1 C.B. 718)

IV. Straightforward Exemption Issues

A. Organizational test

B. Operational test

C. Private inurement (separate Hopkins presentation)

D. Legislative activities rules (John Pomeranz presentation)

E. Political campaign activities rules (id.)

V. Difficult Exemption Issues

A. Private benefit doctrine (separate Hopkins presentation)

B. Compensatory practices

C. Commerciality

D. Dual character activities

E. Outsourcing

F. Involvement in partnership

G. Involvement in other joint venture

H. Use of for-profit subsidiary

I. Excessive unrelated business

J. Other issues of the day:

1. Credit counseling assistance organizations
2. Housing assistance organizations
3. International grant-making
4. Exempt organizations as or in tax shelters

K. Recent curious IRS private determinations:

1. Attributes of charity (IRS Exemption Denial and Revocation Letter 20044044E)
2. Fees as sole support (Priv. Ltr. Rul. 200450037)
3. Avoidance of regulation (Priv. Ltr. Rul. 200452036)
4. Website as evidence of commerciality (Ex. Den. and Rev. Ltr. 20044045E)


VI. Related Concepts

A. Choice of exemption category

B. Unrelated business rules (Susan A. Cobb presentation)

VII. Foreign Charities

A. Foreign entities recognized under IRC § 501(c)(3)

B. Foreign grantees:

1. Regulations requirements (Reg. §§ 53.4942(a)-3(a)(6), 53.4945-5(a)(5); 53.4945-6(c)(2))

2. IRS simplified procedure (Rev. Proc. 92-94, 1992-2 C.B. 507)
3. Supporting organizations of foreign charities (Rev. Rul. 74-229, 1974-1 C.B. 142)


C. IRS Office of Chief Counsel sketched law concerning international grant-making (Chief Counsel Advice Memorandum 200504031)

D. IRS ruling and examination policies concerning anti-terrorism activities