Charitable purposes under IRC Section 501(c)(3) include the promotion of social welfare by organizations designed to lessen neighborhood tensions. See Treas. Reg. 1.501(c)(3)-1(d)(2) (promulgated in 1959). The IRS Exempt Organizations Technical Guide: TG 3-3 Exempt Purpose, Charitable IRC 501(c)(3) (rev. 3/20/23) provides the following description:
Lessening neighborhood tensions through reducing poverty, improving racial harmony and alleviating community strife and discontent is a charitable endeavor under Section 501(c)(3), as demonstrated by the following rulings:
a. Rev. Rul. 67-250, 1967-2 C.B. 182: Educating the public about the need for making housing available to everyone on a non-discriminatory basis and encouraging investment in this housing helps to eliminate prejudice and discrimination are charitable activities within the meaning of Treas. Reg. 1.501(c)(3)-1(d)(2).
b. Rev. Rul. 70-585, 1970-2 C.B. 115: An organization provides the housing needs of minority groups by building housing units for sale to persons of low and moderate income on an open occupancy basis.
- Constructing new housing that is available to members of minority groups with low and moderate income who are unable to obtain adequate housing because of local discrimination.
- These housing units are so located as to help reduce racial and ethnic imbalances in the community.
- They are sold at or below cost to low- or moderate-income families or rented, with options to purchase, to families who cannot presently afford to purchase. Preference is to be given to families previously located in blighted areas.
- The organization also informs the public regarding integrated housing as a means of minimizing potential misunderstanding and stabilizing integrated neighborhoods.
- It is financed by contributions from the general public and by funds obtained under federal and state housing programs.
As the organization’s activities are designed to eliminate prejudice and discrimination and to lessen neighborhood tensions, it is engaged in charitable activities within the meaning of Section 501(c)(3).
c. Rev. Rul. 74-587, 1974-2 C.B. 162: An organization whose primary purpose is to eliminate prejudice, reduce neighborhood tensions, relieve poverty and fight community deterioration through a program of financial assistance by providing low cost or long-term loans to, or purchasing equity interests in various businesses in economically depressed areas is exempt under Section 501(c)(3).
Although some of the individuals receiving financial assistance in their business endeavors may not themselves qualify for charitable assistance, that fact does not detract from the charitable nature of the program. The recipients of the loans are merely the instruments by which the charitable purposes are sought to be accomplished.
d. Rev. Rul. 81-284, 1981-2 C.B. 130 amplifies Rev. Rul. 74-587 1974-2 C.B. 162: A small business investment company licensed under Section 301(d)of the Small Business Investment Act of 1958 and formed to relieve poverty, eliminate prejudice and discrimination, reduce neighborhood tensions, and combat community deterioration by providing low-cost or long-term loans to businesses not able to obtain funds from conventional commercial sources, with preference given to businesses that provide training and employment opportunities for the unemployed or under- employed residents of economically depressed areas, may qualify for exemption under Section 501(c)(3).
e. Rev. Rul. 68-15, 1968-1 C.B. 244: An organization that, under described circumstances, investigates causes of community tension, discrimination, physical deterioration, and juvenile delinquency, disseminates its findings, and attempts to educate the public as to means of correcting such conditions is exempt under Section 501(c)(3).
Related Charitable Purposes
Charitable purposes also include the promotion of social welfare by organizations that conduct activities to:
- Eliminate prejudice and discrimination,
- Defend human and civil rights secured by law, or
- Combat community deterioration and juvenile delinquency.
We’ll address each of these purposes in separate posts.
The revenue rulings cited in the Technical Guide are all over 40 years old. However, they offer important guidance as to how and why lessening neighborhood tensions may be charitable even when an organization’s activities may not be exclusively directed at individuals experiencing poverty or distress.
In the circumstance in which housing was to be constructed for the benefit of low- and moderate-income groups in an area where no adequate housing exists for such groups, General Counsel Memorandum (GCM) 33671 notes that an organization operating such activities with the goal of lessening neighborhood tensions, eliminating prejudice and discrimination, and combatting community deterioration would qualify as charitable. The GCM makes clear that its conclusion is not based on considering a moderate income group as a charitable class, but is “predicated on the assumption that, due to external circumstances, even the moderate income families in question could not obtain adequate housing.”
In its analysis of Rev. Proc. 74-587, GCM 36744 provides: “The fact that some of the individuals receiving financial assistance do not themselves qualify for charitable assistance does not detract from the charitable character of the organization’s program as such recipients of funds are merely the “instruments’ by which the charitable purposes are sought to be accomplished.”
Rev. Proc. 96-32 ads that lessening neighborhood tensions is “generally identified as an additional charitable purpose by organizations that fight poverty and community deterioration associated with overcrowding in lower income areas in which ethnic or racial tensions are high.”
GCM 36293 clarifies that “the neighborhood tensions with which a charitable organization can reasonably expect to deal in a significant manner by housing activities is limited to tensions in the same general neighborhood where such housing activities are to be carried on.” The GCM also indicates that a charitable organization with a charitable purpose of lessening neighborhood tensions must show that the present racial and ethnic mix has at some point given rise or is likely to give risk to neighborhood tensions of a substantial consequence.
Private Letter Ruling (PLR) 200211052 provides a favorable ruling to an applicant that includes lessening neighborhood tensions as one of its charitable purposes and that described the targeted neighborhood as one with “a relatively high crime rate, a higher number of welfare recipients, higher poverty rates and lower school test scores as compared to many other communities.”
Rev. Proc 96-32 cautions that furthering private interests of those with a financial stake in a related project may disqualify an organization from exemption under 501(c)(3). “For example, the role of a private developer or management company in the organization’s activities must be carefully scrutinized to ensure the absence of inurement or impermissible private benefit resulting from real property sales, development fees, or management contracts.”