The IRS released final regulations that clarify (i) the substantive requirements for tax exemption under section 501(c)(3) of the Internal Revenue Code; and (ii) the relationship between the substantive requirements for tax exemption under section 501(c)(3) and the imposition of section 4958 excise taxes on excess benefit transactions.  The regulations became effective March 28, 2008.

One of the changes made by the final regulations is the addition of examples to Treasury Regulation 1.501(c)(3)-1(d) (Exempt purposes) which illustrate the requirement that an organization serve a public rather than a private interest.

The first example involves an educational organization that focuses on the genealogy of one family and actively solicits for membership only the members of such family.  This example may have derived in part from the controversy over Health and Human Services Secretary Mike Leavitt’s family charitable foundation, The Dixie and Anne Leavitt Foundation.  The Leavitt Foundation is a Type III supporting organization that supports such public charities as the Western Association of Leavitt Families ("WALF").  WALF’s activities focus on research of the Leavitt family genealogy and include publishing a genealogical book for sale, erecting monuments to deceased family members, and paying for a genealogical trek commemorating the path of Leavitt ancestors.  The new example makes clear that such activities primarily serve the private interests of the members of one family rather than a public interest, and the educational organization in the example would consequently fail the operational test.

The second example involves an art museum that exhibits and sells art created by a group of unknown artists.  The sales price for such art is determined by the artist and the museum retains 10 percent of the sales price under a consignment agreement.  Such an arrangement causes the museum to be operated for the benefit of private interests, and the museum would consequently fail the operational test.

The third example involves an educational organization whose sole activity consists of training individuals in a program developed by the organization’s President and owned by the President’s company (the "Company").  The organization licensed the program from the Company, which was the former operator of the program.  Under the license agreement, the Company provides the organization with the services of trainers and course materials, sets the tuition, and retains ownership of any new course materials that the organization develops in connection with the program in return for royalty payments.  Such an arrangement causes the organization to be operated for the benefit of private interests, and the organization would consequently fail the operational test.