You'll find a discussion of the general advantages of classification as a public charity rather than a private foundation in a January 1, 2005 post. This post will discuss how charitable organizations receive recognition as a public charity under IRC Section 509(a)(1).
All 501(c)(3) organizations are categorized as private foundations unless they fall into one of the four basic categories specifically excluded from the definition of that term in IRC 509(a). The excluded organizations are called public charities. Generally, a large class of organizations excluded under IRC 509(a)(1) and all organizations excluded under IRC 509(a)(2) depend upon a support test. A support test is used to assure a minimum percentage of broad-based public support in the organization's total support pattern.
An organization will qualify as publicly supported if it passes the One-Third Support Test. If it fails that test, it may qualify under the Facts and Circumstances Test.
One-Third Support Test:
An organization will qualify as public supported if it normally receives at least one-third of its TOTAL SUPPORT from sources that qualify as PUBLIC SUPPORT.
PUBLIC SUPPORT = 1/3 or greater
An organization will be considered as normally meeting the One-Third Support Test for its current tax year and the next tax year if, for the 4 tax years immediately before the current tax year, the organization meets the One-Third Support Test on an aggregate basis. For new organizations, there is a special computation period, discussed below.
- Gifts, grants, contributions or membership fees.
- Net income from unrelated business activities, whether or not those activities are carried on regularly as a trade or business.
- Gross investment income.
- Tax revenues levied for the benefit of an organization and either paid to or spent on behalf of the organization.
- The value of services and facilities furnished by a governmental unit to an organization without charge (except services or facilities generally furnished to the public without charge).
Generally, SUPPORT does not include:
- Any amount received from the exercise or performance by an organization of the purpose or function constituting the basis for its exemption (in general, these amounts include amounts received from any activity the conduct of which is substantially related to the furtherance of the exempt purpose or function, other than through the production of income).
- Contributions of services for which a deduction is not allowed.
PUBLIC SUPPORT includes:
- Direct or indirect contributions from the general public, including contributions from an individual, trust or corporation, but only to the extent that the total contributions from such individual, trust or corporation, during the 4-year period immediately before the current tax year (or substituted computation period) are not more than 2% of the organization's TOTAL SUPPORT for the same period. For example:
* ORG has TOTAL SUPPORT of $800,000.
* ORG receives a contribution from Donor of $200,000.
* $200,000 = part of ORG's TOTAL SUPPORT (now $1 million).
* Only $20,000 (2% of TOTAL SUPPORT) = ORG's PUBLIC SUPPORT.
- SUPPORT received from governmental units.*
- Contributions from other publicly-supported charities.*
* Contributions from a governmental unit or from a publicly-supported organization are not subject to the 2% limit unless the contributions represent amounts earmarked by a donor to the governmental unit or publicly-supported organization as being for, or for the benefit of, the particular organization claiming a publicly-supported status.
Facts and Circumstances Test:
The Facts and Circumstances Test is for organizations failing to meet the One-Third Support Test. If an organization fails to meet the One-Third Support Test, it may still be treated as a publicly-supported organization if it normally receives a substantial part of its support from governmental units, from direct or indirect contributions from the general public, or from a combination of these sources.
An organization will normally meet the requirements of the Facts and Circumstances Test for its current year and the next tax year if, for the 4 tax years immediately before the current tax year, the organization meets the Ten-Percent-of-Support Requirement and the Attraction of Public Support Requirement on an aggregate basis and satisfies a sufficient combination of the Five Public Support Factors discussed later. For new organizations, there is a special computation period, discussed below.
Note that the fact that an organization has normally met the One-Third Support Test requirements for a current tax year, but is unable to meet the requirements for a later tax year, will not in itself prevent the organization from meeting the requirements of the Facts and Circumstances Test for the later tax year.
The Ten-Percent Support Test is based on the same ratio described in the One-Third Support Test, only with a lower threshold. An organization must normally receive PUBLIC SUPPORT equal to at least 10% of its TOTAL SUPPORT for PUBLIC SUPPORT to be considered sufficiently substantial to meet the public support requirement.
Attraction of Public Support Requirement:
An organization must be organized and operated in a manner to attract new and additional public or governmental support on a continuous basis. An organization will meet this requirement if it maintains a continuous and bona fide program for solicitation of funds from the general public, community, or membership group involved, or if it carries on activities designed to attract support from governmental units or other charitable organizations described in IRC 509(a)(1). In determining whether an organization maintains a continuous and bona fide program for solicitation of funds from the general public or community, consideration will be given to whether the scope of its fundraising activities is reasonable in light of its charitable activities. Consideration also will be given to the fact that an organization may, in its early years of existence, limit the scope of its solicitation to persons who would be most likely to provide seed money sufficient to enable it to begin its charitable activities and expand its solicitation program.
Five Public Support Factors:
- Percentage of financial support factor. The greater the PUBLIC SUPPORT/TOTAL SUPPORT ratio, the lesser the burden of establishing the publicly supported nature of the organization through other factors, and vice versa. If the ratio is low because the organization receives a high percentage of its TOTAL SUPPORT from investment income on its endowment funds, the organization will be treated as complying with this factor if the endowment fund was originally contributed by a governmental unit or by the general public. However, if the endowment funds were originally contributed by a few individuals or members of their families, this fact will increase the burden on the organization of establishing compliance with other factors. Facts pertinent to years before the 4 tax years immediately before the current tax year also may be considered.
- Sources of support factor. The fact that an organization receives its PUBLIC SUPPORT from governmental units or directly or indirectly from a representative number of persons, rather than receiving almost all of its support from the members of a single family, will be considered in determining whether the organization is publicly supported. In determining whether what is a representative number of persons, consideration will be given to the type of organization involved, the length of time it has existed, and whether it limits its activities to a particular community or region or to a special field that can be expected to appeal to a limited number of persons. Facts pertinent to years before the measuring period may also be considered.
- Representative governing body factor. The fact that an organization has a governing body that represents the broad interests of the public rather than the personal or private interest of a limited number of donors will be considered in determining whether the organization is publicly supported. An organization will meet this requirement if it has a governing body composed of: (a) public officials acting in their public capacity; (b) individuals selected by public officials acting in their public capacities; (c) persons having special knowledge or expertise in the particular field or discipline in which the organization is operating; and (d) community leaders, such as elected or appointed officials, members of the clergy, educators, civil leaders, or other such persons representing a broad cross-section of the views and interests of the community.
- Availability of public facilities or services factor. The fact that an organization generally provides facilities or services directly for the benefit of the general public on a continuing basis is evidence that the organization is publicly supported. Examples are: (a) a museum or library that is open to the public; (b) a symphony orchestra that gives public performances; (c) a conservation organization that provides educational services to the public through the distribution of educational materials; (d) an old-age home that provides domiciliary or nursing services for members of the general public. The following factors also evidence that an organization is publicly supported: (a) participating in, or sponsoring of, the programs of the organization by members of the public having special knowledge or expertise, public officials, or civil or community leaders; (b) maintaining a definitive program by the organization to accomplish its charitable work in the community, such as slum clearance or developing employment opportunities; (c) receiving a significant part of its funds from a public charity or governmental agency to which it is in some way held accountable as a condition of the grant, contract or contribution.
- Additional factors pertinent to membership organizations.
(a) Whether the solicitation for dues-paying members is designed to enroll a substantial number of persons in the community or area, or in a particular profession or field of special interest (taking into account the size of the area and the nature of the organization's activities).
(b) Whether membership dues for individual (rather than institutional) members have been fixed at rates designed to make membership available to a broad cross section of the interested public, rather than to restrict membership to a limited number of persons.
(c) Whether the activities of the organization will be likely to appeal to persons having some broad common interest or purpose, such as educational activities in the case of alumni associations, musical activities in the case of symphony societies, or civil affairs in the case of parent-teacher associations.
* ALERT: SEE PUBLIC SUPPORT TESTS – PUBLIC CHARITIES: AN UPDATE - DESCRIBES SOME CHANGES IN THE LAW SINCE THIS POST.