An environmental purpose is not one of the seven exempt purposes specified in Section 501(c)(3) of the Internal Revenue Code (the “Code”). However, many environmental organizations qualify for exemption under 501(c)(3) because their activities further charitable, educational, and/or scientific purposes.
Although there is no explicit mention of environmental purposes in the statutes or regulations defining what is charitable under Section 501(c)(3) of the Code, the IRS has said that efforts to preserve and protect the environment for the benefit of the public serve a charitable purpose. However, not every activity directed at advancing environmental benefits is recognized as charitable. Additional factors may be required to show that the environmental activities are “lessening the burdens of government” and/or “combating community deterioration.” (See Starting a Nonprofit: What is “Charitable” under 501(c)(3)).
IRS rulings reveal that the IRS looks for activities that have a “significant” and “direct” impact on the environment when determining if an activity qualifies as charitable. In addition, the charitable aspects of the activity must outweigh any commercial or private benefits. Any private benefit conferred upon individuals or for-profit businesses that is more than incidental, quantitatively and qualitatively, to the environmental preservation activities will defeat the exemption. Some rulings suggest that credible studies and research should be provided to the IRS to demonstrate the direct and significant impact of the proposed activities.
Examples of environmental organizations that served charitable purposes according to the IRS include:
- an organization that planted trees in public areas when the city did not have sufficient funds to do so, thus lessening the burdens of government and combating community deterioration (Rev. Rul. 68-14, 1968-1 C.B. 243);
- an organization that acquired and maintained ecologically significant land, the IRS noting that the benefit to the public was guaranteeing “future generations … the ability to enjoy the natural environment” (Rev. Rul. 76-204, 1976-1 C.B. 152).
Examples of organizations that did not qualify for exemption because the impact on the environment was determined to be too indirect or resulting in too much private benefit, include:
- an organization that provided particular solar panels to low and middle class income households, where the impact on the environment was “indirect and tangential” and the benefits flowed to a select group of homeowners rather than the general community (Priv. Ltr. Rul. 201210044 (2012);
- an organization whose primary activity was beta testing green residential housing products to make those products market-ready, because the direct and primary beneficiaries were the private business manufacturing the products (Priv. Ltr. Rul. 201149045 (2011).
In Example 12 of IRS’s final regulations for program related investment (PRIs), effective April 2016, the IRS illustrates another instance where furthering an environmental interest is recognized as charitable so long as the private benefit is only incidental to the overall charitable nature of the activity. In the example, a private foundation is permitted to make an investment in a new business enterprise in a developing country whose only activity would be to collect recyclable solid waste and deliver those materials to recycling centers. Although the investment was benefiting a private business, the primary purpose for making it was to combat environmental deterioration, in furtherance of the foundation’s exempt purposes. The facts show that the business was unable to attract other funding because the expected rate of return was low, and thus, the IRS reasons, the foundation would not have made the investment but for its charitable purpose.
As more nonprofits are created to address new and continuing environmental concerns, it will be interesting to see how such activities are characterized as charitable or not by the IRS. Alternative energy, segments of the sharing economy, and eco-friendly products all pose several questions for the future.