Tax advantages or other incidental benefit to an individual or entity from transactions with a controlled exempt organization does not necessarily result in private benefit or inurement of net earnings.

A charity purchased securities from its creator for less than the fair market value. The creator claimed a charitable contribution equal to the difference between the fair market value of the securities and the price at which they were sold to the charity. Although the transaction may have resulted in an advantage to the creator the charity profited from the transaction and its exemption was not affected. Wiilam Waller, et al. v. Commissioner, 39 T.C. 665 (1963), acq., 1963–2 C.B. 5. See also Rev. Rul. 69–39, 1969–1 C.B. 148.

Where a business corporation donated lands and money to a foundation to establish a public park, exemption was not jeopardized by the donor’s retention of the right to use as a brand symbol a scenic view located in the park. Rev. Rul. 66–358, 1966–2 C.B. 218.

A corporation created an organization to operate a replica of an early 19th Century American village named after the corporation. The corporation donated the land upon which the village was located and provided a substantial amount of financial support. Although the corporation benefits by having its name mentioned in conjunction with the organization’s advertising program, such benefits are merely incidental to benefits flowing to the general public from access to the village and its historic structures. Rev. Rul. 77–367, 1977–2 C.B. 193.

An organization subsidized recent law graduates who provided free legal services to low income residents of economically depressed communities. Any private benefit derived by the legal interns is incidental to the public charitable purpose. Rev. Rul. 72–559, 1972–2 C.B. 247.

Nurses’ registers—A nonprofit community nursing bureau that maintains a register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses, for the benefit of hospitals, health agencies, doctors and individuals, as a community project, qualifies for IRC 501(c)(3) exemption. It receives financial support from community organizations and public contributions. Rev. Rul 55–656, 1955–2 C.B. 262.

Employee benefits—A trust organized to pay pensions to retired employees is not exempt under IRC 501(c)(3). Rev. Rul. 56–138, 1956–1 C.B. 202.

Hospitals—The necessary criteria for a hospital to qualify for exemption as a public charitable organization are outlined. Modified by Rev. Rul. 69–545, to remove the requirement relating to caring for patients without charge or at rates below cost. Rev. Rul. 56–185, 1956–1 C.B. 202.

Nurses’ registers; maintaining an employment registry—A nurses’ association that maintains an employment registry primarily for the employment of members is not entitled to IRC 501(c)(3) exemption. Rev. Rul. 61–170, 1961–2 C.B. 112.

Research and development—An organization that makes research grants for the development of new machinery to be used in particular commercial operations and retains all the rights to the new developments does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 65–1, 1965–1 C.B. 226.

Business benefits—A nonprofit organization that makes funds available to authors and editors for preparing teaching materials and writing text books, and under the terms of the contract with the publisher receives royalties from the sales of published materials and then shares them with those individuals, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–104, 1966–1 C.B. 135.

Trusts—reversionary interest—A trust that provides for the reversion of principal on termination to the creator does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–259, 1966–2 C.B. 214.

Public park—Where a business corporation donated lands and money to a foundation to establish a public park, exemption under IRC 501(c)(3) was not jeopardized by the donor’s retention of the right to use as a brand symbol a scenic view located in the park. Rev. Rul. 66–358, 1966–2 C.B. 218.

Investments benefiting insiders; family controlled foundations—A foundation, controlled by the creator’s family and operated to enable the creator and his family to engage in financial activities beneficial to them, results in the foundation’s ownership of non-income-producing assets which prevents its carrying on a charitable program commensurate in scope with its financial resources. It is not entitled to exemption. Rev. Rul. 67–5, 1967–1 C.B. 123.

Financial support of other organizations—An organization provides financial assistance to exempt organizations by distributing funds at periodic intervals. It carries on no operations other than to receive contributions and incidental investment income, not accumulated. It is exempt from tax. Rev. Rul. 67–149, 1967–1 C.B. 133.

Private benefit; personal grants—An organization whose sole activity is the operation of a "scholarship fund" plan that makes payments to pre-selected, specifically named individuals, does not qualify for exemption. Rev. Rul. 67–367, 1967–2 C.B. 188.

Commercial drug testing—A nonprofit organization primarily engaged in testing drugs for commercial pharmaceutical companies does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 68–373, 1968–2 C.B. 206.

Pension plan—An organization created pursuant to the will of a stockholder of a company to pay pensions to all retired employees of that company does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 68–422, 1968–2 C.B. 207. See also Rev. Rul. 56–138, 1956–1 C.B. 202.

Financial support of other organizations—An organization will not jeopardize its exemption even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for IRC 501(c)(3) purposes. Rev. Rul. 68–489, 1968–2 C.B. 210.

Permissible benefits—A charitable organization’s exemption from tax will not be affected by purchasing securities from its creator (and sole trustee) at the price he paid for them and reselling them at a profit. Rev. Rul. 69–39, 1969–1 C.B. 148.

School bus transportation—A nonprofit organization formed by parents of pupils attending a private school that provides school bus transportation for its members’ children serves a private rather than a public interest. Rev. Rul. 69–175, 1969–1 C.B. 149.

Deferred or retained interests—The exempt status of an organization is not affected by the acceptance of an income-producing asset subject to a reserved life estate in the transferor or in exchange for an annuity specifically charged against the asset. Rev. Rul. 69–176, 1969–1 C.B. 150.

Perpetual care—A testamentary trust established to make annual payments to exempt charitable organizations and to use a fixed sum from annual income for the perpetual care of the testator’s burial lot is not exempt under IRC 501(c)(3). Rev. Rul. 69–256, 1969–1 C.B. 150.

Private benefit—An organization, formed and controlled by a medical doctor to conduct research programs consisting of examining and treating patients who are charged the prevailing fees for services rendered, is not exempt under IRC 501(c)(3). Rev. Rul. 69–266, 1969–1 C.B. 151.

Private benefit—An irrevocable inter vivos trust which provides that a fixed percentage of income must be paid annually to the settlor with the balance to charity is organized and operated for private interests. Rev. Rul. 69–279, 1969–1 C.B. 152.

Hospital specialist—The exempt status of a hospital under IRC 501(c)(3) will not be jeopardized where, after arms’ length negotiations, it enters into an agreement with a hospital based specialist for compensation on the basis of a fixed percentage of the departmental income. Rev. Rul. 69–383, 1969–2 C.B. 113. See also Rev. Rul. 69–545, 1969–2 C.B. 117.

Hospital; office building leased to medical group—The leasing of its adjacent office building, and the furnishing of certain services, by an exempt hospital to a hospital-based medical group is not unrelated trade or business. Rev. Rul. 69–463, 1969–2 C.B. 131.

Financial support of other organizations—A nonprofit organization, created to construct and maintain a building for the exclusive purpose of housing and serving exempt member agencies of a community chest, may be exempt. The performance of a particular activity that is not inherently charitable may nonetheless further a charitable purpose. The overall result in any given case is dependent on why and how that activity is actually being conducted. Rev. Rul. 69–572, 1969–2 C.B. 119.

Industrial association—A nonprofit organization composed of members of a particular industry to develop a new and improved use for existing products of the industry is not exempt under IRC 501(c)(3) but may qualify under IRC 501(c)(6). Rev. Rul. 69–632, 1969–2 C.B. 120.

Resource conservation—A nonprofit organization formed to preserve and improve a lake used extensively as a public recreational facility qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–186, 1970–1 C.B. 128.

Day care center—A children’s day-care center that is primarily funded by Federal grants and is not restricted to children of employees of the sponsoring employer but instead is open to members of the community and selects children on the basis of financial needs and children’s needs, is exempt under IRC 501(c)(3). Rev. Rul. 70–533, 1970–2 C.B. 112.

Cooperative art gallery—A cooperative art gallery formed and operated by a group of artists for the purpose of exhibiting and selling their works does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 71–395, 1971–2 C.B. 228.

City Bar Association—A city bar association exempt under IRC 501(c)(6) that primarily directs its activities to the promotion and protection of the practice of law may not be reclassified as an educational or charitable organization under IRC 501(c)(3). Rev. Rul. 71–505, 1971–2 C.B. 232.

Low income housing—An organization formed to provide low income housing to families but giving preference for housing to employees of a farm proprietorship operated by the individual who created and controls the organization does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 72–147, 1972–1 C.B. 147.

Business benefits; legal aid—An organization formed to provide legal services for low income residents of economically depressed communities is exempt as a charitable organization under IRC 501(c)(3). Rev. Rul. 72–559, 1972–2 C.B. 247.

Medical peer review—A nonprofit organization formed by members of a State medical association to operate medical peer review boards is primarily furthering the common business interests of members and exempt under IRC 501(c)(6) but not exempt under IRC 501(c)(3). Rev. Rul. 74–553, 1974–2 C.B. 168. See also Rev. Rul. 73–567, 1973–2 C.B. 178.

Law library—An organization operating a law library whose rules limit use to members of a local bar association composed of substantially all of the members of the legal profession in the municipality qualifies for exemption under IRC 501(c)(3). Rev. Rul. 75–196, 1975–1 C.B. 155.

Hospitals; purchase of intangible assets by related organization—The purchase, in a transaction not at arm’s length, of all the assets of a profit-making hospital by a nonprofit hospital corporation at a price that includes the value of intangible assets, determined by the capitalization of excess earnings formula by an independent appraiser, does not result in the inurement of the hospital’s net earnings to the benefit of any private shareholder or individual or serve a private interest precluding exemption. Rev. Rul. 76–91, 1976–1 C.B. 149.

Educational; for-profit school converted to nonprofit school—An organization that purchases or leases at fair market value the assets of a former for-profit school and employs the former owners, who are unrelated to the current directors, at salaries commensurate with their responsibilities, is operated exclusively for educational and charitable purposes. An organization that takes over a school’s assets and its liabilities, which exceed the value of the assets and include notes owed to the former owners and current directors of the school, is serving the directors’ private interests and is not operated exclusively for educational and charitable purposes. Rev. Rul. 76–441, 1976–2 C.B. 147

Testing cargo containers—An organization that inspects and certifies the safety of cargo shipping containers is not operated exclusively for the purposes of testing for public safety or for scientific purposes. Rev. Rul. 78–426, 1978–2 C.B. 175. Rev. Rul. 65–61 distinguished.

Benefit to founder, rent-free facility—In an IRC 7428 action, the Tax Court upheld the Service’s determination that the organization, whose secondary purpose was promotion of the (hand) papermaking industry, was not described in IRC 501(c)(3). The organization also provided rent-free facilities to the founder, although the founder received no compensation for his work with the organization. The Service had determined that promotion of the papermaking industry was a substantial non-exempt purpose and that the organization provided private benefit to the founder. The court ruled that the organization had not carried its burden of proof to show the Service’s determination was erroneous. The Church of the Living Tree v. Commissioner, T.C. Memo 1996–291 (1996).

Attempts to influence legislation are not limited to direct appeals to members of the legislature (direct lobbying). Indirect appeals to legislators through the electorate or general public (indirect or "grass roots" lobbying) also constitute attempts to influence legislation. Both direct and indirect lobbying are nonexempt activities subject to the IRC 501(c)(3) limitation on substantial legislative action.

Attempting to influence legislation includes requesting that an executive body support or oppose legislation. See, Rev. Rul. 67–293, 1967–2 C.B. 185, Roberts Dairy Company v. Commissioner, 195 F.2d 948 (8th Cir. 1952), cert. denied, 344 U.S. 865 (1952). American Hardware and Equipment Company v. Commissioner, 202 F.2d 126 (4th Cir. 1953), cert. denied, 346 U.S. 814 (1953).

Attempting to influence legislation does not include appearing before a legislative committee in response to an official request for testimony.

The legislative restriction applies to activities undertaken by the organization itself. Thus in Rev. Rul. 72–513, 1972–2 C.B. 246, the legislative activities of a student newspaper did not jeopardize the exemption of the sponsoring university.

Study, research, and discussion of matters pertaining to government and even to specific legislation, may, under certain circumstances, be educational activities rather than attempts to influence legislation. This is so where the study, research, and discussion do not serve merely as a preparatory stage for the advocacy of legislation. (Of course, the primary inquiry is the purpose of the study, research, or discussion.)

Reg. 56.4911–4 provides rules under IRC 4911(e) for determining an electing public charity’s "exempt purpose expenditures." The regulation also provides that, in determining exempt purpose expenditures, no expenditure shall be counted twice by an organization.

Under Reg. 56.4911–4(b), amounts paid or incurred by an organization that are exempt purpose expenditures include the following:

There are two types of transfers that will be treated as an exempt purpose expenditure:

For public charities that elect to be covered by IRC 501(h), lobbying expenditures are expenditures made for the purpose of influencing legislation (as defined in IRC 4911(d)). IRC 501(h)(2)(A). An electing public charity’s lobbying expenditures for a year are the sum of its expenditures during that year for direct lobbying communications ( "direct lobbying expenditures" ) plus its expenditures during that year for grass roots lobbying communications ( "grass roots expenditures" ).

IRC 501(h)(3) provides that the provisions of IRC 501(h) will apply to any eligible IRC 501(c)(3) organization that has elected to have those provisions apply.

To be eligible to make the IRC 501(h) election, the IRC 501(c)(3) organization must be an organization described in IRC 501(h)(4) and it must not be a disqualified organization described in IRC 501(h)(5).

The IRC 501(c)(3) organizations described in IRC 501(h)(4) are as follows:

Reg. 1.501(c)(3)–1(c)(3)(i) provides that an organization is not operated exclusively for one or more exempt purposes if it as an "action" organization. An organization is an "action organization" if a substantial part of its activities is attempting to influence legislation by propaganda or otherwise. Reg. 1.501(c)(3)–1(c)(3)(ii).

Reg. 1.501(c)(3)–1(c)(3)(iv) also describes a special kind of "action" organization that has a main or primary objective attainable only by legislation and advocates attainment of that main objective as distinguished from engaging in non-partisan analysis, study, or research. See Rev. Rul. 62–71, supra.

A nonprofit organization formed to implement an orderly change of administration of the office of Governor of a State by assisting the Governor-elect, during the period between his election and inauguration in screening and selecting applicants for State appointive offices and preparing a legislative message and program reflecting the party’s platform and budget, was held to be an "action" organization and did not qualify for exemption. Rev. Rul. 74–117, 1974–1 C.B. 128.

A nonprofit organization that attempts to influence and advocates changes in the laws of a foreign country is an "action" organization within the meaning of Reg. 1.501(c)(3)–1(c)(3), and therefore does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 73–440, 1973–2 C.B. 177.

The Supreme Court, upheld the restriction on lobbying in Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983). An organization contended that the IRC 501(c)(3) restriction on lobbying was unconstitutional on the grounds that it violated both the freedom of speech guarantee of the First Amendment and the equal protection doctrine of the Fifth Amendment. The Court, in a unanimous decision, held the restriction to be constitutional. Concerning the First Amendment issue, the Court held that, in enacting the lobbying restriction, Congress had not infringed on any First Amendment activity, but simply had chosen not to subsidize the lobbying of organizations otherwise described in IRC 501(c)(3). As to the Fifth Amendment claim, which was based on the contention that veterans organizations that qualify for IRC 501(c)(19) exemption and for deductible contributions under IRC 170(c)(3) have no restrictions on their lobbying, whereas IRC 501(c)(3) do, the Court stated that the general rule of statutory classification is that classifications are valid if they bear a rational relation to a legitimate government purpose. It also noted that legislatures have especially broad latitude in creating classifications and distinctions in tax statutes. The Court then found it was not irrational for Congress to decide that, even though it will not subsidize lobbying by charities generally, it will subsidize lobbying by veterans organizations.

Prohibited political activities include, but are not limited to, the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to a candidate. Reg. 1.501(c)(3)–1(3)(iii).

IRC 501(c)(3) organizations that make political expenditures will be subject to an excise tax under IRC 4955.

Any amount paid or incurred by an IRC 501(c)(3) organization in connection with any intervention in a political campaign on behalf of, or in opposition to, any candidate for public office is a political expenditure subject to the excise tax under IRC 4955. The initial tax is equal to 10 percent of the amount involved. An additional tax of 100 percent of the amount involved is also imposed if the organization fails to correct the expenditure in a timely manner. The initial tax may be abated if the organization can establish that its making of the expenditure was not willful and flagrant. The tax is imposed even if the political expenditure gives rise to a revocation of the organization’s IRC 501(c)(3) status.

An initial tax of 2¹/₂ percent of the political expenditure (limited to $5,000 of tax with respect to any one expenditure) is imposed on any manager of the organization who, knowing that the expenditure is a political expenditure, agrees to the making of the expenditure, unless such agreement is not willful and is due to reasonable cause. A manager who refuses to agree to part or all of the required correction of the political expenditure also may be subject to an additional tax of 50 percent of the political expenditure (subject to a $10,000 maximum).

When tax is imposed under IRC 4955 to a private foundation, the expenditure in question will not be treated as a taxable expenditure under IRC 4945.

Candidate controlled organizations are organizations formed primarily to promote the candidacy or prospective candidacy of an individual for public office, as well as organizations that are effectively controlled by a candidate or prospective candidate and that are availed of primarily for those purposes. IRC 4955(d)(2).

For candidate controlled organizations, amounts paid or incurred for any of the following purposes are deemed political expenditures:

The Service is authorized to make an immediate determination and assessment of income tax, or of the tax imposed by IRC 4955, for the current or preceding year of an IRC 501(c)(3) organization, if the Service finds that the organization has made political expenditures and that such expenditures constitute a flagrant violation of the prohibition against making political expenditures. For this purpose, the organization’s current taxable year is treated as if it terminates on the date taxability is determined. IRC 6852. Any taxes assessed under IRC 6852 against the organization or its managers become due and payable immediately.

The Service may seek an injunction to bar political expenditures by an IRC 501(c)(3) organization after it has notified the organization of its intention to seek an injunction if the organization does not immediately cease making political expenditures and after the Commissioner personally has determined that the organization has flagrantly participated in a political campaign and that an injunction is appropriate to prevent further abuse. The Service also may seek such other injunctive relief as may be appropriate to ensure that the organization’s funds are preserved for IRC 501(c)(3) purposes. IRC 7409.

IRC 504 precludes qualification under IRC 501(c)(4) for any organization (except for churches, conventions of churches, etc.) that ceases to qualify under IRC 501(c)(3) by reason of participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for public office.

An IRC 501(c) organization is subject to tax on any amount that it spends on the selection, nomination, election, or appointment of a candidate for public office, but only to the extent of its net investment income. IRC 527(f). An IRC 501(c) organization may set up a separate segregated fund that is used to carry out the political activities of the IRC 501(c) organization. IRC 527(f)(3)

IRC 527 was not intended to affect the prohibition against IRC 501(c)(3) organizations engaging in political activities. Thus, notwithstanding IRC 527, charities may not engage in political activities on behalf of or in opposition to candidates for elective public office nor may they set up separate segregated funds to engage in such activities without endangering their IRC 501(c)(3) exempt status.

A corporation created to encourage greater participation in government and political affairs through the use of seminars, non-partisan workshops, and through the distribution of educational materials does not qualify for exemption as an educational organization under IRC 501(c)(3). Rev. Rul. 60–193, 1960–1 C.B. 195. Modified by Rev. Rul. 76–456.

A nonprofit organization formed to conduct public forums at which lectures and debates on social, political, and international matters are presented qualifies for exemption even though some of its programs include controversial speakers or subjects. Rev. Rul. 66–256, 1966–2 C.B. 210.

A nonprofit organization created to improve a public educational system is not exempt from tax where it campaigns on behalf of candidates for election to the school board. Rev. Rul. 67–71, 1967–1 C.B. 125.

A university is not participating in political campaigns on behalf of candidates for public office by providing a political science credit course that requires students’ participation in political campaigns of candidates of their choice. Rev. Rul. 72–512, 1972–2 C.B. 246.

A university that provides facilities and faculty advisors for a campus newspaper that publishes the students’ editorial opinions on political and legislative matters has not attempted to influence legislation or participate in political campaigns. Rev. Rul. 72–513, 1972–2 C.B. 246.

An IRC 501(c)(3) organization that operates a broadcasting station presenting religious, educational, and public interest programs, is not participating in political campaigns on behalf of public candidates in violation of the provisions of that section by providing reasonable air time equally available to all legally qualified candidates for election to public office in compliance with section 312(a)(7) of the Federal Communications Act of 1934, as amended, and endorsing no candidate or viewpoint. Rev. Rul. 74–574, 1974–2 C.B. 160.

An organization formed to elevate the standards of ethics and morality in the conduct of political campaigns that disseminates information concerning general campaign practices, furnishes teaching aids to political science and civics teachers, and publicizes its proposed code of fair campaign practices without soliciting the signing or endorsement of the code by candidates qualifies as an educational organization. Rev. Rul. 76–456, 1976–2 C.B. 151.

Certain "voter education" activities conducted in a nonpartisan manner by an organization recognized as exempt under IRC 501(c)(3) will not constitute prohibited political activity disqualifying the organization from exemption. Rev. Rul. 78–248, 1978–1 C.B. 154.

Certain publications of congressional incumbents’ voting records on selected issues in a nonpartisan newsletter do not constitute participation or intervention in any political campaign within the meaning of IRC 501(c)(3). Rev. Rul. 80–282, 1980–2 C.B. 178.

The conduct of public forums involving qualified congressional candidates in which both the format and content of the forums are presented in a neutral manner, by an organization otherwise described in IRC 501(c)(3), will not constitute participation or intervention in any political campaign within the meaning of IRC 501(c)(3). Rev. Rul. 86–95, 1986–2 C.B. 73.

Attempts by an organization recognized as exempt under IRC 501(c)(3) to influence the Senate confirmation of a federal judicial nominee constitute attempts to influence legislation, but do not constitute prohibited political activity. Notice 88–76, 1988–27 I.R.B. 34.

Regs. 1.501(c)(3)–1(c)(1) and 1.501(c)(3)–1(e)(1) provide that the fact that an organization’s primary activity is a trade or business does not, in itself, disqualify the organization from exemption, provided the trade or business furthers or accomplishes exempt purposes. See also, Dumaine Farms v. Commissioner, 73 T.C. 650 (1080).

If an activity serves a substantial nonexempt purpose, however, the organization does not qualify for exemption even if the activity also furthers an exempt purpose. See Schoger Foundation v. Commissioner, 76 T.C. 380 (1981).

Determining whether an activity serves an exempt purpose requires considering all facts and circumstances. The following factors are especially important:

An organization operated for the primary purpose of carrying on a trade or business under the test in (1), above, will not qualify for exemption even though:

Rev. Rul. 64–182, 1964–1 C.B. 186, describes a foundation that derived its income principally from operating a commercial office building yet qualified for exemption under IRC 501(c)(3). Although the organization had no exempt activities other than distributing its funds in contributions and grants and its principal source of income was from the business operation, its contributions and grants constituted a "charitable program commensurate in scope with its financial resources."

However, Rev. Rul. 54–420, 1954–2 C.B. 128, holds that a foundation is not exempt under IRC 501(c)(3) where it acquires all of the outstanding stock of a business corporation, dissolves the corporation, and sells, leases, or licenses the assets to an operating company, receiving a substantial portion of the profits of the operating company in return, and using those profits to liquidate the indebtedness incurred in acquiring the business.

In University Hill Foundation v. Commissioner, 446 F.2d 701 (9th Cir. 1971), rev’g 51 T.C. 548 (1969), cert. den., 405 U.S. 965 (1972), the court held an organization that engaged in several transactions to provide funds for an exempt university to be nonexempt under IRC 501(c)(3). The court concluded that the organization was engaged in the business of purchasing and selling businesses and was thus trading on its purported tax exemption. The court also noted that the business was engaged in solely to produce a profit for disbursement to the university and none of the acquired businesses were in any way related to the university’s exempt purposes.

An organization engaged in the retail sale, on a commission basis, of handicraft items produced by needy and deserving women was held to be a charitable organization in Rev. Rul. 66–104, 1966–1 C.B. 135. Although the retail sale of goods is normally a business activity, the ultimate test is purpose. Under the circumstances it was clear that the primary purpose was the charitable purpose of enabling the women to support themselves.

Similarly, a corporation organized for the purpose of operating a book and supply store and a cafeteria on the campus of a university was held exempt under IRC 501(c)(3) in Rev. Rul. 58–194, 1958–1 C.B. 240. The organization was operated for the convenience of the students and faculty, and carried a line of necessary, "everyday" merchandise that could be obtained elsewhere only with some inconvenience. On those facts, Rev. Rul. 58–194 concluded the store was operated primarily to further the educational purposes of the university.

In United Missionary Aviation, Inc. v. Commissioner, T.C.M. (CCH) 1990–566, the Tax Court held an organization formed to support religious missionary work not exempt under IRC 501(c)(3) because it had a substantial nonexempt commercial purpose. The court focused on how the organization carried on its primary activity, a tape and equipment supply division. Although no one factor was determinative, the court considered the following particularly relevant:

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7^th Cir. 1991), the Court of Appeals upheld a Tax Court decision, CCH T.C. Memo. 1990–484, that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the Seventh Day Adventist Church does not qualify under IRC 501(c)(3). The court found substantial evidence to support a conclusion that the organization’s activities furthered a substantial nonexempt purpose, including;

Making interest-bearing loans to students was held to be a charitable purpose within the meaning of IRC 501(c)(3) in Rev. Rul. 63–220, 1963–2 C.B. 208, and Rev. Rul. 61–87, 1961–1 C.B. 191. Although making personal loans may be a commercial activity in some circumstances, the low interest rate and the surrounding circumstances showed the primary purpose was to further the education of students.

On the other hand, merely employing students so they can earn enough to continue their education is not in itself an exempt activity. Rev. Rul. 69–177, 1969–1 C.B. 150, held that a subsidiary of a tax-exempt college that hired students to manufacture and sell wood products at a profit was not exempt under IRC 501(c)(3). The students were not employed for the purpose of receiving instruction or training. In effect, the subsidiary was engaging in a trade or business to obtain funds for scholarship purposes. Therefore, IRC 502 precluded exemption.

Contributions to charitable foreign organizations are not deductible in computing United States income tax. Under IRC 170(c)(2)(A) of the Code, charitable contributions by donors to organizations formed either outside the United States or under foreign law are not deductible.

Under certain tax treaties, contributions to foreign organizations may be deductible to a limited extent. Generally, tax treaties limit deductibility to the applicable percentage of the taxpayer’s income derived from the treaty-partner.

Bequests to charitable foreign organizations are deductible in computing the taxable estate of a deceased resident or citizen of the United States for United States estate tax purpose under IRC 2055 and 2106.

Gifts of property to foreign charitable organizations are deductible in computing the United States gift tax of a resident or citizen of the United States under IRC 2522.

Unless excepted by provisions of a tax treaty, a foreign organization seeking exemption under IRC 501(c)(3) must file an application on the Form 1023 in the same manner as a domestic organization.

The following organizations whose exempt status is based upon IRC 501(c)(3) are excepted from the IRC 508(a) notice requirements:

The regulations provide a formula for what constitutes gross receipts normally not in excess of $5,000. Under that formula, if an organization’s gross receipts do not exceed $7,500 during the first taxable year, $12,000 during the first two taxable years, and $15,000 during the first three taxable years, the organization’s gross receipts are deemed to be normally less than $5,000. The regulations also provide detailed rules for the notice requirement of organizations that start out within the formula but exceed the "normally $5,000 test" in a subsequent year. See Reg. 1.508–1(a)(3)(ii).

An organization must have a written document to establish its existence for purposes of the organizational test under IRC 501(c)(3).

The written document is variously referred to as "articles of organization" under Reg. 1.501(c)(3)–1(b)(2) and as the "organizing or enabling document" under Rev. Proc. 90–27, 1990–1 C.B. 514. The terms are interchangeable.

State law determines the date of formation of a corporation incorporated under the laws of the State. The date is generally the date the organizing document (usually called the articles of incorporation) is filed with and approved by an appropriate State official. See Rev. Rul. 75–290, 1975–2 C.B. 215.

For trusts and associations, the date of formation is generally the date the organizing document is signed (or otherwise adopted) by the relevant parties. See the organizational test under IRC 501(c)(3). For 508(a) purposes, a trust created by will is not considered organized before the date of the first distribution of trust corpus to the trustee, or, if earlier, the date the decedent’s estate is considered terminated for federal tax purposes.

An organization is not considered organized for 508(a) purposes until it is described in IRC 501(c)(3) (without regard to IRC 508(a)). See Reg. 1.508–1(a)(2)(iii). For example, if a split-interest trust changes to an exclusively charitable trust by expiration of the non-charitable interests, then the 508(a) filing period begins at the time of the change. However, if an organization’s organizing document requires only a nonsubstantive amendment to comply with the organizational test under IRC 501(c)(3) (e.g., the addition of a proper dissolution clause) and the organization makes the amendment (either on its own initiative or when requested by the Service), the organization will be regarded as satisfying the organizational test from its formation. See Rev. Proc. 84–47, 1 C.B. 545; Rev. Proc. 90–27, 1990–1 C.B. 514.

If an organization files its Form 1023 after the 15 month period provided in Reg. 1.508–1(a)(1)(ii) (and the period of any additional extensions granted) it may be recognized as exempt only from the date its application was filed. It follows that the organization may be a taxable organization under such circumstances (and thus would be unable to attract charitable contributions) for the period which precedes the date the application was filed.

As mentioned in IRM 7.25.3.21(4), Reg. 301.9100–1 provides an automatic 12-month extension to the 15-month period established by Reg. 1.508–1(a)(1)(ii). In addition, Reg. 301.9100–1 provides that a further extension can be granted if:

An "incomplete" application does not constitute notice under IRC 508(a). However, an application is not incomplete merely because it needs to be perfected. A completed application may need additional information before a determination of exempt status may be made. In such cases the notice requirement of IRC 508(a) has been met whether or not the additional information is timely received. However, absence of the following information will cause an application to be incomplete:

Reg. 1.508–1(a)(2)(ii) provides that an incomplete application will be considered timely filed if the organization supplies the necessary additional information requested by the Service within the additional time period provided for in the request.

Organizations that are recognized exempt but change their organizational form must file an application for exemption to establish that the new organization qualifies for exemption. Rev. Rul. 67–390, 1967–2 C.B. 179, describes four specific circumstances under which the new organization must apply for recognition of exemption. They are:

Rev. Rul. 74–490, 1974–2 C.B. 171, provides that a private foundation remaining in existence after terminating its private foundation status under IRC 507(b)(1)(A), must file a new application, unless specifically excepted by IRC 508(c).

Exemption from Federal income tax may be obtained on a group basis for subordinate organizations affiliated with and under the general supervision or control of a central organization. A complete description of the requirements for submitting a group exemption application is provided by revenue procedure.

Although most of the attention has focused in recent years on amendments to IRC 501(c)(3) provided in the Tax Reform Act of 1976 and on new IRC 501(j), organizations involved with sports may be recognized as described in IRC 501(c)(3) based on prior law:

The "educational" and "charitable" rationales continue to be valid bases for recognition of exemption, particularly in cases where the applicant’s activities are directed at children or adolescents.

The Tax Reform Act of 1976 amended IRC 501(c)(3) to include organizations that "foster international amateur sports competition (but only of no part of its activities involve the provision of facilities and equipment." (But see the discussion of IRC 501(j), below.)

This amendment posed two problems for the Service:

In an attempt to clarify the amateur athletic provision, Congress amended lRC 501(c) in 1982 by adding IRC 501(j).

IRC 501(j)(1) provides generally that a "qualified amateur sports organization" that otherwise satisfies the requirements of IRC 501(c)(3) will qualify as exempt regardless of whether it provides athletic facilities or equipment and regardless of whether its membership is local or regional in nature.

IRC 501(j)(2) defines a "qualified amateur sports organization" as an organization organized and operated primarily to conduct or to support and develop amateur athletes for national or international competition in sports.

Although IRC 501(j) solved the facilities and equipment dilemma, many other questions remain unresolved. For example, what is the meaning of the phrase "national or international sports competition?"

The legislative history of the Tax Reform Act of 1976 indicates that the amateur athletic provisions were not intended to grant exemption to "social clubs or organizations of casual athletes" or to organizations "whose primary purposes are the recreation of their members." It is therefore necessary to distinguish between social/recreational organizations and organizations that promote serious competition.

The following factors may be relevant in determining whether an organization fosters national or international competition:

Although all the facts and circumstances must be considered, these factors are not exhaustive. A "yes" response to these questions, however, strongly indicates that the organization qualifies under IRC 501(j).

In some cases the organization’s activities are so clearly local in scope and so far removed from any relationship to national or international competition that however IRC 501(j) is interpreted, the organization cannot qualify.

If an organization is composed of local amateur athletes who primarily play other local teams, the fact that occasionally games are scheduled with teams or organizations in another state would not cause the organization to qualify unless those games can be shown to be part of national competition.

Similarly, even if the organization provides a regional tournament, some link to national or international competition must be established. Such a national or international nexus could possibly be established through the organization’s membership in a national sports association. An assertion by an organization that its is a training ground for collegiate, professional, and/or Olympic players, absent some evidence that there is a reasonable probability that the members will participate in national or international competition, would not suffice to qualify the organization for exemption.