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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 12. All Other IRC 501(c)(3) Organizations

4.76.12  All Other IRC 501(c)(3) Organizations

4.76.12.1  (04-01-2003)
Introduction

  1. This IRM section contains specific examination guidelines for an organization recognized as exempt from income tax under IRC § 501(a) as an organization described in IRC § 501(c)(3). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of organizations organized and operated for scientific purposes and to foster national or international amateur sports competition.

  2. These guidelines provide guidance for the examination of specific IRC § 501(c)(3) organizations and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM sections 4.75.2 through 4.75.6. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC § 501(c)(3) organizations. The examiner should review the technical information contained in IRM 7.25.3.

4.76.12.2  (04-01-2003)
Scientific Organizations

  1. A scientific organization must be organized and operated in the public interest. The term scientific as used in IRC § 501(c)(3) includes the carrying on of scientific research in the public interest. For research to be scientific within the meaning of IRC § 501(c)(3), it must be carried on in furtherance of a scientific purpose.

  2. Conducting scientific research is not sufficient to qualify an organization for IRC § 501(c)(3) status. The scientific research must be " in the public interest" . There is a generally recognized distinction between the public interest and the private interests of individuals or business enterprises. Scientific research will be regarded as carried on in the public interest if:

    1. The results of the research are made available to the public on a nondiscriminatory basis;

    2. The research is performed for the United States, or any of its agencies or instrumentalities, or for a State or political subdivision thereof; or

  3. Research is considered directed toward benefiting the public if it is carried on for the purpose of:

    1. Aiding in the scientific education of college or university students;

    2. Obtaining scientific information which is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public;

    3. Discovering a cure for a disease, or scientific research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area.

  4. An organization may meet the requirements of IRC § 501(c)(3) only if it serves a public rather than a private interest. A scientific organization must be organized and operated in the public interest.

  5. A scientific organization must engage in scientific research rather than commercial or industrial testing,

  6. Scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc.

  7. Commercially sponsored research that otherwise qualifies as scientific research under IRC § 501(c)(3) constitutes scientific research carried on in the public interest if the results, including all relevant information, are timely published in a form available to the interested public, even though it is performed pursuant to a contract under which the sponsor has the right to obtain ownership of the patent.

  8. Research is not in the public interest, and constitutes unrelated trade or business within the meaning of IRC § 513, if publication is withheld or delayed significantly beyond the time reasonably necessary to establish ownership rights.

  9. An example of research that is not exclusively scientific occurs when a commercially sponsored scientific research is withheld entirely or delayed significantly beyond the time reasonably necessary to establish patent or other ownership rights in the results of the research. This is usually done in order to accommodate the sponsor's business interest in maintaining the secrecy of certain processes or to control the timing of public disclosure of the results. Such activity is the conduct of unrelated trade or business within the meaning of IRC § 513.

4.76.12.2.1  (04-01-2003)
Examination Guidelines – Scientific Organizations

  1. Examine catalogues or lists of the organization’s projects or plans to determine the kinds of research in which the organization engages.

  2. Review the minutes, agreements, and other available documentation to determine if the organization retains (directly or indirectly) the ownership or control of more than an insubstantial portion of the patents, copyrights, processes, or formulae resulting from its research and does not make such patents, copyrights, processes, or formulae available to the public.

  3. Examine corporate minutes to determine how the organization selects projects. For example, if nearly all projects are performed for one firm, the organization may be serving a private rather than a public interest.

  4. Review payments to identify sponsors. Review agreements and contracts with sponsors. Identify any private interests being served.

  5. Interview officers and directors and determine if research is performed only for persons which are (directly or indirectly) its creators and which are not described in IRC § 501(c)(3).

  6. Look for large and recurring donations by a particular firm. Determine if payments are made for services rendered.

  7. Check payroll records to determine if any nonqualified persons occupy well-paid positions, which may be a way to disburse the organization’s funds for nonexempt purposes.

  8. Review project contracts or grants to:

    1. Identify if the grantor is a commercial firm. If so, determine if the project is scientific research rather than commercial or industrial testing.

    2. Determine if the organization will make results of the scientific research available to the public in a nondiscriminatory manner. (See Rev. Rul. 76-296, 1976-2 C.B. 141.)

    3. Identify the standards the organization uses to differentiate scientific from nonscientific research projects.

  9. Examine the articles of organization, lease agreements, contracts, payroll records, bylaws, and minutes for possible relationships between the exempt organization and a commercial firm. Indications that a commercial firm controls the exempt organization are:

    1. Interlocking directorates (minutes, bylaws,etc.;

    2. Sharing of staff and facilities (lease agreements, contracts, payroll records, indications of allocation of expenses between the exempt organization and the commercial firm);

    3. Large and recurring donations by a particular firm (financial records).

  10. If the organization has undertaken any scientific research projects that clearly do not fall within the categories of "scientific research in the public interest" , such as ordinary testing incident to commercial or industrial operations, determine if

    1. The activity is related or unrelated to the attainment of the organization's exempt purpose;

    2. The activity is a trade or business;

    3. It is regularly carried on, and

    4. The income from the unrelated business activity is excluded from tax by exceptions and exclusions contained in IRC § 512(b).

  11. Review sources of income to determine if the organization engages in research and whether it is exclusively scientific within the meaning of IRC § 501(c)(3). Determine if the activities carried on are unrelated business activities.

4.76.12.3  (04-01-2003)
Amateur Athletic Sport Organizations

  1. Amateur sports organizations may qualify under IRC § 501(c)(3) in the following ways:

    1. The organization may be "educational" if it teaches sports to youth or is affiliated with an exempt educational organization. Such educational organizations may also provide facilities and equipment;

    2. The organization may be "charitable" on the grounds that it combats juvenile delinquency or lessens the burdens of government;

    3. The organization is organized and operated to foster national or international amateur sports competition, but does not provide athletic facilities or equipment; or

    4. The organization is a "qualified amateur sports organization " under IRC § 501(j)(2).

  2. The educational and charitable rationale are valid bases for exemption particularly in cases where the organization’s activities are directed at children or adolescents.

  3. Review the organizational and operational documents to determine which category best describes the organization’s purposes and activities. If the organization is not a "qualified amateur sports organization " and does not meet the conditions for continued exemption under IRC § 501(c)(3), consider whether it qualifies under IRC § 501(c)(4).

4.76.12.3.1  (04-01-2003)
IRC § 501(j)

  1. IRC § 501(j) provides 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 in nature.

  2. IRC § 501(j)(2) provides that the term "qualified amateur sports organization" means any organization organized and operated exclusively to foster national or international amateur sports competition if such organization is also organized and operated primarily to conduct national or international competition in sports or to support and develop amateur athletes for national or international competition in sports.

  3. IRC § 501(j)(1)(B) provides that an organization shall not fail to meet the requirements of subsection (c)(3) merely because its membership is local or regional in nature. An organization, composed of local amateur athletes who primarily play other local teams, occasionally schedules games with teams or organizations in another state, will not qualify for exemption unless it demonstrates that those games are part of some national competition. Similarly, even if it provides a regional tournament, the organization will fail the requirements of IRC § 501(j) unless it shows some link to national or international competition. The organization's membership in a national sports association could provide that link.

  4. An organization's assertion that it is a training ground for collegiate, professional, and/or Olympic players, absent some evidence of a reasonable probability that the members will participate in national or international competition, would not suffice to cause the organization to meet the requirements for exemption. However, prior participation in national or international competitions would constitute some evidence for favorable consideration if the organization could also show a likelihood that it was in a position to continue to participate.

4.76.12.3.2  (04-01-2003)
Examination Guidelines – IRC § 501(j)

  1. Review the minutes, brochures, and activities to determine if the organization links to national or international competition.

  2. Review membership to determine if it is merely local. If so, determine whether there has been prior participation in national or international competitions.

4.76.12.3.3  (04-01-2003)
National or International Amateur Sports

  1. IRC 501(j) requires the organization to be organized and operated exclusively to foster national or international amateur sports competition. This can be accomplished by:

    1. Conducting national or international sports competitions; or

    2. Supporting and developing amateur athletes for national or international competition.

  2. The organization cannot be a training ground for collegiate, professional and/or Olympic players, without some evidence that there is a reasonable probability that the members will participate in national or international competition.

4.76.12.3.4  (04-01-2003)
Examination Guidelines – National or International Amateur Sports

  1. Review programs, minutes of board meetings, newsletters, fund-raising solicitations, etc. to verify that the organization promotes serious competition or training rather than social or recreational activities.

  2. Obtain the criteria used by the applicable governing body to determine "amateur" status to determine if the organization’s athletes are eligible for national or international competitions. The following factors may be relevant in determining whether an organization fosters national or international competition:

    1. Is the sport the organization supports an event in the Olympic or Pan-American Games?

    2. Are the athletes the organization supports in the age group from which Olympic-quality athletes are usually chosen?

    3. Are the athletes of a caliber that makes them serious contenders for the Olympic or Pan-American Games?

    4. Do the athletes demonstrate a certain level of talent and achievement in order to receive support from the organization?

    5. Does the organization provide intensive, daily training, as opposed to sponsoring weekend events that are open to and attract a broad range of competitors?

    6. Is the organization devoted to improving the performance of a small group of outstanding athletes or does it emphasize the improvement in health of the general public?

    7. Is the organization a member of the United States Olympic Committee?

      Note:

      While this criteria is useful, it is not necessarily determinative. For example, an organization might sponsor a foreign team and still qualify, especially if the organization were a member of its own country's Olympic Committee.


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