501(c)(3) Organization: Public Charity or Private Foundation

Organizations described in Internal Revenue Code Section* 501(c)(3) fall into two categories:  private foundations and public charities.  Under Section 509, all organizations, domestic or foreign, described in Section 501(c)(3) are private foundations except the types of organizations described in Sections 509(a)(1), (2), (3) or (4).  "Public charities" is the generic term given to the excepted organizations.

               * All further references to "Sections" refer to sections in the Internal Revenue Code.

The distinction between private foundation and public charity classification is critical because public charity status is by far the more advantageous category where there is a choice for a number of reasons.

Private foundations are subject to additional regulation and must:

* Refrain from acts of self-dealing (Section 4941),
* Meet minimum distribution requirements (Section 4942),
* Abstain from "excess business holdings" (Section 4943),
* Abstain from "jeopardizing investments" (Section 4944),
* Refrain from making certain expenditures (Section 4945).

Additional advantages flowing from public charity classification involve:

* Exemption from Section 4940 tax on net investment income to which most private foundations are subject,
* Less burdensome reporting requirements (the annual information return that most private foundations must complete, Form 990-PF, is more complex than the information returns filed by public charities (Forms 990 and Form 990-EZ),
* Exemption, in the case of certain public charities, from various federal excise taxes, and
* Additional fundraising opportunities due to several factors:
     – Higher dollar limitations apply to contributions made by individuals and corporations to public charities.
     – Under Section 642(c), organizations classified under Section 509(a)(1) (i.e., public charities) may establish and maintain pooled income funds; other organizations described in Section 501(c)(3) may not.
     – The expenditure responsibility rules of Section 4945(d)(4) make it far more likely that a public charity will receive grants from private foundations.

Public Charities:

Section 509(a)(1): an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)):
     (i)     Churches or conventions or associates of churches,
     (ii)    Certain educational organizations,
     (iii)   Hospital and medical research organizations,
     (iv)    Endowment funds organized and operated in connection with state and municipal colleges and universities,
     (v)     Governmental unit,
     (vi)    Publicly supported organizations described in Section 170(c)(2) that normally receive a substantial part of their support (exclusive of income received in the exercise of its exempt purpose or function) from a governmental unit or from direct or indirect contributions from the general public.  The "substantial part of support" requirement is met by satisfying a 33 1/3 percent support test or, alternatively, a "facts and circumstances" 10 percent test.  The percentages are calculated by using total support as the denominator and public support as the numerator.  Both tests generally measure an organization’s public support over a four-year period.  See more on "Public Support Tests" in future posts.

Section 509(a)(2):  a publicly supported organization for which its public support more typically consists of gross receipts derived from an activity that is related to its exempt function.  See more on "Public Support Tests" in future posts (note that the 509(a)(2) test is different from the 170(b)(1)(A)(vi) test).

Section 509(a)(3):  a supporting organization that meets all of the following tests:
     (A) Organizational and Operational Tests.  The organization must be organized and at all times operated for the benefit of, and to perform the function of, the specified organizations described in Sections 509(a)(1) and (2).
     (B) Nature of Relationship Test.  The organization must be operated, supervised, or controlled by, or in connection with, one or more organizations described in Sections 509(a)(1) and (2).
     (C) Lack of Outside Control Test.  The organization must be controlled directly or indirectly by one or more disqualified persons other than foundation managers and other than one or more organizations described in Sections 509(a)(1) or (2).
     – See more on "Supporting Organizations" in future posts.

Section 509(a)(4):  an organization which is organized and operated exclusively for testing for public safety.

Click here for IRS Exempt Organizations – Technical Instruction Program for FY 2003:  Public Charity or Private Foundation Status – Issues Under IRC 509(a)(1)-(4), 4942(j)(3), and 507.

10 thoughts on “501(c)(3) Organization: Public Charity or Private Foundation

  1. Nancy Hopson

    A 501(c(3) organization has received a donation for work done by the students and parents. Can the monies received be used to defray costs of an upcoming trip, supported by the board, for the individual students who worked?

  2. A museum of history can certainly be structured as an organization exempt under Section 501(c)(3). Presuming you expect annual revenues over $5,000 to run the museum, you will need to apply for exemption under 501(c)(3) by filing Form 1023 with the IRS. Lots of other steps involved in forming and operating a 501(c)(3) organization. See my site http://www.FormingANonprofit.com for additional information.

  3. Buddy Smith

    I am a member of a group that wants to start a museum of history for a small town. All voluntary workers. Could donations & contributions to this effort be tax deductible & would it be considered a 501c3 corporation?

  4. Farshad, I’ve not heard of a private territorial management corporation. If it is owned by individuals or private entities, it is not a public charity.
    Dave, are you referring to executive committee meetings instead of “executive director meetings?” Meetings with an E.D. do not have to be documented (although there may be circumstances where that is required or recommended for specific reasons). Meetings of the executive committee of the board may require minutes to reflect actions taken, depending on the bylaws and appropriate state laws. Where no actions were taken, minutes may simply state that a meeting took place and include a record of attendance. Discussions are not normally required to be included in the minutes.

  5. Dave

    Are non-profit organizations such as a hospital required to have minutes for executuve director meetings?

  6. Farshad

    Is a private “territorial management corporation” considered as public charity or what? Is it included in section 509(a)(4)or what? What if the mentioned corporation functions and registered outside the USA?

  7. Lin, you should refer to the IRS Publication 1771 on Substantiation and Disclosure Requirements. There is no signature requirement.

  8. Does the confirmation letter for a donation to a 501.c.3 have to be an original or can you do a mail merge on template with electronic signature?

  9. Generally, the minutes to a meeting of the board are confidential. However, pursuant to state or local laws, minutes may be open to voting members and the public (to comply with sunshine laws). You should ask an attorney in your jurisdiction for more specific information.
    Salary information on the 990 should not be redacted. This information is part of the transparency required of public charities.

  10. jenn

    are the board of directors meeting minutes (non executive session) of a public charity confidential? also, is it legal to white out the salary information for staff people who serve as officers on the 990 of a public charity when that 990 is posted on the org’s website?

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