Not All Tax-Exempt Organizations Are Entitled to Deductible Gifts

Click here for a discussion of the difference between tax-exempt and tax-deductible on give.org’s website.

Section 501(c)(3) vs. Section 170(b)(1)(A):

Section 501(c)(3) organizations that are tax-exempt under Section 501(a) are defined as:

"Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

Section 170(b)(1)(A) organizations are entitled to deductible contributions (subject to certain limitations) and consist of the following:

"(i) a church or a convention or association of churches,
(ii) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on,
(iii) an organization the principal purpose or functions of which are the providing of medical or hospital care or medical eduction or medical research, if the organization is a hospital, or if the organization is a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and during the calendar year in which the contribution is made such organization is committed to spend such contributions for such research before January 1 of the fifth calendar year which begins after the date such contribution is made,
(iv) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any political subdivision thereof or from direct or indirect contributions from the general public, and which is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or which is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions,
(v) a governmental unit referred to in subsection (c)(1),
(vi) an organization referred to in subsection (c)(2) which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from the general public,
(vii) a private foundation described in subparagraph (E), or
(viii) an organization described in section 509(a)(2) or (3)."  (Emphasis added.)

     Subsection (c)(1) refers to "[a] State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia."

     Subsection (c)(2) refers to "[a] corporation, trust, or community chest, fund, or foundation –
(A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States;
(B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals;
(C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; and
(D) which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

          * Compare with the language of Section 501(c)(3).  Unlike Section 501(c)(3), Section 170(c)(2) includes trusts (note, however, that a charitable trust will qualify as a fund or foundation under Section 501(c)(3)) but does not include organizations organized and operated for testing for public safety.  Moreover, in contrast to Section 170(c)(2), Section 501(c)(3) does not require the organization to be either created or organized in the United States.

     Subparagraph (E) refers to:
(i) private operating foundations (use the bulk of their resources to provide charitable services or run charitable programs of their own),
(ii) flow-through foundations (distribute all gifts received and investment income earned during a given year to qualifying public charities), and
(iii) pooled common funds (maintain a common fund for contributions and distributes all of its income and contributions to public charities).

     Section 509(a)(2) refers to "an organization which –
(A) normally receives more than one-third of its support in each taxable year from any combination of –
     (i) gifts, grants, contributions, or membership fees, and
     (ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business … not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization’s support in such taxable year,
     [-] from persons other than disqualified persons … with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii), and
(B) normally receive not more than one-third of its support in each taxable year from the sum of –
     (i) gross investment income … and
     (ii) the excess (if any) of the amount of the unrelated business taxable income … over the amount of the tax imposed by section 511 [unrelated business income tax]."

          * Section 509(a)(2) organizations generally include organizations that receive few gifts or grants, but which normally receive their support from fees for services (e.g., admissions, sales of materials supporting their exempt function).  Click here for more information about Section 509(a)(2) on the IRS website.

     Section 509(a)(3) refers to "an organization which –
(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2),
(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and
(C) is not controlled directly or indirectly by one or more disqualified persons … other than foundation managers and other than one or more organizations described in paragraph (1) or (2)."

          * Click here for more information about Section 501(c)(3) supporting organizations on the IRS website.  Also look for future posts on "Supporting Organizations."

     Disqualified persons for purposes of Section 509 are defined in Section 4946 and include:
(A) a substantial contributor to the foundation (person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2% of the total contributions and bequeaths received by the foundation; or in the case of a trust, the creator of the trust);
(B) a foundation manager (officer, director or trustee or an individual having powers or responsibilities similar to those of officers, directors or trustees; and with respect to any act or failure to act, the foundation employees having authority or responsibility with respect to such act or failure to act);
(C) an owner of more than 20% of – (i) the total combined voting power of a corporation, the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise – which is a substantial contributor to the foundation;
(D) a member of the family (spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren and great grandchildren);
(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35% of the total combined voting power;
(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35% of the profits interest; and
(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35% of the beneficial interest.