Today we continue discussing 501(c)(3)s, specifically the two sub-categories — private foundations and public charity — and the standards for qualification as a public charity. ——————————————– As a recap, 501(c)(3)s fall into two sub-categories: the private foundation and the public charity. 501(c)(3)s are by default private foundations, and must establish to the IRS that they meet the standards for public charities in order to become one. Private foundations also have two sub-types: the operating foundation and the non-operating foundation. Non-operating foundations primarily carry out their mission through making grants and donations to other individuals and organizations, whereas operating foundations undertake active conduct. Operating foundations have a couple of benefits over non-operating foundations, including 50% deductibility , and exception from the 5% payout rule. Public charities are typically preferred over private foundations as they have additional benefits, including: – More favorable percentage limitations and valuing contribution – No tax on investment income – No requirement to pay out 5% of annual earnings – No ban on lobbying or self-dealing – Better access to foundation grants/financing – Fewer restrictions on grants to others – Potential exemption from federal excise taxes In order to qualify as a public charity, an organization must meet one of four qualifications: – Meeting the “50% charity” test – Being publicly supported with exempt purpose revenue – Being a “supporting organization” – Being a public safety testing organization The “50% charity” test can be met either by being (1) a “status-based organization” or (2) by being publicly supported with gifts/grants/contributions. Status-based organization types include: – Churches – Schools – Organizations providing healthcare or conducting medical research – Organizations support state colleges and universities – Government units The public support test involves either: – Mechanical test: At least one-third of total support from contributions from government units and/or general public (the public support) – Facts and circumstances test: At least 10% of total support from contributions from government units and/or general public (the public support and, under all the facts and circumstances, it is organized and operated to attract public support. – Facts and circumstances include: – Extent of public support (higher is better) – Attraction of public support – Sources of support (more supporters are better) – Representative governing body – Public availability of facilities or services and public participation in programs (more people participating is better) – Membership base (broader base is better) Both tests include in total support gifts, grants, contributions, unrelated business net income, gross investment income, value of free services provided by government units, but exclude from public support: contributions from single individual or entity (other than government unit or another public charity) to the extent that contribution exceeds 2% of total support, and exclude from total AND public support: income from activities related to exemption purpose (for example, a college excludes the tuition it charges), gains from sale of capital assets, and “unusual” (uniquely large) contributions and grants Whether an organization meets the “being publicly supported with exempt purpose revenue” standard is determined by the “more than one-third and less than one-third” test, which refers to the amount of total support received by the organization, including gifts/grants/contributions as well as unrelated business income and gross receipts from activities. The “more than one-third” test measures whether the organization receives at least one-third of its total support from a combination of: (1) gifts, contributions, and membership fees; (2) gross receipts from admissions, merchandise sales, performance of service, furnishing of facilities, etc., that is not an unrelated trade or business (except those receipts that exceed the greater of $5,000 or 1% of total support); (3) contributions from persons other than disqualified insiders, government agencies, or other 501(c)(3) public charities that meet the “50% charity” test. Conversely, the “less than one-third” test measures whether the organization receives less than one-third of its support from either: (1) gross investment income; or (2) net after-tax unrelated business taxable income. An organization that meets the “supporting organization” standard does what the name suggests — it supports another public charity, thereby “piggybacking” on the parent public charity’s (of either the “50% charity” or “public support” standard) status. Supporting organizations can either have a parent-subsidiary relationship with the supported (parent) organization, or it can have common management with the supported organization; essentially, the supported organization must acknowledge the relationship and maintain a corporate or otherwise close relationship. Supporting organization do not include those operated primarily to simply carry out a trade or business whose profits are payable to tax-exempt groups. Instead, a supporting organization must be organized for the benefit of, to perform functions of, or to carry out the purposes of the supported organization. The supporting organization must either be an integral part of or maintain a significant involvement in the activities of the supported organization. A supported organization may not be controlled by substantial contributors, except if those contributors are public charities that meet the “50% charity” or the “public support” standards. Finally, a supporting organization may also support a 501(c)(4), 501(c)(5), or 501(c)(6) if those organizations would also meet the “public support” test as a 501(c)(3).