Exemption Requirements – § 501(c)(3) To be tax-exempt as an organization described in § 501(c)(3) of the Code, an organization must be organized and operated exclusively for one or more of the purposes set forth in § 501(c)(3) and none of the earnings of the organization may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities and it may not participate at all in campaign activity for or against political candidates. The organizations described in § 501(c)(3) are commonly referred to under the general heading of “charitable organizations.” Organizations described in § 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with § 170. The exempt purposes set forth in § 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening the burdens of government; lessening of neighborhood tensions; elimination of prejudice and discrimination; defense of human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
To be organized exclusively for a charitable purpose, the organization must be a corporation, community chest, fund, or foundation. A charitable trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify. The articles of organization must limit the organization’s purposes to one or more of the exempt purposes set forth in § 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that are not in furtherance of one or more of those purposes. This requirement may be met if the purposes stated in the articles of organization are limited in some way by reference to § 501(c)(3). In addition, assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the federal government or to a state or local government for a public purpose. The organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a § 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any managers agreeing to the transaction. A § 501(c)(3) organization may not engage in carrying on propaganda, or otherwise attempting, to influence legislation as a substantial part of its activities. Whether an organization has attempted to influence legislation as a substantial part of its activities is determined based upon all relevant facts and circumstances. However, most § 501(c)(3) organizations may use Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, to make an election under § 501(h) to be subject to an objectively measured expenditure test with respect to lobbying activities rather than the less precise “substantial activity” test. Electing organizations are subject to tax on lobbying activities that exceed a specified percentage of their exempt function expenditures.
For further information regarding lobbying activities by charities, download Lobbying Issues. For purposes of § 501(c)(3), legislative activities and political activities are two different things, and are subject to two different sets of rules. The latter is an absolute bar. A § 501(c)(3) organization may 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. Whether an organization is engaging in prohibited political campaign activity depends upon all the facts and circumstances in each case. For example, organizations may sponsor debates or forums to educate voters. But if the forum or debate shows a preference for or against a certain candidate, it becomes a prohibited activity. The motivation of an organization is not relevant in determining whether the political campaign prohibition has been violated. Activities that encourage people to vote for or against a particular candidate, even on the basis of non-partisan criteria, violate the political campaign prohibition of § 501(c)(3). See the FY-2002 CPE topic entitled Election Year Issues for further information regarding political activities of charities
Board Members: Kim Molhoek,Director; Bill Carey, Chair; Jennifer Clark, Vice Chair; Clara Carey, Recording Secretary; Gale Lammers, Treasurer; Clareen Heikel Fund-Raising/Public Relations; Pat Wilhelme, Social; Jennifer Clark; Marvin Wilson; Liz Sinn; Christopher Blegen