part4-379

4.76.2 
Special Features of IRC § 501(c)(3) Organizations

4.76.2.1 
(05-15-2003)
Introduction

  1. This IRM section contains specific examination guidelines for organizations
    recognized as exempt from income tax under IRC § 501(a) as an organization
    described in IRC § 501(c)(3), including organizations classified as public
    charities described in IRC § 509(a)(1), (2), or (3), and private foundations
    described in IRC § 509(a) or 4942(j). It provides examination techniques
    effective in identifying issues commonly encountered during the examination
    of IRC § 501(c)(3) organizations.

  2. These guidelines provide specific guidance for examining IRC §
    501(c)(3) organizations and are not all-inclusive. The purpose is to supplement
    the guidelines contained in IRM sections 4.75.10 through 4.75.16. The intent
    is not to restrict the examiner in identifying issues or using examination
    techniques not included herein.

  3. This IRM provides general information for identifying issues. When an
    issue is identified, the examiner should refer to IRM 4.76.3, Public Charities
    or IRM 4.76.4, Private Foundations, for development.

  4. Examination guidelines and procedures for specific types of IRC §
    501(c)(3) organizations are discussed in:

    • IRM 4.76.5, NECT

    • IRM 4.76.6, Religious Organizations

    • IRM 4.76.7, Church § 501(c)(3) – Including Church Tax Inquiry
      Procedures

    • IRM 4.76.8, Private and Chartered Schools

    • IRM 4.76.9, Public Interest Law Firms

    • IRM 4.76.11, Educational Organizations

    • IRM 4.76.12, All Other § 501(c)(3) Organizations

4.76.2.2 
(05-15-2003)
Examination Scope

  1. An IRC § 501(c)(3) examination should serve the following objectives
    to:

    1. Ensure the organization operates for public purposes rather than private
      interests;

    2. Determine if the organization engages in any substantial nonexempt activity,
      such as social or recreational activities;

    3. Ensure that the organization protects and preserves its assets exclusively
      for § 501(c)(3) purposes;

    4. Evaluate the organization’s procedures to account for funds disbursed
      to individuals or non-§ 501(c)(3) organizations;

    5. Determine if the organization pays, directly or indirectly, any excessive
      compensation, fees, allowances or taxable benefits;

    6. Determine if the organization engages in legislative activities or directly
      or indirectly participates in or intervenes in, any political campaign on
      behalf of, or in opposition to, any candidate for elective public office;

    7. Determine the organizations foundation status.

4.76.2.3 
(05-15-2003)
Inurement, Excess Benefit Transactions, Private Benefit

  1. During the examination of an IRC § 501(c)(3) organization, the
    examiner should determine if the organization engaged in any financial transactions,
    including payment of compensation, which may result in inurement of earnings,
    an excess benefit transaction, or an impermissible amount of private benefit.

4.76.2.3.1 
(05-15-2003)
Inurement, Excess Benefit Transactions, Private Benefit – Examination
Guidelines

  1. Review salaries, employee contracts and other compensation amounts,
    such as reimbursable travel expenses, sales or exchanges of property, and
    other financial transactions to determine if they result in an excess benefit
    transactions under IRC § 4958, inurement of earnings, or otherwise confer
    a private benefit.

  2. IRC § 4958, which imposes an excise tax on certain excess benefit
    transactions entered into by public charities occurring on or after September
    14, 1995, was added to the Code to provide an intermediate sanction short
    of revocation for transactions resulting in inurement of earnings. See IRM
    4.76.3 for computation of tax.

  3. Inurement of earnings to private shareholders or individuals is prohibited
    by IRC § 501(c)(3) and can result in loss of exemption. However, for
    transactions occurring after September 14, 1995, the excise tax of IRC §
    4958 should be imposed on the disqualified person in lieu of revocation (4941
    if a private foundation) unless inurement is to such a degree that the organization
    no longer functions as an exempt organization.

  4. The term private benefit is used to refer to excessive benefits provided
    to persons other than private shareholders or individuals within the meaning
    of IRC § 501(c)(3) or disqualified persons as defined in IRC § 4958(f)(1).
    The restriction on private benefit is not absolute. Review contracts and lease
    agreements for indications of private benefit.

  5. IRC § 4941 imposes an excise tax on any direct or indirect act
    of self-dealing between a private foundation and a disqualified person. See
    IRM 4.76.4 for computation of the tax. Self-dealing transactions described
    under IRC § 4941(d) are:

    • The sale, exchange, or leasing of property

    • The lending of money or other extension of credit

    • The furnishing of goods, services, or facilities

    • The payment of compensation or expenses by the foundation to a disqualified
      person

    • The transfer or use of the foundation’s income or assets by or for
      the benefit of a disqualified person; and.

    • Payments to government officials.

4.76.2.4 
(05-15-2003)
Lobbying Activities

  1. IRC § 501(c)(3) states that no substantial part of the activities
    of an otherwise qualified organization may be the carrying on of propaganda
    or otherwise attempting to influence legislation. Identify legislative activities
    such as:

    1. Direct lobbying by the organization or its officers to directly influence
      legislators;

    2. Grassroots campaigns, in which the organization urges members of the public
      to contact legislators for, or in opposition to, or to propose, some piece
      of legislation.

4.76.2.4.1 
(05-15-2003)
Lobbying Activities – Examination Guidelines

  1. Review itemized billings or reports by representatives retained by the
    organization to monitor legislation to determine the amount of lobbying conducted
    by the representative of the organization.

  2. Determine, from a review of the organizations publications or financial
    records, or from a discussion with the officers whether the organization has
    engaged in the following in furtherance of their legislative interests.

    1. Articles or paid advertisements in newspapers or magazines, radio and
      television;

    2. Television, radio or other public commentaries;

    3. Articles published by the organization; or

    4. Direct mail campaigns.

  3. Analyze disbursements to determine if:

    1. Contributions were made to organizations engaged in legislative activities;
      or

    2. Payments were made to attorneys or other intermediaries for legislative
      purposes of the organization. These payments are frequently charged to advertising
      or professional fees and services accounts.

  4. Analyze dues paid to parent organizations and state or national organizations
    to determine if any portion of the dues are used for legislative activities.
    This activity might be imputed to the subsidiary organization paying the dues.

  5. If the organization is a public charity and has engaged in legislative
    activity, determine if it made the election under IRC § 501(h), subjecting
    it to the lobbying expenditures test. If not, it is governed by the substantiality
    test of IRC § 501(c)(3).

4.76.2.5 
(05-15-2003)
Political Campaign Intervention

  1. An IRC § 501(c)(3) organization is prohibited from participating
    in or intervening in any political campaign. This prohibition includes publishing
    or distributing campaign statements. (However, see Rev. Rul. 78-248, 1978-1
    C.B. 154, and Rev. Rul. 80-282, 1980-2 C.B. 178 for a discussion of certain
    “voter education activities.”
    ) The sources set forth in IRM
    4.76.2.4.1 also apply in finding evidence of political activity.

4.76.2.6 
(05-15-2003)
Contributions and Receipts

  1. Contributions received by an organization described in IRC § 501(c)(3)
    is considered deductible to the donor unless there are restrictions incurred
    upon the use of the funds which benefit the donor.

  2. Larger organizations have specialized departments that solicit contributions
    in the form of cash, stocks, bonds, property, as well as life estate and annuity
    programs.

4.76.2.6.1 
(05-15-2003)
Contributions and Receipts – Examination Guidelines

  1. Review contributions and grants received to determine if their use is
    restricted. If so, determine if the restrictions serve the business or private
    purpose of the donor.

  2. Review correspondence files for any acknowledgment letters provided
    to the donors of restricted contributions to determine if the organization
    properly notified the contributor of the portion of the payment that represents
    a quid pro quo contributions.

  3. If a restricted grant is received, determine that the restricted use
    does not violate the organizations exempt purposes. A future interest in
    tangible personal property is not an IRC § 170 deduction until all intervening
    rights have expired.

  4. Review annuities and determine that deductible portion is based on Services
    present value tables.

  5. Determine that all charitable remainder annuity trusts, charitable remainder
    unitrusts and pooled income funds meet the requirements of IRC §§
    170(f)(2)(A), 642(c), and 664. (See IRM 4.76.5 for additional information.)

4.76.2.7 
(05-15-2003)
Fund-raising Activities

  1. Under IRC § 170, the donor is responsible for determining the value
    of his or her donation. However, some organizations give receipts to donors
    for the fair market value (FMV) of the donation based on either the organization’s
    appraisal of the donation or the donor’s statement as to the value.

  2. IRC § 170(f)(8) specifies that no deduction shall be allowed for
    any contribution of $250 or more unless the taxpayer substantiates the contribution
    by a contemporaneous written acknowledgement of the contribution by the donee
    organization that includes the following:

    1. The amount of cash and a description of any property other than cash contributed;

    2. Whether the donee organization provided any goods or services in consideration,
      in whole or in part, for any property described above;

    3. Description and good faith estimate of the value of any goods or services
      referred to above.

4.76.2.7.1 
(05-15-2003)
Fund-raising Activities – Examination Guidelines

  1. Review records of receipts, especially valuations of closely held stocks
    and bonds, personal property, and real property to determine if assigned values
    are reasonable.

  2. If the organization sold any donated property soon after receipt, compare
    the sales price, which, if the sale is at arms’ length, is the most
    likely indication of FMV, with the value assigned on the receipt given to
    the donor. Refer to IRM 4.76.51 for additional guidelines on fund-raising
    activities.

4.76.2.8 
(05-15-2003)
Unrelated Business Income

  1. Any IRC § 501(c)(3) examination should include an inspection of
    activities that generate revenue to determine if the organization has unrelated
    business income. This inspection should include the following:

    1. Determine whether any activities represent carrying on a trade or business;

    2. Compare the business activity to the overall activities of the organization
      to determine whether the activity is substantially related to the organization’s
      exempt purpose;

    3. Determine whether the business activity is regularly carried on, similar
      to comparable commercial activities of nonexempt organizations;

    4. If an unrelated business is regularly carried on, determine whether the
      business activity is substantial enough to jeopardize the exempt status of
      the organization.

  2. For possible sources of unrelated business income, the examiner should
    analyze the following activities where appropriate:

    1. Sale of mailing lists (Rev. Rul. 72-431, 1972-2 C.B. 281);

    2. Sale of pharmaceutical items by a hospital to non-patients (Rev. Rul.
      68-374, 1968-2 C.B. 242);

    3. Sale of scientific books and city souvenirs by a museum (Rev. Rul. 73-105,
      1973-1 C.B. 264);

    4. Commercial sponsored scientific research if the results are not made available
      to the general public (Rev. Rul. 76-296, 1976-32 I.R.B. 6);

    5. Operation of a medical illustration department by a medical research foundation
      (Rev. Rul. 57-313, 1957-2 C.B. 316);

    6. Publication and sale of a book on a topic not related to the organization’s
      exempt purpose (Rev. Rul. 66-323, 1966-2 C.B. 216);

    7. The income derived by an exempt organization, organized and operated for
      the prevention of cruelty to animals, from providing pet boarding and grooming
      services for the general public (Rev. Rul. 73-587, 1973-2 C.B. 192);

    8. Sale of art objects at exhibits (Rev. Rul. 76-152, 1976-17 I.R.B. 18);

    9. Sale of advertising space in EO journal (Rev. Rul. 76-93, 1976-11 I.R.B.
      11);

    10. Rental by a university of sports facilities such as stadiums, swimming
      pools, ski slopes, skating rinks (Rev. Rul. 76-402, 1976-2 C.B. 177);

    11. Sales of heavy duty appliances to senior citizens by an exempt senior
      citizens center (Rev. Rul. 81-62, 1981-1 C.B. 355);

    12. Rental by a university of its stadium to a professional football team
      for several months of the year (Rev. Rul. 80-298, 1980-2 C.B. 197);

    13. Operation of a health club facility (Rev. Rul. 79-360, 1979-2 C.B. 236);

    14. Operation of a miniature golf course (Rev. Rul. 79-361, 1979-2 C.B. 237);

    15. A travel tour program operated by a university alumni association (Rev.
      Rul. 78-43, 1978-1 C.B. 164).

Law Offices of Darrin T. Mish, PA

100 S. Edison Ave. Suite A, PO Box 3414, Tampa, FL 33606 (813) 229-7100
Made with Semiologic Pro • Colorblock-blue skin by Techie Coach