part7-86
- 7.26.3.1
Introduction - 7.26.3.2
33 1/3 Percent-of-Support Test - 7.26.3.3
Facts and Circumstances - 7.26.3.4
Definition of
“Support”
- 7.26.3.5
Support From Governmental Units - 7.26.3.6
Organizations Normally Publicly Supported - 7.26.3.7
Advance Rulings to Newly Created Organizations - 7.26.3.8
Reliance by Grantors and Contributors - 7.26.3.9
Community Trusts - 7.26.3.10
Digests of Published Rulings
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This Chapter deals with publicly supported charities described in IRC 170(b)(1)(A)(vi).
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IRM 7.26.3.2 discusses the 33 1/3 percent-of-support requirement, otherwise known as the mechanical test.
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IRM 7.26.3.3 sets out the alternative to the mechanical test, the facts and circumstances test.
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To clarify the broad definition of
“support,”
IRM 7.26.3.4 discusses general support. -
IRM 7.26.3.5 deals with governmental support.
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IRM 7.26.3.6 defines what is meant by an organization that is
“normally”
publicly supported. -
The discussion of the advance ruling period is contained in IRM 7.26.3.7.
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Reliance by grantors and contributors is dealt with in IRM 7.26.3.8.
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Community trusts are discussed in IRM 7.26.3.9.
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IRM 7.26.3.10 is the Digest of Published Rulings.
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Prior to the Tax Reform Act of 1969, IRC 170(b)(1)(A) and the regulations thereunder described those organizations to which
an individual donors contribution deduction limitation was 30% rather than 20% of income (generally changed by the Act to
50% rather than 30%). Passage of the private foundation provisions of the 1969 Act substantially increased the importance
of a charitable organization being described in IRC 170(b)(1)(A)(i) through (vi) by excluding such organizations from private
foundation status and certain excise tax liability attached to that classification. As a result, the regulations under IRC
170 (b)(1)(A) were amended to make more explicit the rules to be used in determining the proper classification of certain
charitable organizations.
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An organization described in IRC 170(b)91)(A)(vi) is one which:
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is referred to in IRC 170(c)(2), and
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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 IRC 501(a)) from
a governmental unit referred to in IRC 170(c)(1) or from direct or indirect contributions from the general public.
-
-
There is one circumstance where an organization may qualify as a
“public charity”
under IRC 509(a)(1) even though it does not satisfy IRC 170(c)(2). If it is created or organized under laws outside the
United States or its possessions and it otherwise meets the requirements under IRC 170(b)(1)(A)(vi) it will qualify as a public
charity. See Regs. 1.509(a)(2)(a)(1) and (2). -
If an organization is described both in IRC 509(a)(1) and also in 509(a)(2)or 509(a)(3), the organization will be treated
as described in 509(a)(1). Reg. 1.509(a) – 6.
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The types of organizations generally contemplated to fall under the IRC 170(b)(1)(vi)
“publicly supported”
category include:-
publicly or governmentally supported museums, libraries, community organizations that promote the fine arts,
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American Red Cross, United Way and
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other organizations that receive a significant part of their support form government grants and/or contributions from the
general public. Reg. 1.170A–9(e)(1).
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An organization is publicly supported so as to qualify under IRC 170(b)(1)(A)(vi) if it
“normally”
receives at least 33 1/3% of its total
“support”
from governmental units, direct or indirect contributions from the general public, or a combination of these sources.
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An organization that does not meet the 33 1/3% test may nonetheless be considered publicly supported if:
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it
“normally”
receives a substantial part of its support from governmental units, the general public or a combination of these sources
and -
it satisfies a number of other factors that collectively evidence continuing public involvement in its affairs.
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A mandatory consideration in determining whether an organization satisfies the facts and circumstances test is whether it
is organized and operated to attract public and governmental support on a continuing basis. In this regard, the Service will
favorably consider an organization that maintains a continuous and bona fide program for soliciting funds from the general
public, community, or membership group involved, or whose activities are such as to attract support from governmental units
or other publicly oriented organizations described in IRC 170(b)(1)(A)(vi) through (vi). Reg. 1.170A–9(e)(3)(ii). -
Underlying this approach are three considerations. 1. Whether the scope of the organizations fund-raising activities is reasonable
in light of its charitable activities. 2. A new organization may have limited sources amounts of support before it can expand
its solicitation program or activities. 3. The facts and circumstances involving each case will vary and must be considered
based upon the nature and purpose of the organization. -
For example, the regulations point out that a high support percentage of investment income form endowment funds will normally
be treated as an adverse factor especially if such funds were originally contributed by a few individuals or members of their
families. On the other hand, if such endowments were originally contributed by a governmental unit or by the general public,
this would be favorable to a conclusion that the organization is publicly supported. -
As indicated above, no one factor will fit all situations or be considered conclusive of an organizations publicly supported
nature. Each factor is only meaningful in light of the type of organization involved. However, the regulations provide certain
facts and circumstances which, taken as a whole, offer a guide for ascertaining whether an organization has a publicly supported
nature. However, before the facts and circumstances test can be used, an organization must meet the 10% support requirement.
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Where an organization receives at least 10% but less than 33 1/3% of its total support form contributions made directly or indirectly by the general public or form governmental units, Reg.
1. 170A–9(e)(3) provides that the Service will then look to the factors (described above) to determine whether the organization
is in the nature of a publicly supported organization. An organization with at least 10% public support that also shows sufficient
characteristics indicating it is in the nature of a publicly supported organization my qualify, as an organization described
in IRC 170(b)(1)(A)(vi). -
The regulations make clear that the 10% requirement is minimal so that an organization without this minimal amount of public
support is not described in IRC 170(b)(1)(A)(vi). -
Also, the higher an organizations public support above 10%, the lesser is its burden of establishing its publicly supported
nature through other factors. Reg. 1.170A–9(e)(3)(iii). A discussion of these applicable factors is set out below.
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Reg. 1.170A–9(e)(3)(iv) provides that where an organizations public support is derived from a representative number of persons
rather than from members of a single family, this factor indicates a publicly supported nature. On the other hand, this factor
will not be persuasive when dealing with a new organization or with an organization that can be expected to appeal to a limited
number of persons because its activities are limited to a particular region or to a special field.
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Reg. 1.170A–9(e)(3)(v) provides that where an organizations governing body represents the broad interests of the public rather
than the private interest of a limited number of donors, this factor indicates a publicly supported nature. -
In general, the broad interests of the public will be served by a governing body comprised of public officials or their representatives;
persons with expertise in the organizations field of operation; community leaders; or persons elected by a broadly based
membership. -
The regulations provide additional details concerning representative governing bodies.
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Where an organization provides a facility or service directly for the benefit of the general public on a continuing basis,
this factor indicates a publicly supported nature. Reg. 1.170A–9(e)(3)(vi)(a) provides some examples of facilities or services
which are for the general public, such as a:-
museum or library which holds open its building and facilities to the public,
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symphony orchestra which gives public performances,
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conservation organization which provides educational services to the public through the distribution of educational materials,
or -
old services from members of the general public.
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The fact that an educational or research institution regularly publishes scholarly studies that are widely used by colleges
and universities or by the general public is evidence that an organization is publicly supported pursuant to Reg. 1.170A–9(e)(3)(vi)(b). -
Additional factors set forth in Reg. 1.170A–9(e)(3)(vi)(c) evidencing that an organization is publicly supported include:
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the participation in, or sponsorship of, the programs of the organization by members of the public having special knowledge
or expertise, public having special knowledge or expertise, public officials, or civic or community leaders; -
the maintenance of a definitive program by an organization to accomplish its charitable work in the community, such as slum
clearance or developing employment opportunities; and -
the receipt of a significant part of its funds from a public charity or governmental agency to which it is in some way held
accountable as a condition of the grant, contract, or contribution.
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Factors useful in considering whether membership organizations have the requisite publicly supported nature are provided by
Reg. 1.170(A)–9(e)(3)(vii) as follows:-
whether the solicitation for dues-paying members is designed to enroll a substantial number of persons in the community or
area, or in a particular profession or field of special interest (taking into account the size of the area and the nature
of the organizations activities); -
whether membership dues for individual (rather than institutional) members have been fixed at rates designed to make membership
available to a broad cross section of the interested public, rather than to restrict membership to a limited number of persons;
an -
whether the activities of the organization will be likely to appeal to persons having some broad common interest or purpose,
such as educational activities in the case of alumni associations, musical activities in the case of symphony societies, or
civic affairs in the case of parent-teacher associations.
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Examples are provided under Reg. 1.170(a)–9(e)(9) which illustrate whether an organization meets the 10% requirement.
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Example (2) illustrates an organization which fails to meet the 10% test.
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Example (3) illustrates an organization which meets the 10% rule.
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For purposes of IRC 170(b)(1)(A)(vi), the term
“support”
includes the following:-
gifts, grants, contributions, membership fees;
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net income from unrelated business activities, whether or not such activities are carried on regularly as a trade of business;
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gross investment income, such as interest, dividends, rents, and royalties;
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tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization; and
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the value of services of facilities (exclusive of these generally furnished to the public without charge) furnished by a governmental
unit referred to in IRC 170(c)(1) to an organization without charge. See Reg. 1.170A–9(e)(7)(i) which adopts the definition
of the term
“support”
provided in IRC 509(d) (except for 509(d)(2)).
-
-
The term
“support”
does not include the following:-
Any amounts an organization receives from the exercise or performance of its charitable, educational, or other purpose or
function constituting the basis for its exemption under IRC 501(a). -
Any gain upon the sale or exchange of property which would be considered under any section of the Code as gain from the sale
or exchange of a capital asset (IRC 509(d)). -
Contributions or services for which a deduction is not allowable.
-
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In determining to what extent an organization is publicly supported, the organizations total support forms the denominator
of the support fraction. The numerator (public support) is determined from the support (subject to certain limitations) from
any combination of gifts, grants, contributions and membership fees from the general public, and from governmental units.Example:
M, an organization described in IRC 170(c)(2), shows that it derived funds from the following sources during taxable years
1995–1998:-
interest and dividends $80,000
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net income from unrelated business activities $20,000
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gifts and contributions from the general public $200,000
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capital gains $5,000
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admission fees (amounts form the exercise of its exempt function under IRC 501(a)) $5,000
Note:
In this situation Ms total support = $300,000, the sum of items a, b, and c; items d, and e are excluded because capital
gains and income related to exempt functions are not included in the definition of support for purposes of IRC 170(b)(1)(A)(vi).
M organizations public support (numerator of the public support fraction) is $200,000, since of the total support received
only item (c), gifts and contributions, qualifies as public support. Ms public support fraction is public support $200,000
over total support $300,000 or 66 2/3% public support.
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Support from the general public means any direct or indirect contribution an organization derives from a donor. Thus, contributions
from the general public are included in full in the numerator and denominator of the organizations public support fraction
except as provided below. See Reg. 1.170A–9(e)(6)(i). -
The term
“contribution”
has the same meaning as it has under IRC 170(c). Thus any payment of money or transfer of property without consideration
will be treated as a contribution. The amount includable in computing support with respect to contributions of appreciated
property shall be the fair market value of such property at the date of the contribution.-
To the extent that a donors contribution exceeds 2% of an organizations total support, it is not considered public support
and, therefore, is excluded from the numerator of the public support fraction. -
The entire amount of the contribution is included in the denominator of the fraction.
-
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The 2% limitation applies to any person or persons related to the donor in a manner described in IRC 4946(a)(1)(C) through
(G) as if the contribution were made by the donor.Example:
A husband and wife would be treated as one person for purposes of the 2% limitation.
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In most cases, the 2% limitation does not apply to support from other IRC 170(b)(1)(A)(vi) organizations or from governmental
units referred to in IRC 170(c)(1). It is also not applicable to support from other organizations which normally receive a
substantial part of their support from direct or indirect contributions made by the general public. See Reg. 1.170A–9(e)(9)(1)
Example (1), which illustrates the application of the 2% limitation principle.
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There is an exception to the special rule for grants from public charities and governmental units as described in IRM 7.26.3.4.2(4),
above.-
Where a donor makes an indirect contribution (one which is expressly or impliedly earmarked as being for, or for the benefit
of, a particular recipient) through an organization described in IRC 170(b)(1)(A)(vi) or a governmental unit for a particular
organization claiming status under IRC 170(b)(1)(A)(vi), such contribution is subject to the 2% limitation. Reg. 1.170A–9(e)(6)(v).
(For further details, see Reg. 1.509(a)–3(j).) -
In other words, the substance of a transaction will always govern, and if the publicly supported organization or governmental
unit is merely a conduit for amounts which have been expressly or impliedly earmarked by a donor as being for the particular
organization, the contributions will be treated as having been made by the original donor and the 2% limitation will apply.
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Membership fees are fully included (subject to the 2% limitation) in the numerator and denominator of the public support fraction
if made for the recipient organizations support fraction if made for the recipient organizations support rather than to
purchase admissions, merchandise, services, or the use of facilities. If made for any of the latter purposes, it is important
to determine further whether such membership fees represent amounts derived from unrelated or related business activities
because the treatment accorded each varies. -
Net income from membership fees that represent income from business activities unrelated to the organizations exempt purposes
under IRC 501(a) are included in the denominator, but excluded from the numerator, of the public support fraction. (See IRC
509(d)(3) and IRC 513 for a further discussion of unrelated business activities.) -
Membership fees that represent amounts received from business activities related to the organizations exempt purposes under
IRC 501(c) are fully excluded from the numerator and denominator of the public support fraction. In this regard, see IRM 7.26.3.4.5.
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In computing an organizations public support fraction, gross receipts derived from any trade or business activity the conduct
of which is related to the organizations charitable, educational, or other purpose constituting the bases for its exemption
under IRC 501(a) are excluded from the numerator and denominator. Rules for determining whether support is or is not related
to an organizations exempt purposed are set forth in IRC 513, and Reg. 1.513–1(d). -
If an organization is depended for its support primarily on gross receipts from related activities, it is not considered publicly
supported under IRC 170(b)(1)(A)(vi) regardless of any other factors. Reg. 1.170A–9(e)(7)(ii). -
An organization is considered to be dependent primarily on gross receipts from related activities if it derives almost all
support from related activities and an insignificant amount from governmental units and direct or indirect contributions made
by the general public. -
In the following example, drawn from Reg. 1.170A–9(e)(7)(ii), the organization is dependent primarily on gross receipts from
activities related to its exempt purposes so that it cannot qualify as an IRC 170(b)(1)(A)(vi) organization:Example:
X, an organization described in IRC 501(c)(3), is controlled by A, its president. X received $500,000 during the 4 taxable
years immediately preceding its current taxable year under a contract with the Department of Transportation, pursuant to which
X has engaged in research to improve a particular vehicle used primarily by the Federal Government. During this same period,
the only other support received by X consisted of $5,000 in small contributions primarily from Xs employees and business
associates. The $500,000 amount constitutes support under IRC 509(d)(2).
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If an organization cannot meet the one-third public support test or the 10% public support requirement because of one or more
unusually large contributions, it may be entitled to exclude such contributions as support in computing whether it is publicly
supported. Amounts excluded from an organizations support as unusual grants are entirely excluded from the numerator and
denominator of the organizations public support fraction. Reg. 1.170A–9(e)(6)(ii). -
All pertinent facts and circumstances are to be considered, but the following factors are considered most important in concluding
that a particular contribution should be excluded as an unusual grant:-
the contribution will adversely affect the organizations status as normally being publicly supported;
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the contribution is unusual as to amount relative to contributions which the recipient organization usually receives, or it
is received unexpectedly; and -
the donor is a disinterested party with respect to the recipient organization in the sense that the donation is made solely
because of the publicly supported nature of the organization.
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Additional facts and circumstances concerning the exclusion of unusual grants are contained in Reg. 1.509(a)–3(c)(4) and Rev.
Proc. 81–7, 1981 C.B. 621. -
A grant that otherwise qualifies for exclusion that is paid over a period of years may be excluded each year a payment i s
made. For a definition of the term
“grant”
, see Reg. 1.509(a)–3(g). -
Area Managers may issue
“unusual grant”
determinations as to the continued classification of an organization as one that is publicly supported.
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Generally, governmental support is accorded favorable treatment when determining whether an organization qualifies under IRC
170(b)(1)(A)(vi). Any amount classified as support from a governmental unit is fully included in the numerator of an organizations
public support fraction except for indirect contributions earmarked by individual donors as described in IRM 7.26.3.4.3. The
term
“governmental unit”
means entities described in IRC 170(c)(1). -
Governmental support means only contributions received from governmental units and certain other amounts received in connection
with contracts entered into with governmental units that constitute amounts paid for the performance of services or in connection
with a government research grant. See Reg. 1.170A–9(e)(8)(i).
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Amounts an organization receives from governmental contracts may be classified, depending on the particular facts, either
as governmental support or support from activities related to the organizations exempt purposes. The classification is important
since:-
amounts classified as governmental support will be included in the numerator of the public support fraction;
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whereas, if the payments are classified as support from activities related to exempt purposes, they will be excluded from
the numerator and denominator of the public support fraction unless the purpose is to permit the recipient organization to
provide a facility or service for the direct benefit of the public rather than to serve the direct and immediate needs of
the payor. See Reg. 1.170A–9(e)(8)(ii).
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-
the following illustrates amounts paid for direct public benefit under this provision:
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amounts paid for the maintenance of library facilities which are open to the public;
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amounts paid under government programs to nursing homes or homes for the aged in order to provide health care or domiciliary
services to residents of such facilities; and -
amounts paid to child placement or child guidance organization under government programs for services rendered to children
in the community.
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In addition, similar rules applicable to amounts from governmental sources considered to provide direct public benefit are
set forth in Reg. 1.509(a)–3(g).
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Because an organizations sources of support will vary from year to year, one year is generally not a sufficient period of
time to reflect an organizations normal sources of support. Therefore, a four-year computation period is used to determine
whether an organization is
“normally”
publicly supported within the meaning of IRC 170(b)(1)(A)(vi). Reg. 1.170A–9(e)(4). -
If an organization satisfies the 33 1/3% public support test or, the 10% public support requirement, on an aggregate basis for the four proceeding taxable years,
the organization will then qualify as being
“normally”
publicly supported for the current year and the immediately succeeding taxable year.-
For example, an organization meeting the one-third public support test on an aggregate basis for the years 1990, 1991, 1992,
and 1993 will be considered
“normally”
publicly supported for the years 1994 and 1995.
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-
The following example from Reg. 1.170A–9(e)(4)(iv) illustrates an application of the four year normal support rule.
Example:
X, an organization described in IRC 170(c)(2), meets the 33 1/3 percent-of-support test described in subparagraph (2) of this
paragraph in taxable year 1975 on the basis of support received during taxable years 1971, 1972, 1973, and 1974. It therefore“normally”
meets the requirements of subparagraph (2) of this paragraph for 1975 and 1976, the taxable year immediately succeeding
1975 (the current taxable year). For the taxable year 1976, X is unable to meet the 33 1/3 percent-of-support test described
in subparagraph (2) of this paragraph on the basis of support received during taxable years 1972, 1973, 1974, and 1975. If
X can meet the requirements of subparagraph (3) of this paragraph on the basis of taxable years 1972, 1973, 1974, and 1975,
X will meet the requirements of subparagraph (3) of this paragraph for 1977 (the taxable year immediately succeeding 1976,
the current taxable year) under subdivision (ii) of this subparagraph. However, if on the basis of both the taxable years
1972 through 1975 and 1973 through 1976, X, fails to meet the requirements of both subparagraphs (2)(3) of this paragraph,
X will not be described in IRC 170(b)(1)(A)(vi) for 1977. However, X will not be disqualified as a IRC 170(b)(1)(A)(vi) organization
for taxable year 1976, because it
“normally”
met the requirements of subparagraph (2) of this paragraph on the basis of the taxable years 1971 through 1974, unless
the provisions of subdivision (v) of this subparagraph become applicable. -
Generally, after an organization is considered normally publicly supported, it must then be unable for two consecutive computation
periods to satisfy the 33 1/3% public support test or the 10% public support requirement to fall short of being described in IRC 170(b)(1)(A)(vi). there
is an exception to this general rule for material changes in sources of support as described below.
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Where a substantial and material change in an organizations support occurs, then, notwithstanding the rule for determining
whether an organization is
“normally”
publicly supported, its status as an organization described in IRC 170(b)(1)(A)(vi) ceases. Once example of such a substantial
or material change is where an organization receives an unusually large contribution or bequest that does not qualify as an
unusual grant. -
The organization may affirm its IRC 170(b)(1)(A)(vi) status for the year of material change by showing that it is publicly
supported based on a computation period that includes the year in which the material change occurs plus the four taxable years
immediately preceding such year. Regs. 1.170A–9(e)(4)(v)(a). -
For example, assume that in 1993 X, an organization described in IRC 170(b)(1)(A)(vi), receives a large grant that does not
qualify for exclusion as an unusual grant. Since such grant is considered a substantial and material change, the determination
of whether X is
“normally”
publicly supported for 1993 is based on taxable years 1989 through 1993 (a five year computation period) rather than 1988
through 1991 or 1989 through 1992.
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Organizations that have been in existence for at least one taxable year consisting of at least eight months, but for less
than five taxable years, can substitute the number of taxable years they have been in existence prior to their current taxable
year to determine whether they meet the 33 1/3 or facts and circumstances tests described in IRM 7.26.3.2 and IRM 7.26.3.3. Reg. 1.170–9(e)(4)(vi).Note:
An exception to this rule is discussed in IRM 7.26.3.6.1 where there is a material change in sources of support.
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An organization that meets the
“at least 8 months”
requirement has the option of requesting a five year advance ruling period instead of a definitive ruling based on the
support it has received to date. Organizations that do not meet the 8 months requirement do not qualify for a definitive ruling
and must request a five year advance ruling. Further discussion of the term
“eight months”
can be found in Rev. Rul. 74–487, 1974–2 C.B. 82. -
Where an organization has received a five year advance ruling described in IRM 7.26.3.7, the computation period will be based
on all the years in the 5 year advance ruling period.
-
-
Many newly created organizations cannot meet either the four year
“normally”
publicly supported provisions or the provisions for new organizations to qualify as
“normally”
publicly supported because they have not been in existence for a sufficient period of time. Nevertheless, a newly created
organization may qualify for an advance ruling that it will be treated as an organization described in IRC 170(b)(1)(A)(vi)
during an advance ruling period sufficient to enable it to develop an adequate support history on which to base an initial
determination as to foundation status. -
Briefly, the type of newly created organization that would qualify for an advance ruling is one that can show that its organization
structure, proposed programs and activities, and intended method of operations are such as to attract the type of broadly
based support form the general public, public charities, and governmental units necessary to meet the public support requirements
under IRC 170(b)(1)(A)(vi). -
Initially, Reg. 1.170A–9(e)(5)(i) provided for an advance ruling period of two or three years depending on the length of the
first tax year. Reg. 1.170–9(e)(5)(iv) provides for an extended advance ruling of an additional three years. -
Subsequently, Congress directed the Treasury Department to extend the advance ruling period for newly formed organizations
to five years. H.Rept. No. 861, 98th Cong., 2nd Sess. 1090 (1984), 1984–3 (Vol. 2) C.B. 344. the new five year period replaces
both the two or three year advance ruling period and the extended advance ruling period for organizations applying on Form
1023 (Rev. March 1986). -
A newly created organization subject to the five year advance ruling period may request a ruling or determination letter that
it will be treated as an IRC 170(b)(1)(A)(vi) organization for its first five taxable years.-
The request must be accompanied by a consent to extend the statute (Form 872–C) that in effect states the organization will
be subject to IRC 4940 taxes if it fails to qualify as not a private foundation during the five year advance ruling period. -
The organizations first tax year (regardless of length) shall count as the first year in the five year period.
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The advance ruling period will end on the last day of the organizations fifth tax year.
-
-
If a newly created organization has not obtained an advance ruling or determination letter, it cannot rely upon the possibility
that it will meet the
“mechanical test”
and
“facts and circumstances test”
discussed in IRM 7.26.3.2 and IRM 7.26.3.3. Thus, in order to avoid the risk of being classified a private foundation,
the organization may comply with the rules governing private foundations by paying any applicable Chapter 42 taxes. Then if
the organization subsequently meets the public support requirements for either of the computation periods mentioned in Regs.
1.1270A–9(e)(5)(v)(b) or (c), it will be treated as an IRC 170(b)(1)(A)(vi) organization from its inception and any tax imposed
under Chapter 42 will be refunded.
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If an organization is not able to meet the public support requirements for its current taxable year or has its advance ruling
period terminated prior to the expiration of such ruling period, grantors and contributors will ordinarily not be affected
by such change of status until notice is given to the public by a means such as publication in the Internal Revenue Bulletin. -
However, grantors and contributors will be affected if they were responsible for, or aware of, the act or failure to act that
resulted in the organizations loss of IRC 170(b)(1)(A)(vi) status or acquired knowledge that the Service had given notice
that the organization would be deleted from such classification. See Reg. 1.170A–9(e)(4)(v)(b). -
In this respect, Regs. 1.170A–9(e)(4)(v)(c) and 1.170A–9(e)(6)(iv)(b), respectively, provide procedures by which potential
grantors may obtain advance assurance that they will not be considered responsible for, or aware of, a substantial and material
change in support (discussed in IRM 7.26.3.6.1) or an unusual grant that is not excluded from the support computation (discussed
in IRM 7.26.3.4.6) which may result in a recipient organizations failure to meet the requirements of IRC 170(b)(1)(A)(vi). -
Rev. Proc. 81–6, 1981–1 C.B. 620, provides guidelines to determine whether a grantor or contributor will be considered responsible
for a substantial and material change in support.
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If a grantee organization is concerned that a potential grant may cause it to lose classification under IRC 170(b)(1)(A)(vi),
it can request a ruling to determine the effect a particular contribution will have on its status. Such request must contain
all the pertinent information necessary to make a determination. The issuance of such letter is at the discretion of the Service
but if a favorable ruling is issued, affected grantors and contributors can rely on such ruling. Regs. 1.170A–9(e)(5)(iii)(C).
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A special rule is provided in Regs. 1.170A–9(e)(4)(vii) for older organizations that as of January 1, 1970, possessed outstanding
ruling or determination letters classifying them as publicly supported organizations described in IRC 170(b)(1)(A)(vi). Under
this rule, such organizations are not subject to the presumption of private foundation status set forth in IRC 508(b) until
March 29, 1973. Moreover, grantors to such organizations can rely on the outstanding letter for purposes of IRC 170, 507,
545(b)(2), 556(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2) and 2522 until such time as the Service may expressly revoke the
letter (provided the grantor is aware of such revocation), or the Service gives notice to the public of a change in the organizations
status through publication in the Internal Revenue Bulletin.
-
Community trusts are often established to attract large contributions of a capital or endowment nature for the benefit of
a particular community or area, and often such contributions come initially from a small number of donors.-
While the community trust generally has a governing body comprised of representatives of the particular community or area,
its contributions are often received and maintained in the form of separate trusts or funds, which are subject to varying
degrees of control by the governing body. -
Usually the separate trusts or funds are managed by banks or other corporate trustees.
-
-
To qualify as a publicly supported organization, a community trust:
-
meet the one-third support test explained earlier, or,
-
if it cannot meet the test, it must be organized and operated so as to attract new and additional public or governmental support
on a continuous basis sufficient to meet the facts and circumstances test, also explained earlier.
-
-
Community trusts are generally able to satisfy the requirement of attraction of public support (as contained in the facts
and circumstances test) if they seek gifts and bequests from a wide range of potential donors in the community or area served,
through banks or trust companies, through attorneys or other professional persons, or in other appropriate ways that call
attention to the community trust as a potential recipient of gifts and bequests made for the benefit of the community or area
served. -
A community trust, however, is not required to engage in periodic, community-wide, fund-raising campaigns directed toward
attracting a large number of small contributions in a manner similar to campaigns conducted by a community chest or a united
fund. Reg. 1.170A–9(e)(10).
-
When the Tax Reform Act of 1969 was enacted, a number of community trusts had already been established. The regulations under
IRC 170(b)(1)(A)(vi) prior to the Tax Reform Act of 1969 recognized this trend by containing an example describing a typical
community trust. However, the regulations failed to address two major problems:-
the entity problem—whether an aggregation of trusts could be treated as a single entity for purposes of Subchapter F and related
provisions; -
the support problem—whether community trusts should be subject to the same support requirements as other IRC 170(b)(1)(A)(vi)
organizations.
-
-
In order to be treated as a
“single entity”
, the present regulations under IRC 170(b)(1)(A)(vi) provide that a community trust must satisfy the following requirements—-
It must be commonly known as a community trust, fund, foundation or by other similar name conveying the concept of a capital
or endowment fund to support charitable activities in the community or area it serves. Reg. 1.170A–9(e)(11)(iii). -
All the funds of the organization must be subject to a common governing instrument or a master trust or agency agreement.
Reg. 1.170A–9(e)(11)(iv). -
The organization must have a common governing body or distribution committee which either directs or, in the case of a fund
designated for specified beneficiaries, monitors the distribution of all of the funds exclusively for charitable purposes.
Reg. 1.170A–9(e)(11)(v)(A). -
the governing body must have the power to modify any restriction or condition on the distribution of funds for any specified
charitable purposes or to specified organizations, and to replace any participating trustee, custodian, or agent for breach
of fiduciary duty under State law or for failure to produce a reasonable return of net income over a reasonable period of
time. Reg. 1.170A–9(e)(11)(v)(B). -
The community trust must prepare periodic financial reports treating all of the funds which are held by the community trust,
either directly or in component parts, as funds of the organization. Reg. 1.170A–9(e)(11)(vi). -
The governing body must also (by resolution or otherwise) commit itself to exercise the powers of modification and removal
(indicated in d above) in the interest of the community trust. Reg. 1.170A–9(e)(11)(v)(E). -
The governing body must also (by resolution or otherwise) commit itself to obtain information and take other appropriate steps
with the view to seeing that each participating trustee, custodian, or agent, with respect to each restricted fund or trust
(as defined in Reg. 1.170A–9(e)(13)(x)), and with respect to the aggregate of the unrestricted trusts or funds that are a
component part of the community trust administers such trust or fund in accordance with the terms of its governing instrument
and accepted standards of fiduciary conduct to produce a reasonable return of net income, with due regard to safety of principal,
in furtherance of the exempt purposes of the community trust. Reg. 1.170A–9(e)(11)(F).
-
-
These requirements may be satisfied by amendments to the governing instrument of the community trust and by the governing
bodys adoption of the appropriate resolutions. Sample governing instrument amendments and resolutions are contained in Rev.
Rul. 77–333, 1977–2 C.B. 75, and Rev. Rul. 77–334, 1977–2 C.B. 77. -
The regulations also contain transitional rules that relate to the adoption of the powers of modification and removal. These
rules apply to:-
the effect of inconsistent State law requirements, and
-
the dates by which the community trust must adopt these powers. Generally, a community trust must change its governing instrument
(or instrument of transfer) by the later of November 11, 1977, or one year after a gift or bequest is acquired (in the case
of an instrument of transfer relating to gifts or bequests acquired before January 1, 1982). However, unless a community trust
is barred by its governing instrument from causing proceedings to be instituted by request to the appropriate State authority,
the November 11th deadline is effectively extended to January 19, 1978.
-
-
There are also rules that complement the single entity test in that they provide guidelines for treatment of a trust or fund
as a component part of the community trust. Reg. 1.170A–9(e)(11)(i) and (ii). To be treated as a component of a community
trust, a trust or fund must meet the following requirements:-
be created by a gift, bequest, legacy, devise, or other transfer to a community trust which is treated as a
“single entity”
; and, -
the trust or fund may not be directly or indirectly subjected by the transferor to any material restriction or condition (as
defined in Regs. 1.507–2(a)(8)) with respect to the transferred assets. IRM 7.26.3.9.3, below, describes the criteria for
determining whether a material restriction or condition has been imposed.
-
-
The community trust regulations also provide guidelines with respect to the treatment of trusts, not-for-profit corporations
and association not included as component parts. See Reg. 1.170A–9(e)(14).
-
Whether a material restriction or condition has been imposed must be determined from all the facts and circumstances of the
transfer. Significant facts and circumstances include the following:-
Whether the transferee (including a participating trustee, custodian, or agent) is the owner in fee of the assets it receives;
-
Whether such assets are to be held and administered by the transferee in a manner consistent with one or more of its exempt
purposes; -
Whether the governing body of the transferee has the ultimate authority and control over such assets, and the income derived
therefrom; and -
Whether, and to what extent, the governing body of the transferee is organized and operated so as to be independent from the
transferor. Reg. 1.507–2(a)(8)(i).
-
-
Certain factors will not adversely affect the determination.
-
The fund may be given a name that memorializes the donor or his or her family.
-
The income and assets of the transferred fund may be used for a purpose or a public charity designated in the transfer instrument.
-
-
The donor may designate, before or at the time of the creation of the fund, the specific public charity described in IRC 509(a)(1), 509(a)(2), or
509(a)(3) that may receive the income and assets of the fund.-
The designation of a specific public charity as the recipient of the income or assets of a fund at the time of creation of
the fund must be distinguished from the reservation of the right of the donor to direct the distribution of the income or
assets following the gift or to offer advice as to such distribution after the gift is completed. -
The reservation of a power to direct or advise as to distribution after the completion of a gift is subject to the rules relating
to material restrictions or conditions. These rules are discussed in IRM 7.26.3.9.3.1(1).Example:
The O private foundation transferred all of its net assets to X Bank as trustee for the P Community Trust, a community trust
which is a public charity described in IRC 170(b)(1)(A)(vi). Under the terms of the transfer, X is to hold the assets in trust
for P and is directed to distribute the income annually to the Y Church, a public charity. The distribution of income to Y
Church is consistent with Ps exempt purpose. The distribution of the income is a designated gift meeting the requirements
of Reg. 1.507–8(a)(iii)(B). Reg. 1.507–8(a)(v), Example 3.
-
-
Transferred assets may be administered in an identifiable fund with restrictions on distributions of principal. The donor
may require the transferee to retain the transferred property, so long as continued retention is important to the achievement
of exempt purposes. Reg. 1.507–2(a)(8)(iii)(C) and (D). -
Adverse factors [Reg. 1.507–2(a)(8)(iv)(A) through (F)] include the following:
-
The donor or the donors designee reserves the right to name the distributees or direct the timing of distributions by the
transferee (other than by designation in the transfer instrument). See IRM 7.26.3.9.4(2)(b), this text, for a discussion of
advised funds where such a reservation may exist. -
The transferee is required to take or withhold action with respect to the transferred assets which is not designed to further
the transferees exempt purposes, and if performed by the transferor would have constituted a violation of Chapter 42. -
The transferee assumes the transferors contractual obligations or takes the assets subject to such obligations, for purposes
inconsistent with the purposes or best interests of the transferee. -
The transferee is required to retain transferred investment assets.
-
The transferor retains a right of first refusal to the transferred assets.
-
The transferee is required to maintain relationships with respect to the management of transferred assets, such as continuing
relationships with investment counselors.
-
-
Where the only criterion considered by the transferee in making a distribution of income or principal form the transferred
assets is advice offered by the transferor, the Service will conclude that a material restriction exists. In all other instances,
the issue is one of facts and circumstances. Factors that will be favorably considered [Reg. 1.507–2(a)(8)(iv)(A)(2)] include
the following:-
There has been an independent investigation by the staff of the transferee evaluating whether the donors advice is consistent
with specific charitable needs most deserving the transferees support; -
The transferee has promulgated guidelines enumerating specific charitable needs consistent with its charitable purposes and
the donors advice is consistent with such guidelines; -
The transferee has instituted an educational program publicizing to donors and other persons the above guidelines;
-
The transferee distributes funds in excess of amounts distributed from the donors fund to the same or similar types of organizations
or charitable needs as those recommended by the donor; and -
The transferees solicitations for funds specifically state that it will not be bound by advice offered by the donor.
-
-
Adverse factors [Reg. 1.507–2(a)(8)(iv)(A)(3)] include the following:
-
The solicitations (written or oral) of funds by the transferee state or imply, or a pattern of conduct on the part of the
transferee creates an expectation, that the donors advice will be followed; -
The advice of a donor is limited to distributions of amounts from the donors fund, and the independent investigation and
guidelines described above in (1)a. and b. are not present; -
Only the advice of the donor as to distributions of such donors fund is solicited by the transferee and no procedure is provided
for considering advice from persons other than the donor with respect to such fund; and -
For the taxable year and all prior taxable years the transferee follows the advice of all donors with respect to their funds
substantially all of the time.
-
-
A growing number of commercial companies promote donor advised funds as exempt entity vehicles for deductible charitable donations
by private individuals and interests. These commercially promoted donor advised funds may employ concepts and terminology
that are quiet similar to those associated with community trusts qualifying under the Regulations as described in the preceding
paragraphs. A community trust must serve a defined community or geographical area. Reg. 1.170A–9(e)(10); Reg. 1.170A–9(e)(11)(iii).
Commercially promoted donor advised funds usually fail this requirement. -
Two court cases dealing with organizations employing purported donor advised funds outside the traditional community trust
structure are National Foundation, Inc. v. United States, 13 Cl. Ct. 486 (1987) and Fund for Anonymous Gifts, CA 95–1629 (D.D.C 1997) vacated on other grounds 194 F.3rd 173 (D.C. Cir. 1999). In the latter case, the Court held that
the organization failed to qualify for exemption because the donor exercised significant control over the donation while,
at the same time, claiming a charitable deduction for the gift. the Court found that the organizations activity benefits
the donor because the donor controls the investment. In National Foundation, Inc., the Claims Court, on the narrow issue of commercial enterprise, found no evidence that the organization was a commercial
enterprise.
-
The following are examples under Reg. 1.507–2(a)(8)(v) of the application of the criteria concerning material restrictions:
Example:
(1): The M Private Foundation transferred all of its net assets to the V Community Trust. Prior to the transfer, Ms activities
consisted of making grants to hospitals and universities to further research into the causes of cancer. Under the terms of
the transfer, V is required to keep Ms assets in a separate fund and use the income and principal to further cancer research.
Although the assets may be used only for a limited purposed, this purpose is consistent with and in furtherance of Vs exempt
purposes, and therefore does not subject the transferred assets to a material restriction.Example:
(2): The N Private Foundation transferred all of its net assets to W Community Trust. Under the terms of the transfer, W is
required to use the income and principal to endow a chair at a university to be known as the
“John J. Doe Memorial Professorship,”
named after Ns creator. Although the transferred assets are to be used for a specified purposed by W, this purposed is
in furtherance of Ws exempt educational purposes, and there are no conditions on investment or reinvestment of the principal
or income. The use of the name of the foundations creator for the chair is not a material restriction which would prevent
the transferred assets from being a component part of W Community Trust.Example:
(3): The U Private Foundation transferred all of its net assets to Z Bank as trustee for the R Community Trust. Under the
terms of the transfer, Z is to hold the assets in trust for R and distribute the income to those public charities described
in IRC 170(b)(1)(A)(i) through (vi) that are designated by B, the creator of U. Rs governing body has no authority during
Bs lifetime to vary Bs direction. Under the terms of the transfer, it is intended that Z retain the transferred assets in
their present form for period of 20 years, or until the date of Bs death if it occurs before the expiration of such period.
Upon the death of B, R will have the power to distribute the income to such public charities as it selects and may dispose
of the corpus as it sees fit. The restrictions imposed are material, and accordingly the transfer will be treated as made
to a separate trust rather than to a component part of R Community Trust.
-
Since some established community trusts may have problems in satisfying traditional support requirements under IRC 170(b)(1)(A)(vi),
the regulations provide for a 5-year transitional ruling period which was designed to give community trusts the time needed
to attract new sources of support to enable them to meet the established support requirements under IRC 170(b)(1)(A)(vi).
See in this regard Regs. 1.170A–9(e)(12) and (13).
-
Publicly supported organizations; advance ruling period. The one remaining relevant and current element to Rev. Rul. 74–487,
1974–2 C.B. 82, is that the term
“eight months,”
as used in Regs. 1.170A–9(e)(5)(i), means eight full months. -
Publicly-supported organization; unusual contribution. A large inter vivos gift of undeveloped land from a disinterested donor
to a normally publicly supported organization exempt under IRC 501(c)(3), conditioned on the lands being used in perpetuity
to further the exempt organizations purposes of preserving natural resources, constitutes an unusual grant and will not adversely
affect the status of the organization as a publicly supported organization under IRC 170(b)(1)(A)(vi). Rev. Rul. 76–440, 1976–2
C.B. 58. -
Publicly supported organization; untimely notification. A corporation that states it is a publicly supported charity when
it files its application for recognition of exemption subsequent to the 15-month deadline provided by regulation cannot be
treated as an organization described in IRC 501(c)(3) before the date it files its application; financial support received
prior to that date may not be used for purposes of determining whether the organization is publicly supported under IRC 170(b)(1)(A)(vi).
Rev. Rul. 77–208, 1977–1 C.B. 153.Note:
IRC 7428(b)(2) mandates a 270 day period for the determination of exemption which supersedes the 15 month period of prior
law reflected in Rev. Rul. 77–208. -
Publicly supported; business league contribution limitation. Contributions made by an IRC 501(c)(6) business league to an
IRC 501(c)(3) organization seeking to be classified as other than a private foundation under IRC 509(a)(1) because it is publicly
supported under IRC 170(b)(1)(A)(vi) are subject to the two percent limitation imposed by Regs. 1.170A–9(e)(6). Rev. Rul.
77–255, 1977–2 C.B. 74. -
Community trusts; governing instruments. Examples are given of provisions in the governing instruments of community trusts
that meet the requirements of Regs. 1.170A–9(e)(11)(v)(B). Rev. Rul. 77–333, 1977–2 C.B. 75. -
Community trusts; required resolutions. Examples are given of resolutions adopted by community trusts with respect to the
administration of such trusts or funds that satisfy the requirements of Regs. 1.170A–9(e)(11)(v)(E) and (F). Rev. Rul. 77–334,
1977–2 C.B. 77. -
Publicly supported organization; limitation of support received from churches. The two percent limitation prescribed by Regs.
1.170A–9(e)(6)(i) does not apply to the support received by an exempt organization described in IRC 170(c)(2) from individual
churches described in IRC 170(b)(1)(A)(i) that are publicly supported and entitled to IRC 170(b)(1)(A)(vi) status. Rev. Rul.
78–95, 1978–1 C.B. 71. -
Private foundation; supporting organization; community trust. A community trust described in section 1.170A–9(e)(11) of the
regulations that was created by a community chest to hold permanently endowed charitable funds and to distribute income to
support local charitable organizations that are public charities is a supporting organization under IRC 509(a)(3) and is not
a private foundation, even if the publicly supported charities are not specified by name. Rev. Rul. 81–43, 1981–1 C.B. 350. -
Professional standards review organization (PSRO). An organization was established to perform the services of a professional
standards review organization (PSRO) pursuant to section 249F of the Social Security Amendments of 1972, and was designated
as a PSRO for a particular area by the Department of Health and Human Services (HHS). It derives all of its support from contracts
with HHS that provide for payment for all reasonable and necessary expenses incurred by it in the performance of its functions.
The organization qualifies for exemption under IRC 501(c)(3) and is not a private foundation under IRC 509(a) because it is
described in IRC 170(b)(1)(A)(vi). Rev. Rul. 74–553 distinguished Rev. Rul. 81–276, 1981–2 C.B. 128. -
Health care organizations; medicare and medicaid payments. Medicare and medicaid payments constitute gross receipts derived
from the exercise or performance of a health care organizations exempt activities for purposes of the support test of IRC
170(b)(1)(A)(vi) and 509(a)(2). Rev. Rul. 83-153, 1983–2 C.B. 48. -
Publicly supported; substantial and material changes in support. Guidelines set forth the circumstances under which grantors
or contributors will not be considered responsible for
“substantial and material”
changes in sources of financial support. Reg. 1.170A–9, 1.509(a)–3, 601.105, Rev. Proc. 81–6, 1981–1 C.B. 615. -
Rev. Proc. 89–23, 1989–1 C.B. 844 amplifies Rev. Proc. 81–6 in the following respects:
-
All grantors and contributors, including private foundations, may continue to rely on the guidelines in Rev. Proc. 81–6, pending
the issuance of regulations implementing the directions of congress in 1984 to permit greater reliance by private foundations
on IRS classification of new organizations in the first five years of such organizations existence. -
For purposes of IRC 4942(g) (qualifying distributions) and IRC 4945(g) (taxable expenditure), a private foundation making
gifts, grants and contributions to another organization may rely on the status of the recipient organization as not a private
foundation to the extent provided in Rev. Proc. 89–23.
-
-
Publicly supported; unusual grants. Guidelines set forth the circumstances under which grants or contributions will be considered
“unusual grants”
without benefit of an advance ruling. Reg. 1.170A–9, 1.509(a)–3, 601.105, Rev. Proc. 81–7, 1981–1 C.B. 615.