Nonprofit OrganizationsNonprofit OrganizationsClass Nine: Public Class Nine: Public Charities – Corrected Charities – Corrected 4/16/044/16/04

Michael V. BourlandMichael V. Bourland

Michelle Coleman-JohnsonMichelle Coleman-Johnson

Bourland, Wall & Wenzel, P.C.Bourland, Wall & Wenzel, P.C.

Types of Public Types of Public CharitiesCharities ““Traditional” public charities – Section Traditional” public charities – Section

509(a)(1);170(b)(1)(A)(i)-(v)509(a)(1);170(b)(1)(A)(i)-(v)– By definition or activityBy definition or activity

Publicly supported charitiesPublicly supported charities– 509(a)(1);170(b)(1)(A)(vi) “donative” 509(a)(1);170(b)(1)(A)(vi) “donative”

public charitiespublic charities– 509(a)(2) “gross receipts” or “service 509(a)(2) “gross receipts” or “service

provider” public charitiesprovider” public charities Supporting Organizations – 509(a)(3)Supporting Organizations – 509(a)(3)

““Traditional” Public Traditional” Public Charities - 170(b)(1)Charities - 170(b)(1)(A)(A) (i) Church or convention of churches(i) Church or convention of churches (ii) Educational organization(ii) Educational organization

– Must normally maintain a regular faculty Must normally maintain a regular faculty and curriculum and normally have a and curriculum and normally have a regularly enrolled body of students in regularly enrolled body of students in attendance at the place where attendance at the place where educational activities are regularly educational activities are regularly carried oncarried on

(iii) hospital/medical research facility(iii) hospital/medical research facility

““Traditional” public Traditional” public charities - 170(b)(1)charities - 170(b)(1)(A) (A) (iv) organizations that support or (iv) organizations that support or

benefit of state college or benefit of state college or universityuniversity

(v) governmental unit(v) governmental unit (vi) “donative” public charity(vi) “donative” public charity

““Donative” Public Donative” Public CharityCharity Referenced in 509(a)(1) and Referenced in 509(a)(1) and

170(b)(1)(A)(vi)170(b)(1)(A)(vi) Does not provide servicesDoes not provide services Must meet public support testMust meet public support test Example: Community FoundationExample: Community Foundation

Support Test for Support Test for 509(a)(1) Public 509(a)(1) Public CharityCharity Must receive a substantial part of Must receive a substantial part of

its support from the public or its support from the public or governmental unitsgovernmental units

Two “either/or” testsTwo “either/or” tests– Mechanical TestMechanical Test– Facts and Circumstances TestFacts and Circumstances Test

Mechanical Test for Mechanical Test for 509(a)(1)509(a)(1) Must normally receive at least 33 1/3% Must normally receive at least 33 1/3%

of total support from the publicof total support from the public– Numerator (Public Support): Numerator (Public Support):

gifts and grants from private donors, private gifts and grants from private donors, private foundations and corporationsfoundations and corporations

Gifts and grants from public donors Gifts and grants from public donors (governmental agencies or certain other publicly (governmental agencies or certain other publicly supported charities)supported charities)

Membership feesMembership fees Tax revenues levied on behalf of the organizationTax revenues levied on behalf of the organization Governmental services/facilities provided without Governmental services/facilities provided without

chargecharge

Mechanical TestMechanical Test

Denominator (Total Support)Denominator (Total Support)– Includes everything BUT:Includes everything BUT:

Gross receipts incomeGross receipts income Unusual grantsUnusual grants Voluntary servicesVoluntary services Capital gainsCapital gains In other words, these items are In other words, these items are

excluded from the support fraction excluded from the support fraction entirelyentirely

Large Gifts – Special Large Gifts – Special RulesRules If a gift exceeds 2% of the If a gift exceeds 2% of the

organization’s total support for the organization’s total support for the taxable periodtaxable period– Total gift is included as Total SupportTotal gift is included as Total Support– Only the portion up to the 2% is included Only the portion up to the 2% is included

in Public Supportin Public Support Gifts from disqualified personsGifts from disqualified persons

– Counted as total support/public support in Counted as total support/public support in accordance with rules aboveaccordance with rules above

Facts and Facts and Circumstances TestCircumstances Test If the mechanical test cannot be met, If the mechanical test cannot be met,

the organization may be considered the organization may be considered publicly supported if it normally publicly supported if it normally receives a substantial part (10% or receives a substantial part (10% or more) of its support from the more) of its support from the public/governmental units and public/governmental units and demonstrates other facts and demonstrates other facts and circumstances that it is organized and circumstances that it is organized and operated to attract public/government operated to attract public/government support (see Treas. Reg. 1.170A-9)support (see Treas. Reg. 1.170A-9)

““Service Provider” Service Provider” Public CharityPublic Charity Described in 509(a)(2)Described in 509(a)(2) Generally has membersGenerally has members Provides services or has “gross Provides services or has “gross

receipts”receipts” Must meet public support testMust meet public support test Example: Scout OrganizationsExample: Scout Organizations

Support Test – 509(a)Support Test – 509(a)(2)(2) ““gross receipts” or “service gross receipts” or “service

provider” public charity must provider” public charity must meet the meet the – ““more than 1/3” support testmore than 1/3” support test– ““not more than 1/3” support testnot more than 1/3” support test

““More than 1/3” More than 1/3” Support TestSupport Test Must normally receive more than Must normally receive more than

1/3 of its support from the public1/3 of its support from the public– Numerator (Public Support)Numerator (Public Support)

Amounts from governmental unitsAmounts from governmental units Amounts from other than disqualified Amounts from other than disqualified

personspersons Amounts received from other public Amounts received from other public

charities, but not from other 509(a)(2) or charities, but not from other 509(a)(2) or supporting organizationssupporting organizations

Gross receiptsGross receipts

““More than 1/3” More than 1/3” Support TestSupport Test Denominator (Total Support)Denominator (Total Support)

– Includes everything BUT:Includes everything BUT: Unusual grantsUnusual grants Voluntary servicesVoluntary services Capital gainsCapital gains In other words, these items are In other words, these items are

excluded from the support fraction excluded from the support fraction entirely Total Supportentirely Total Support

Large ContributionsLarge Contributions

Receipts from Disqualified PersonsReceipts from Disqualified Persons– Not counted at all as Public Support, Not counted at all as Public Support,

but included in Total Supportbut included in Total Support– DPs include Substantial ContributorsDPs include Substantial Contributors

Any person who has contributed more Any person who has contributed more than $5,000 if this amount is more than than $5,000 if this amount is more than 2% of all gifts received by the 2% of all gifts received by the organization since its creation (and family organization since its creation (and family members, etc. of SC)members, etc. of SC)

Gross ReceiptsGross Receipts

AdmissionsAdmissions Sales of merchandiseSales of merchandise Performance of servicesPerformance of services Furnishing of facilitiesFurnishing of facilities Counted as Public Support only to the Counted as Public Support only to the

extent the amount received from each extent the amount received from each individual does not exceed $5,000 or individual does not exceed $5,000 or 1% of the Total Support for the year1% of the Total Support for the year

Public Support does not include UBTIPublic Support does not include UBTI

““Not More Than 1/3” Not More Than 1/3” Support TestSupport Test No more than 1/3 of total support No more than 1/3 of total support

from gross investment income from gross investment income plus the excess of UBTI over the plus the excess of UBTI over the amount of tax imposed on such amount of tax imposed on such UBTIUBTI

““Normally”/Unusual Normally”/Unusual GrantsGrants ““Normally”Normally”

– Initially a 5 year advance ruling periodInitially a 5 year advance ruling period– Thereafter, a 4 year moving averageThereafter, a 4 year moving average

Unusual GrantsUnusual Grants– There is criteria in the Treas. Regs. There is criteria in the Treas. Regs.

that provide guidance on what is an that provide guidance on what is an unusual grant. Unusual grants can be unusual grant. Unusual grants can be excluded from the support fractionexcluded from the support fraction

Major DistinctionsMajor Distinctions509(a)(1)509(a)(1) 509(a)(2)509(a)(2) Gifts from DPs Gifts from DPs

included in public included in public support, up to support, up to the 2% thresholdthe 2% threshold

Substantial Substantial contributor is contributor is determined over determined over taxable period (4 taxable period (4 years)years)

““at least” 1/3at least” 1/3

Gifts from DPs Gifts from DPs excluded from excluded from public supportpublic support

Substantial Substantial contributor is contributor is determined from determined from inception of inception of organizationorganization

““more than 1/3”more than 1/3”

Supporting Supporting OrganizationsOrganizations Described in 509(a)(3)Described in 509(a)(3) Three TypesThree Types

– Type I – Parent/Child RelationshipType I – Parent/Child Relationship– Type II – Brother/Sister RelationshipType II – Brother/Sister Relationship

Type III Type III Must not be controlled by a Must not be controlled by a

disqualified persondisqualified person

Organizational TestOrganizational Test

Org Docs mustOrg Docs must– State that purposes of the organization are State that purposes of the organization are

limited to the purposes or one or more limited to the purposes or one or more benefited public charitiesbenefited public charities

– Not expressly empower the SO to engage Not expressly empower the SO to engage in activities that do not further the in activities that do not further the charitable purposes of the benefited charitycharitable purposes of the benefited charity

– Designate by class or purpose or by name Designate by class or purpose or by name the public charities to be benefitedthe public charities to be benefited

– Not authorize the SO to benefit any other Not authorize the SO to benefit any other public or private charity or charitiespublic or private charity or charities

Operational TestOperational Test

Must be “operated exclusively” for Must be “operated exclusively” for the support of the supported the support of the supported organizationsorganizations– ““permissible beneficiary” requirementpermissible beneficiary” requirement

Providing for the charitable class benefited Providing for the charitable class benefited by the specified public charityby the specified public charity

– ““permissible activity” requirementpermissible activity” requirement Pay to the supported organization or use Pay to the supported organization or use

funds to carry on an independent activity funds to carry on an independent activity that supports or benefits the supported that supports or benefits the supported organizationorganization

Type I Supporting OrgType I Supporting Org

Operated, supervised or controlled by one or Operated, supervised or controlled by one or more publicly supported organizationsmore publicly supported organizations– Control by publicly supported orgControl by publicly supported org– Majority of officers, directors, trustees appointed by Majority of officers, directors, trustees appointed by

supported orgsupported org– Purposes must be similar to and no broader than Purposes must be similar to and no broader than

that of supported orgthat of supported org– Specified organization requirementSpecified organization requirement

Designate by name in governing docsDesignate by name in governing docs Designate by class in governing docsDesignate by class in governing docs OrOr Have historic and continuing relationship with Have historic and continuing relationship with

supported org and by virtue of this relationship have supported org and by virtue of this relationship have developed a substantial identity of interest between developed a substantial identity of interest between the orgsthe orgs

Type II Supporting OrgType II Supporting Org

Supervised or controlled in Supervised or controlled in connection with publicly connection with publicly supported charitysupported charity– Common supervision or controlCommon supervision or control

Such that SO will be responsive to Such that SO will be responsive to needs and requirements of supported needs and requirements of supported orgorg

– Mere making of payments not Mere making of payments not enough of a connectionenough of a connection

Type III Supporting Type III Supporting OrgOrg ““Operated in Connection With” one Operated in Connection With” one

or more publicly supported charitiesor more publicly supported charities– Must specify organization by nameMust specify organization by name– Not permitted to substitute supported Not permitted to substitute supported

organizations, unless predicated on organizations, unless predicated on something out of organization’s controlsomething out of organization’s control

– Most risky relationship, must meet two Most risky relationship, must meet two additional testsadditional tests

Responsiveness TestResponsiveness Test

Alternative I – Must haveAlternative I – Must have1.1. ““appointee requirement”appointee requirement”

One or more officers, directors or trustees One or more officers, directors or trustees appointed by supported orgappointed by supported org

2.2. OR “common director requirement”OR “common director requirement” One or more common director/trustee/officerOne or more common director/trustee/officer

3.3. OR “close and continuous requirement”OR “close and continuous requirement” Close working relationshipClose working relationship

4.4. AND “significant voice requirement”AND “significant voice requirement” By reason of 1,2, or 3, the publicly supported By reason of 1,2, or 3, the publicly supported

org has a significant voice in the investment org has a significant voice in the investment policies of the SO, the timing of grants, etc., policies of the SO, the timing of grants, etc., and directing the use of income or assets of the and directing the use of income or assets of the SOSO

Responsiveness Test Responsiveness Test Alternative II Alternative II Alternatively, responsiveness may Alternatively, responsiveness may

be shownbe shown– SO is a trust under state lawSO is a trust under state law– Each specified supported org is a Each specified supported org is a

named beneficiary under the trust’s named beneficiary under the trust’s governing instrumentgoverning instrument

– And supported org has power to And supported org has power to enforce the trust and compel enforce the trust and compel accounting under state lawaccounting under state law

Integral Part TestIntegral Part Test

Two AlternativesTwo Alternatives– ““But For” TestBut For” Test

““but for” the activities of the SO, the supported but for” the activities of the SO, the supported organization would carry on the activity itselforganization would carry on the activity itself

– Or “Substantially All Income” TestOr “Substantially All Income” Test Must pay substantially all income (85%)Must pay substantially all income (85%)

– Must ensure attentivenessMust ensure attentiveness– Substantial amount of SO’s total support must go Substantial amount of SO’s total support must go

to one or more of the supported charitiesto one or more of the supported charities ““Sufficient Part of Total Support” TestSufficient Part of Total Support” Test

““Sufficient Part of Sufficient Part of Total Support”Total Support” Must represent a sufficient part of Must represent a sufficient part of

supported organization’s total supported organization’s total support to ensure attentivenesssupport to ensure attentiveness

Must be such that the supported Must be such that the supported organization will be attentive to organization will be attentive to the SO – needs to be a substantial the SO – needs to be a substantial activityactivity

Community Community FoundationsFoundations ““donative public charity”donative public charity” Treas. Reg. 1.170A-9 lists additional Treas. Reg. 1.170A-9 lists additional

requirementsrequirements– Commonly known as Community Foundation, Commonly known as Community Foundation,

Community Trust or Community FundCommunity Trust or Community Fund– Common governing instrumentCommon governing instrument– Common governing bodyCommon governing body– Governing body needs these powersGoverning body needs these powers

Variance powerVariance power Power to replace trustee, custodian or agent for Power to replace trustee, custodian or agent for

breach of fiduciary dutybreach of fiduciary duty Must commit itself to reasonable return on Must commit itself to reasonable return on

investmentsinvestments Must prepare periodic financial reports treating Must prepare periodic financial reports treating

component funds as funds of the organizationcomponent funds as funds of the organization

Component FundsComponent Funds

If fund is a separate legal entity (trust) If fund is a separate legal entity (trust) the community foundation must meet the community foundation must meet single entity requirementssingle entity requirements

If a separate legal entity, must subject If a separate legal entity, must subject itself to common governing instrument itself to common governing instrument of community foundationof community foundation

May not be directly or indirectly May not be directly or indirectly subjected by the donor to any material subjected by the donor to any material restriction or conditionrestriction or condition

Donor Advised FundsDonor Advised Funds

No definition in IRC or Treas RegsNo definition in IRC or Treas Regs Donor creates fund with CF and Donor creates fund with CF and

makes periodic recommendations makes periodic recommendations regarding distribution of fundsregarding distribution of funds

Donor may recommend but not Donor may recommend but not requirerequire

Field of Interest FundsField of Interest Funds

May instruct CF to limit the use of May instruct CF to limit the use of funds to a specific charitable funds to a specific charitable purposepurpose– Ex. Art, AIDS/Cancer Research, Ex. Art, AIDS/Cancer Research,

youth services, etc.youth services, etc.

Intermediate Intermediate SanctionsSanctions Public charities are not subject to Public charities are not subject to

the private foundation excise the private foundation excise taxes under IRC 4940-4945taxes under IRC 4940-4945

Instead, subject to “intermediate Instead, subject to “intermediate sanctions,” the rules regarding sanctions,” the rules regarding excess benefit transactions set excess benefit transactions set forth in IRC 4958 and Treas Regs forth in IRC 4958 and Treas Regs 53.4958-1 through 53-4958-853.4958-1 through 53-4958-8

Excess Benefit Excess Benefit TransactionTransaction Transactions between public Transactions between public

charity and Disqualified Person charity and Disqualified Person must be at fair market valuemust be at fair market value

Any excess benefit is subject to Any excess benefit is subject to an excise taxan excise tax

Tax ImposedTax Imposed

On Disqualified PersonOn Disqualified Person– 25% of excess benefit25% of excess benefit– 200% of excess benefit if not 200% of excess benefit if not

correctedcorrected On ManagersOn Managers

– 10% of excess benefit10% of excess benefit

Disqualified PersonDisqualified Person

Difference from DP for private Difference from DP for private foundation purposesfoundation purposes

Defined as any person who is in a Defined as any person who is in a position to exercise substantial position to exercise substantial influence over the affairs of the influence over the affairs of the charity at any time during a 5 year charity at any time during a 5 year period ending on date of transactionperiod ending on date of transaction– Similar family/business attribution rules Similar family/business attribution rules

to PFto PF

Who has substantial Who has substantial influence?influence? Presidents, CEOs, COOsPresidents, CEOs, COOs Treasurer and CFOsTreasurer and CFOs Persons with material financial Persons with material financial

interest in a provider sponsored interest in a provider sponsored organization (nonprofit hospital)organization (nonprofit hospital)

Deemed Not to Have Deemed Not to Have Substantial InfluenceSubstantial Influence Tax exempt organizations listed Tax exempt organizations listed

in 501(c)(3)in 501(c)(3) Certain 501(c)(4) organizationsCertain 501(c)(4) organizations Employees receiving economic Employees receiving economic

benefits of less than a specified benefits of less than a specified amount in a taxable yearamount in a taxable year

Facts and Circumstances govern Facts and Circumstances govern in other instancesin other instances

What is reasonable?What is reasonable?

All payments to a DP must be All payments to a DP must be reasonablereasonable

Organization can create a Organization can create a presumption of reasonableness presumption of reasonableness by following certain proceduresby following certain procedures– Transaction approved by authorized Transaction approved by authorized

bodybody– Based on comparability dataBased on comparability data– Adequately documentedAdequately documented