Private Foundations and Public Charities — Definition and Classification, written by Lauren Watson Cesare, Esq., San Jose, California, discusses the definition and classification of private foundations and public charities.
Under §509, enacted by The Tax Reform Act of 1969, certain §501(c)(3) organizations (charitable, educational, religious organizations) are classified as private foundations. Organizations classified as private foundations are subject to restrictions and requirements in addition to those applicable to exempt charities generally. Under §4942(j)(3), also added by the 1969 Tax Reform Act, certain private foundations, known as private operating foundations, are exempted from some of those burdens placed on private foundations. Certain private operating foundations, known as exempt operating foundations, are also exempt from the §4940 tax on investment income. Certain nonoperating private foundations also receive special treatment.
This Portfolio discusses the definition of and types of private foundations under §509 and other relevant Code provisions, including private operating foundations described in §4942(j)(3) and private nonoperating foundations described in §170(b)(1)(A)(vii). It contains a detailed discussion of public charities, as described in §509(a)(1) through (4), and brief discussions of nonexempt trusts subject to the private foundation rules.
This Portfolio discusses the background of §§509 and 4942(j)(3), outlines the additional restrictions and requirements applicable to private foundations to which public charities are not subject, and contains an in-depth discussion of the qualification of public charities under §509(a)(1) through (4) and operating foundations under §4942(j)(3).
Since §509(a)(1) is essentially a cross reference to §170(b)(1)(A)(i) through (vi), this Portfolio contains detailed discussions of these provisions, as well as §170(b)(1)(A)(vii) pertaining to certain nonoperating private foundations.
This Portfolio also contains a brief discussion of foreign public charities and private foundations. In addition, this Portfolio contains materials relating to the effect of the classifications discussed. Membership in these classifications has important effects on the deductibility of contributions to and the operations of the organization.
Private Foundations and Public Charities — Definition and Classification allows you to benefit from:
This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.
Detailed Analysis
I. Introduction
A. General
B. Background
II. Organizations Subject to Classification
III. Advantages and Disadvantages of Public Charities and Private Foundations
B. Public Charities
C. Private Operating Foundations
IV. Scope of § 509
A. Organizations Subject to § 509
B. Relationship Between § § 501(c)(3) and 509
C. Presumption of Private Foundation Status
D. Termination of Private Foundation Status
V. Public Charity Status Based on Activities: § 509(a)(1) Organizations
B. Modification of § 170(b)(1)(A)
C. Effect of TRA '69 on § 170(b)(1)(A)
D. Organizations Qualifying Under More Than One Paragraph of § 509(a)
E. Summary of Organizations Described in § 509(a)(1)
F. Statutory Activity as Principal Activity
G. Churches and Conventions or Associations of Churches
H. Certain Educational Organizations
I. Certain Hospital and Medical Research Organizations
1. Hospitals
2. Medical Research Organizations
3. Cooperative Hospital Service Organizations
J. University Endowment Foundations
1. In General
2. Cooperative Service Organizations of Educational Institutions
K. Governmental Units
VI. Publicly Supported Organizations
B. Application of § § 170(b)(1)(A)(vi) and 509(a)(2)
VII. Section 509(a)(2) Organizations
B. Determination of Support
C. Public Support
1. General
2. Limitation on Public Support
a. Disqualified Persons
b. Government Bureaus
D. Distinction Between § 509(a)(2)(A)(i) and (ii) Receipts
1. Gifts and Contributions Distinguished from Gross Receipts
2. Grants Distinguished from Gross Receipts
3. Membership Fees
E. Unrelated Business Activities
F. Gross Investment Income
G. Special Rules of Attribution
1. Attribution of Investment Income
2. Relationships Created for Avoidance Purposes
H. Definition of "Normally" for Purposes of Determining Support
1. General Rule
2. Exclusion of Unusual Grants
3. Newly Created Organizations
a. No Advance Ruling
b. Advance Ruling
I. Effect of Ruling on Grantors and Contributors
2. Special Situation
VIII. Section 170(b)(1)(A)(vi) Organizations
B. 1966 Regulations
1. "Mechanical" Test
a. Support
b. Public Support
2. "Facts and Circumstances" Test
a. Factors Considered
b. Scope of "Facts and Circumstances" Test
C. Effect of § 509(a)(2) on 1966 Regulations
D. Current Regulations
2. 3313% of Support Test
3. Revised Definition of "Support"
4. "Facts and Circumstances" Test
a. Percentage of Support
b. Sources of Support
c. Representative Governing Body
d. Availability of Public Facilities or Services
e. Public Participation in Programs or Policies
f. Membership Organizations
5. Definition of "Normally"
a. Existing Organizations
b. New Organizations
E. Organizations Qualifying Under Both § 509(a)(1) and (2)
IX. Community Trusts
B. Problems Under 1966 Regulations
C. Proposed Regulations
1. Support Test
2. Structural Test
3. Administration Test
4. Distribution Test
5. Newly Created Organizations
6. Status of Component Trusts
D. Final Regulations
2. Treatment as a Single Entity
a. Name
b. Common Instrument
c. Common Governing Body
d. Exercise of Powers
e. Rate of Return
f. Common Reports
g. Component Parts
3. Transitional Rules
a. Eligible Organizations
b. Substance of Transitional Rules
X. Supporting Organizations: § 509(a)(3)
1. Purpose Requirement
2. Relationship Requirement
3. Control Requirement
C. Purpose Requirement
1. Organizational Test
a. Purposes
b. Specified Organizations
2. Operational Test
3. Noncharitable Beneficiary Organizations
D. Relationship Requirement
1. "Operated, Supervised, or Controlled By"
2. "Supervised or Controlled in Connection With"
3. "Operated in Connection With"
a. Responsiveness Test
b. Integral Part Test
c. Transitional Rules for Certain Pre-1970 Trusts
E. Control Requirement
2. Proof of Independent Control
XI. Section 509(a)(4) Organizations
XII. Private Operating Foundations
B. The Income Test
1. Qualifying Direct Distributions
2. "Substantially All"
3. Adjusted Net Income
4. Minimum Investment Return
C. The Alternative Tests
1. Assets Test
2. Endowment Test
3. Support Test
D. Computation Periods
E. Exempt Operating Foundations
XIII. Special Private Nonoperating Foundations
B. Distributing Foundations Under § 170(b)(1)(A)(vii) and (E)(ii)
C. Private Foundations Maintaining a Common Fund Under § 170(b)(1)(A)(vii) and (E)(iii)
XIV. Foreign Exempt Organizations
B. Comparison of Taxes on Investment Income of Foreign and Domestic Private Foundations
C. Withholding on Foreign Exempt Organizations
XV. Nonexempt Charitable Trusts
B. Charitable Trusts
1. Definition
2. Application
C. Split-Interest Trusts
3. Exemption from Certain Excise Taxes
Working Papers
Table of Worksheets
Other Sources
Worksheet 1 Legislative History Materials
Worksheet 2 I.R.M. 7.8.3, Private Foundations Handbook, Ch. 2â€"6
Worksheet 3 Checklist for Public Charity or Private Foundation Status
Worksheet 4 Letter to Founder of Newly-Created Private Foundation
Worksheet 5 IRS National Office Section 501(c)(3) Determination Letter
Bibliography
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