Private Foundations and Public Charities — Definition and Classification (Portfolio 456)

Tax Management Portfolio, Private Foundations and Public Charities — Definition and Classification, No. 456, discusses the definition and classification of private foundations and public charities.

To view this Portfolio, take a free trial to Bloomberg Tax

Bloomberg Tax

This Portfolio is available with a subscription to Bloomberg Tax, a comprehensive research solution including over 500 Tax Management Portfolios, practice tools, primary sources and timely news.


Tax Management Portfolio, Private Foundations and Public Charities — Definition and Classification, No. 456, 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. Those private operating foundations, known as exempt operating foundations, are exempt from the §4940 tax on investment income as well. Certain non-operating private foundations also receive special treatment.
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 private foundations and public charities. See 877 T.M., Private Foundations and Public Charities — Termination (§507) and Special Rules (§508), for a detailed discussion of the procedures for applying for exemption and notification of nonprivate foundation status. See 459 T.M., Supporting Organizations, for an in-depth discussion of §509(a)(3) supporting organizations, 484 T.M. Tax Issues of Religious Organizations, 873-2nd T.M. Nonprofit Healthcare Organizations: Federal Income Tax Issues, 450 T.M. Tax-Exempt Organizations: Organizational Requirements, and 451 T.M. Tax-Exempt Organizations: Operational Requirements, for in depth discussions of other related topics.
This Portfolio may be cited as Cesare, 456 T.M., Private Foundations and Public Charities — Definition and Classification.


Lauren Watson Cesare, Esq.

Lauren Watson Cesare, B.A., University of California at Davis; J.D., Hastings College of Law, University of California; LL.M. in Taxation, New York University School of Law; board of directors, Spiritmuv, New York, New York; member, Santa Clara County Bar Association., Section of Taxation, admitted to practice, California, U.S. Tax Court. Lauren Cesare is also the author of 877 T.M., Private Foundations and Public Charities — Termination (§507) and Special Rules (§508).

Table of Contents

Portfolio 456-1st: Private Foundations and Public Charities — Definition and Classification

 Portfolio Description


 Technical Advisors


 Detailed Analysis

 I. Introduction

 A. General

 B. Background

 II. Organizations Subject to Classification

 III. Advantages and Disadvantages of Public Charities and Private Foundations

 A. General

 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: Section 509(a)(1) Organizations

 A. General

 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

 a. Community Benefit Standard

 b. Additional Requirements for Hospitals Under § 501(r)

 c. Section 170(b)(1)(A)(iii) Requirements

 2. Medical Research Organizations

 3. Cooperative Hospital Service Organizations

 J. University Endowment Foundations

 1. General

 2. Cooperative Service Organizations of Educational Institutions

 K. Governmental Units

 VI. Publicly Supported Organizations

 A. General

 B. Application of § § 170(b)(1)(A)(vi) and 509(a)(2)

 VII. Section 509(a)(2) Organizations

 A. General

 B. Determination of Support

 C. Public Support

 1. General

 2. Limitations 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. General Rule for Years Beginning Prior to 2008

 3. Exclusion of Unusual Grants

 4. Newly Created Organizations

 a. Taxable Years After 2007

 b. Taxable Years Before 2008

 (1) No Advance Ruling

 (2) Advance Ruling

 c. Factors Considered in Determining Reasonable Expectation of Satisfying Support Tests

 5. Transition Rules

 I. Effect of Ruling on Grantors and Contributors

 1. General

 2. Taxable Years Prior to 2008

 J. Methods of Accounting

 VIII. Section 170(b)(1)(A)(vi) Organizations

 A. General

 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

 1. General

 2. 331/3 % of Support Test

 3. Revised Definition of “Support”

 a. General

 b. Limitations on Public Support Per Donor

 c. Unusual Grants

 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. General Rule

 b. Existing Organizations for Taxable Years Beginning Prior to 2008

 c. Newly Created Organizations in Taxable Years After 2007

 d. New Organizations in Taxable Years Before 2008

 6. Effect of Ruling on Grantors and Contributors

 7. Transition Rules

 E. Organizations Qualifying Under Both § 509(a)(1) and (2)

 F. Methods of Accounting

 IX. Community Trusts

 A. General

 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

 1. General

 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

 X. Donor-Advised Funds

 A. General

 B. Definitions

 1. Donor-Advised Fund

 2. Sponsoring Organization

 3. Fund Manager

 C. Excise Tax on Taxable Distributions

 D. Tax on Prohibited Benefits

 E. Tax on Excess Business Holdings

 F. Tax on Excess Benefit Transactions

 1. General

 2. Automatic Excess Benefit Transaction

 3. Disqualified Persons

 G. Reporting and Disclosure

 XI. Supporting Organizations: Section 509(a)(3)

 A. General

 1. Purpose Requirement

 2. Relationship Requirement

 3. Control Requirement

 B. Background

 C. Purpose Requirement

 1. Organizational Test

 a. Purposes

 b. Specified Organizations

 2. Operational Test

 3. Noncharitable Supported Organizations

 D. Relationship Requirement

 1. Type I Supporting Organizations — “Operated, Supervised, or Controlled By”

 2. Type II Supporting Organizations — “Supervised or Controlled in Connection With”

 3. Type III Supporting Organizations — “Operated in Connection With”

 a. Notification Requirement

 b. Responsiveness Test

 c. Integral Part Test

 (1) Integral Part Test Prior to the Pension Protection Act of 2006

 (2) Integral Part Test After the Pension Protection Act of 2006

 (a) Functionally Integrated Type III Supporting Organizations

 (b) Non-Functionally Integrated Type III Supporting Organizations

 (i) Distribution Requirement

 (ii) Attentiveness Requirement

 d. Transitional Rules for Certain Pre-1970 Trusts

 (1) Transition Rules Prior to the Pension Protection Act of 2006

 (2) Transition Rules Under the Proposed Regulations

 e. Prohibition of Support of Foreign Organizations

 4. Gifts to Organizations Controlled by Donors

 5. Excess Business Holdings Rules

 E. Control Requirement

 1. General

 2. Proof of Independent Control

 F. Disclosure Requirements

 G. Automatic Excess Benefit Transaction Rules for Supporting Organizations

 XII. Section 509(a)(4) Organizations

 XIII. Private Operating Foundations

 A. General

 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

 XIV. Special Private Nonoperating Foundations

 A. General

 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)

 XV. Foreign Exempt Organizations

 A. General

 B. Comparison of Taxes on Investment Income of Foreign and Domestic Private Foundations

 C. Withholding on Foreign Exempt Organizations

 XVI. Nonexempt Charitable Trusts

 A. General

 B. Charitable Trusts

 1. Definition

 2. Application

 C. Split-Interest Trusts

 1. Definition

 2. Application

 3. Exemption from Certain Excise Taxes

Working Papers

 Working Papers

 Table of Worksheets

 Other Sources

 Worksheet 1 Legislative History Materials

 Worksheet 2 Checklist for Public Charity or Private Foundation Status

 Worksheet 3 Letter to Founder of Newly-Created Private Foundation