Tax-Exempt Organizations: Organizational Requirements (Portfolio 450)

Tax Management Portfolio No. 450, Tax-Exempt Organizations: Organizational Requirements, describes the organization aspects of organizations exempt from federal income taxation under the Internal Revenue Code of 1986, as amended (the Code). To view this Portfolio, visit Bloomberg Tax for a free trial.

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Tax Management Portfolio No. 450, Tax-Exempt Organizations: Organizational  Requirements, describes the organization aspects of organizations exempt from federal income taxation under the Internal Revenue Code of 1986, as amended (the Code). Tax-Exempt Organizations are required to meet both the Organizational Test and the Operational Test in order to qualify for tax-exempt status. This Portfolio emphasizes the Organizational Test. There is much overlap in the Organizational Test and the Operational Test so readers should be careful to consult both this portfolio and its companion Tax Management Portfolio No. 451, Tax-Exempt Organizations: Operational Requirements. After generally discussing the different types of tax-exempt organizations, the Portfolio concentrates on §501(c)(3) organizations because these organizations dominate the tax-exempt community. It does not discuss private foundations except to distinguish public charities from private foundations and to mention certain reporting requirements of private foundations. This Portfolio also does not address employee benefit plans or other types of retirement plans. These aspects of tax-exempt organizations are discussed in other Portfolios.

This Portfolio analyzes the organizational requirements of tax-exempt organizations. It discusses organizations exempt under §§501(a) and 501(c)(1) through (29), §521 farmers' cooperatives, §527 political organizations, §528 homeowners' associations, and §529 qualified tuition plans. Governmental entities and instrumentalities also are discussed. Charitable trusts and pooled income funds are briefly mentioned. This Portfolio focuses on the various types of public charities and their activities, and distinguishes public charities from private foundations.

The reporting and record-keeping requirements of exempt organizations are discussed in 452 T.M., Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects. Other issues relating to tax-exempt organizations discussed herein are covered in greater detail in other Portfolios, to which reference is made where appropriate.

This Portfolio may be cited as Webster, 450 T.M., Tax-Exempt Organizations: Organizational  Requirements.


Hugh K. Webster, Esq.

Hugh K. Webster, A.B., Middlebury College (1983); J.D., Duke Law School (1986); Author, 452 T.M., Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects; Author, 488 T.M., Fiduciary Duties of Nonprofit Directors and Officers; Author, 613 T.M., Lobbying and Political Expenditures; Author, 614 T.M., Trade Associations; Author, The Law of Associations (Matthew Bender & Company); Editor, Nonprofit Legal and Tax Letter.

Table of Contents

Detailed Analysis
I. General Considerations — Introduction
Introductory Material
A. History and Reasons for Tax Exemption
B. Statutory Construction of Exemption Provisions
II. Advantages to Tax Exemption
A. Exemption from Federal Income Tax
B. Exemption from State and Local Taxes
C. Eligibility for Deductible Contributions
D. Retroactive Effect of Tax-Exempt Application
E. Miscellaneous
III. Disadvantages to Tax Exemption
IV. The Organizational and Operational Tests of §501(c)(3)
Introductory Material
A. The Organizational Test
1. Types of Entities Qualifying for Exemption
2. Limitation on Purpose and Activities
3. Authorization of Legislative and Political Activity
4. Distribution of Assets on Dissolution
B. The Operational Test
V. Types of Tax-Exempt Organizations
Introductory Material
A. Section 501(c)(1): Instrumentalities of the United States
B. Sections 501(c)(2) and 501(c)(25): Title-Holding Organizations
1. Section 501(c)(2)
2. Section 501(c)(25)
C. Section 501(c)(3): Charitable Organizations
D. Section 501(c)(4): Social Welfare Organizations and Local Associations of Employees
1. Notice and Application Under §501(c)(4)
2. Social Welfare Organizations
3. Local Associations of Employees
E. Section 501(c)(5): Labor, Agricultural and Horticultural Organizations
1. Labor Organizations
2. Agricultural and Horticultural Organizations
F. Section 501(c)(6): Business Leagues
G. Section 501(c)(7): Social Clubs
H. Section 501(c)(8): Fraternal Beneficiary Societies
I. Section 501(c)(9): Voluntary Employees' Beneficiary Associations
1. Generally
2. Application for Recognition of Exemption
3. Benefits
J. Section 501(c)(10): Fraternal Lodge Societies
K. Section 501(c)(11): Teacher's Retirement Fund Associations
L. Section 501(c)(12): Life Insurance, Irrigation, Telephone and Similar Organizations
M. Section 501(c)(13): Cemetery Companies
N. Section 501(c)(14): Credit Unions and Mutual Insurance Funds
O. Section 501(c)(15): Small Insurance Companies
P. Section 501(c)(16): Crop-Financing Corporations
Q. Section 501(c)(17): Supplemental Unemployment Benefit Trusts
R. Section 501(c)(18): Employee-Funded Pension Trusts
S. Section 501(c)(19): Organizations of Past or Present Members of the Armed Forces
T. Former §501(c)(20): Group Legal Services Organizations
U. Section 501(c)(21): Black Lung Benefit Trusts
V. Section 501(c)(22): Certain ERISA Trusts
W. Section 501(c)(23): Armed Forces Organizations
X. Section 501(c)(24): ERISA Trusts
Y. Section 501(c)(26): State-Sponsored Health Insurance Coverage Organizations
Z. Section 501(c)(27): Workers' Compensation Insurance Pools
AA. Section 501(c)(28): National Railroad Retirement Investment Trust
BB. Section 501(c)(29): CO-OP Health Insurance Issuers
CC. Section 501(d): Religious and Apostolic Organizations
DD. Section 501(e): Cooperative Hospital Service Organizations
EE. Section 501(f): Cooperative Educational Investment Organizations
FF. Section 501(n): Charitable Risk Pools
GG. Section 501(o): Provider-Sponsored Organizations
HH. Section 501(q): Credit Counseling Organizations
II. Sections 521, 526, and 528: Farmers' Cooperatives, Shipowners' Protection and Indemnity Associations, and Homeowners' Associations
1. Farmers' Cooperatives
2. Shipowners' Protection and Indemnity Associations
3. Homeowners' Associations
JJ. Section 527: Political Organizations
KK. Section 529: Qualified Tuition Programs
LL. Section 529A: Qualified ABLE Programs
MM. Organizations Treated as Exempt for Certain Purposes
1. Generally
2. Section 664(c): Charitable Remainder Trusts
3. Section 642(c)(5): Pooled Income Funds
4. Section 4947(a)(1): Nonexempt Charitable Trusts
5. Section 4947(a)(2): Split-Interest Trusts
6. Foreign Charitable Organizations
7. Section 502: Feeder Organizations
VI. Governmental Entities and Instrumentalities
A. Introduction
B. Governmental Entities: Definitions
1. “Governmental Unit”
2. Political Subdivisions
3. “Instrumentality”
C. Tax Treatment of Governmental Entities
1. States and Political Subdivisions
2. Exclusion Under §115
D. Governmental Entities' Exemption Under §501(c)(3)
VII. Charitable Organizations — §501(c)(3) Generally
Introductory Material
A. Statutory Development
B. Theory of Exemption Under §501(c)(3)
C. Advantages and Disadvantages of Exemption Under §501(c)(3)
1. Advantages
2. Disadvantages
D. Collateral Benefits of Exemption Under §501(c)(3)
VIII. Distinction Between Public Charities and Private Foundations
Introductory Material
A. Background
B. Section 509: Private Foundations and Public Charities
1. Sections 170(b)(1)(A)(i)–170(b)(1)(A)(v) and 170(b)(1)(A)(ix) (“Public”) Organizations
a. Churches
b. Educational Organizations
c. Hospitals and Medical Research Organizations
(1) Hospitals
(2) Medical Research Organizations
d. University Endowment Funds
e. Governmental Entities
f. Agricultural Research Organizations
2. Sections 170(b)(1)(A)(vi) and 509(a)(2) Publicly Supported Organizations
a. Section 170(b)(1)(A)(vi) (“Donative”) Publicly Supported Organizations
(1) Definition of Support
(2) Public Support Tests
(3) Calculation of Public Support
(4) Definition of “Normally”
(5) Advance Rulings to New Organizations
b. Section 509(a)(2) (“Service Provider”) Publicly Supported Organizations
(1) Definition of Support
(2) Public Support Test
(3) Gross Investment Income Test
(4) Definition of “Normally”
(5) Advance Rulings to New Organizations
c. Advantages to Treatment Under §170(b)(1)(A)(vi) Rather Than §509(a)(2)
3. Section 509(a)(3) Supporting Organizations
4. Section 509(a)(4)
5. Donor Advised Funds
C. Private Foundations Generally
D. Advantages to Classification as a Public Charity
IX. Section 508 Notice Requirements
Introductory Material
A. Application for Recognition of Exemption Under §501(c)(3): §508(a)
1. In General
a. Time for Filing
b. Group Exemption Procedures
c. Contents of Form 1023
d. Revocation of Favorable Determination Letter
e. Suspension of Exempt Status and of Eligibility for Exempt Status
f. Form 1023-EZ
2. Exceptions to §508(a) Notice Requirement
B. Presumption of Private Foundation Status: §508(b)

Working Papers

Table of Worksheets
Worksheet 1 IRS Chart of the Types and Tax Treatment of Section 501(c) Organizations
Worksheet 2 Form 1023 Attachment
Worksheet 3 Common Tax Law Restrictions on Activities of Exempt Organizations
Worksheet 4 Sample Articles of Incorporation for a Charity
Worksheet 5 Sample Consent in Lieu of Organizational Meeting of Single Incorporator
Worksheet 6 Sample Consent in Lieu of Organizational Meeting of Board of Directors
Worksheet 7 Sample Unanimous Written Consent in Lieu of Meeting of the Board of Directors
Worksheet 8 Sample Unanimous Written Consent of Trustees in Lieu of a Meeting
Worksheet 9 Sample Minutes of Organizational Meeting of Directors
Worksheet 10 Sample Client Letter — Compliance for an Exempt Organization