Pages 10 and 11 - Part X - Public Charity StatusCurrent tax law divides all 501(c)(3) organizations into two broad
subcategories - public charities and private foundations. When you
file a 501(c)(3) application, you are actually asking the IRS to
decide not only whether your group qualifies as a 501(c)(3), but
also whether it is publicly supported.
Page 10 - Part X - Question 1 - Are you a private foundation?
A private foundation is an organization that receives most of its
support from a limited number of sources, such as one family or
one corporation.
It is generally less favorable to be a 501(c)(3) private foundation
because these organizations must pay a 1% or 2% tax on interest,
dividends, capital gains, and other investment income, and are
subject to a wide variety of restrictions with respect to how they
invest their assets and conduct their operations. Percentage limits
placed on the amount donors can deduct on their individual income
tax returns are also lower.
I am not including detailed coverage of private foundations in this
website because I have seen too many small groups get themselves in
trouble with the "wide variety of restrictions" mentioned above. If
you are forming this type of group, I recommend you sit down with a
professional who can alert you to the potential pitfalls as well as
help you prepare your 501(c)(3) application.
Page 10 - Part X - Questions 2 through 4 - Private Operating Foundation
Private Operating Foundations are outside the scope of this website.
If you are forming this type of group, you should seek professional
help in preparing your 501(c)(3) application.
Page 10 - Part X - Question 5 - Public Charity
Some organizations are public charities solely because of the
activities they carry on (boxes 5a through 5f on page 10 and 11
of Form 1023):
- Churches (if you check this box, you must complete Schedule A
of Form 1023; click here for information about Sandy Deja's book
about Schedule A)
- Schools
- Hospitals
- Supporting Organizations
- Testing for Public Safety OrganizationsOther organizations are public charities because they receive at
least one third of their support from the general public. Organiza-
tions whose public support is mostly in the form of gifts or con-
tributions would check box g on page 11 of Form 1023; organizations
whose public support is mostly in the form of payments for goods or
services, such as admissions to cultural events, fees for therapy,
or payments at fundraising events, would check box h. Many groups
have a mixture of types of income. It is perfectly OK to simply
check box i and let the IRS decide for you.
Page 10 - Part X - Question 6 - Advance Ruling
Organizations that are public charities because they receive at
least one third of their support from the general public must com-
plete a tax year of at least eight months before they can receive
a permanent public charity determination from the IRS. Because of
this, many new organizations receive a temporary or "advance" ruling
rather than a permanent, "definitive," ruling.
With an Advance Ruling, the IRS rules that an organization is likely
to be publicly supported, and agrees to treat the organization as a
public charity for an initial five year period. Because five years
is longer than the normal IRS statute of limitations, organizations
receiving an Advance Ruling must complete the Consent on page 11
of Form 1023 to extend the statute of limitations to cover the
additional years.
At the end of an Advance Ruling the IRS will give the organization
an opportunity to show that it is, in fact, publicly supported. With
an Advance Ruling, the 501(c)(3) status of the organization is not
in question. It is only foundation status, a sort of subcategory
under 501(c)(3), that is still up in the air.
An organization that...
1. Has closed at least one tax year which was at least eight full
months long, and
2. Meets one of the one third tests
...can receive a permanent or "definitive" ruling that it is a
public charity. If this applies to your group, check box 6b
indicating you are requesting a definitive ruling, and provide
the additional information requested.
For additional information about Advance Rulings, click on the link
to Advance Ruling Letters at the bottom of this page.
Page 10 - Part X - Question 7 - Unusual Grants
Read the Form 1023 Instructions or the definition of unusual grants
given in IRS Publication 557 before deciding that any amounts
received are unusual grants.
