501(c)(3) Status
In order to qualify under Section 501(c)(3) of the Code, an organization must be organized and operated exclusively for one or more of the following limited purposes, including, but not limited to, charitable, educational, scientific, and religious purposes. Regardless of its identified purpose, a 501(c)(3) organization cannot participate in any political campaign on behalf of or in opposition to any candidate running for public office. However, such an organization can elect to participate in limited lobbying to influence legislation or public opinion provided that lobbying expenditures do not exceed a certain amount. Finally, no part of a 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. A 501(c)(3) organization must disclose its substantial contributors on its Form 990 filed with the Internal Revenue Service (the “Service”) and must make such list available to the public.
Section 501(c)(3) organizations are deemed to be “private foundations” which are subject to significant restrictions and excise taxes unless the organization can establish that it is a “public charity” because it receives a substantial amount of financial support from the public (Section 509(a)(1) or Section 509(a)(2)) or because it is affiliated with one or more publicly-supported charitable organizations (Section 509(a)(3). Specifically, in general, a 501(c)(3) organization will qualify under Section 509(a)(1) as a public charity if it receives at least one-third of its financial support from the public, governmental entities, or membership fees, with certain limitations. Under Section 509(a)(2), a public charity’s one-third support may also come from gross receipts from activities directly related to its tax-exempt function. However, unlike a 509(a)(1) public charity, a 509(a)(2) public charity cannot receive total gross investment income greater than one-third of the charity’s total financial support. Although there is not a similar limit on investment income for 509(a)(1) public charities, substantial investment income may affect whether the charity is meeting its one-third public support requirement.
You asked whether there are limits on the ability of an organization exempt under Section 501(c)(3) to accumulate “profit”. The accumulation of profit and the subsequent generation of investment income does not affect whether an organization qualifies as being tax-exempt under 501(c)(3) unless the accumulation is so great that the exempt organization is not fulfilling its Section 501(c)(3) purposes, which would be extremely rare. However, the amount of investment income may affect whether a 501(c)(3) organization qualifies as a private foundation or a public charity.
SOURCE: Claire Topp, Attorney, Dorsey & Whitney, LLP
|
Site developed by