Exceptions.

This filing requirement doesn't apply to:

Form 990-EZ.

This is a shortened version of Form 990. Form 990-EZ is designed for use by small exempt organizations and nonexempt charitable trusts.

An organization can file either Form 990 or 990-EZ if it satisfies both of the following:

Group return.

A group return on Form 990 may be filed by a central, parent, or like organization for two or more local organizations, none of which is a private foundation. This return is in addition to the central organization's separate annual return if it must file a return. The central organization can't be included in the group return. See the Instructions for Form 990 for the conditions under which this procedure may be used.

.In any year that an organization is properly included as a subordinate organization on a group return, it shouldn't file its own Form 990..

Schedule A (Form 990).

Organizations, other than private foundations, that are described in section 501(c)(3) and that are otherwise required to file Form 990 or 990-EZ must also complete Schedule A of that form.

Schedule B (Form 990).

Organizations that file Form 990, 990-EZ or 990-PF use this schedule to provide required information regarding certain contributors.

Schedule O (Form 990).

Organizations that file Form 990 or 990-EZ, must use this schedule to provide required additional information or if additional space is needed.

Other schedules may be required to be filed with Form 990 or 990-EZ. See the Instructions for Form 990 or the Instructions for Form 990-EZ for more information.

Report significant new or changed program services and changes to organizational documents.

An organization should report new significant program services or significant changes in how it conducts program services, and significant changes to its organizational documents, on its Form 990 rather than in a letter to EO Determinations. EO Determinations no longer issues letters confirming the tax-exempt status of organizations that report new services or significant changes, or changes to organizational documents. See Miscellaneous Rules, Organization Changes and Exempt Status, later.

Form 990.

For tax years beginning on or before July 1, 2019, an organization is required to file Form 990 electronically if it files at least 250 returns during the calendar year and has total assets of $10 million or more at the end of the tax year. For tax years beginning after July 1, 2019, an organization is required to file Form 990 electronically unless exceptions described in the form instructions apply. As of the 2020 Form 990, the instructions no longer describe any exceptions to the e-filing requirement.

Form 990-EZ.

For small exempt organizations, the legislation specifically allowed a postponement (“transitional relief”). For tax years ending before July 31, 2021, the IRS will accept either paper or electronic filing of Form 990-EZ, Short Form Return of Organization Exempt from Income Tax. For tax years ending July 31, 2021, and later, Forms 990-EZ must be filed electronically. Generally, Form 990-EZ is for organizations with annual gross receipts less than $200,000 and total assets at tax year-end less than $500,000.

Form 990-PF.

For tax years beginning on or before July 1, 2019, an organization is required to file Form 990-PF electronically if it files at least 250 returns during the calendar year. For tax years beginning after July 1, 2019, an organization is required to file Form 990-PF electronically unless exceptions described in the form instructions apply. As of the 2020 Form 990-PF, the instructions no longer describe any exceptions to the e-filing requirement.

Form 990-N.

An organization that is eligible and elects to submit Form 990-N must submit it electronically.

Form 990-T.

The IRS continued to accept paper forms Form 990-T into 2021 pending its conversion into electronic format. In March 2020, the IRS announced the availability of the electronic filing of Form 990-T. Any 2020, and any future year Form 990-T with a due date on or after April 15, 2021, must be filed electronically and not on paper.

Form 8872.

Form 8872 must be filed electronically if reporting on periods after 2019.

Extension of time to file.

Use Form 8868 to request an automatic six month extension of time to file Forms 990, 990-EZ, or 990-PF.

When filing Form 8868 for an automatic extension, neither a signature, nor an explanation is required.

Application for exemption pending.

An organization that claims to be exempt under section 501(a) but has not established its exempt status by the due date for filing an information return must complete and file Form 990, 990-EZ, 990-N, or 990-PF (if it considers itself a private foundation), unless the organization is exempt from Form 990-series filing requirements. If the organization's application is pending with the IRS, it must so indicate on Forms 990, 990-EZ, or 990-PF (whichever applies) by checking the application pending block at the top of page 1 of the return. For more information on the filing requirements, see the Instructions for Forms 990, 990-EZ, and 990-PF.

State reporting requirements.

Copies of Forms 990, 990-EZ, or 990-PF may be used to satisfy state reporting requirements. See the instructions for those forms.

Form 8870.

Organizations that filed a Form 990, 990-EZ, or 990-PF, and paid premiums or received transfers on certain life insurance, annuity, and endowment contracts (personal benefit contracts), must file Form 8870. For more information, see Form 8870 and the instructions for that form.

Form 8822-B.

If you moved during the year, fill out Form 8822-B, Change of Address or Responsible Party-Business. Also, if your “Responsible Party” changed this year, you must also fill out Form 8822-B. The “Responsible Party” is the tax-exempt organization’s “Principal Officer,”as defined in the Form 990 instructions, in the Glossary section.

Penalties for failure to file.

Generally, an exempt organization that fails to file a required return must pay a penalty of $20 a day for each day the failure continues. The same penalty will apply if the organization doesn't give all the information required on the return or doesn't give the correct information.

Maximum penalty.

The maximum penalty for any one return is the smaller of $10,000 or 5% of the organization's gross receipts for the year.

Organization with gross receipts over $1 million.

For an organization that has gross receipts of over $1 million for the year, the penalty is $100 a day up to a maximum of $50,000.

Managers.

If the organization is subject to this penalty, the IRS may specify a date by which the return or correct information must be supplied by the organization. Failure to comply with this demand will result in a penalty imposed upon the manager of the organization, or upon any other person responsible for filing a correct return. The penalty is $10 a day for each day that a return isn't filed after the period given for filing. The maximum penalty imposed on all persons with respect to any one return is $5,000.

Penalties indexed for inflation.

These penalty provisions are indexed for inflation for returns required to be filed after December 31, 2014.

Exception for reasonable cause.

No penalty will be imposed if reasonable cause for failure to file timely can be shown.

Failure to file.

An organization that is required to file Form 8871, but fails to do so on a timely basis, won't be treated as a tax-exempt section 527 organization for any period before the date Form 8871 is filed. Also, the taxable income of the organization for that period will include its exempt function income (including contributions received, membership dues, and political fundraising receipts) minus any deductions directly connected with the production of that income.

Failure to file an amended Form 8871 will cause the organization to not be treated as a tax-exempt section 527 organization. If an organization is treated as not being a tax-exempt section 527 organization, the taxable income of the organization will be determined by considering any exempt function income and deductions during the period beginning on the date of the material change and ending on the date that the amended Form 8871 is filed.

The tax is computed by multiplying the organization's taxable income by the highest corporate tax rate.

Fraudulent returns.

Any individual or corporation that willfully delivers or discloses to the IRS any list, return, account, statement or other document known to be fraudulent or false as to any material matter will be fined not more than $10,000 ($50,000 in the case of a corporation) or imprisoned for not more than 1 year or both.

Waiver of penalties.

The IRS may waive any additional tax assessed on an organization for failure to file Form 8871 if the failure was due to reasonable cause and not willful neglect.

Additional information.

For more information on Form 8871, see the form and its instructions. For a discussion on the public inspection requirements for the form, see Public Inspection of Exemption Applications, Annual Returns, and Political Organization Reporting Forms, later.

Fraudulent returns.

Any individual or corporation that willfully delivers or discloses any list, return, account, statement, or other document known to be fraudulent or false as to any material matter will be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned for not more than 1 year, or both.

Waiver of penalties.

The IRS may waive any additional tax assessed on an organization for failure to file Form 8872 if the failure was due to reasonable cause and not willful neglect.

Material improvements or significant intervening use.

To constitute significant intervening use, the organization must actually use the vehicle to substantially further the organization's regularly conducted activities, and the use must be significant, not incidental. Factors in determining whether a use is a significant intervening use depend on the nature, extent, frequency, and duration. For this purpose, use includes providing transportation on a regular basis for a significant period of time or significant use directly related to training in vehicle repair. Use doesn't include the use of a vehicle to provide training in business skills, such as marketing or sales. Examples of significant use include:

Material improvements include major repairs and additions that improve the condition of the vehicle in a manner that significantly increases the value. To be a material improvement, the improvement can't be funded by an additional payment to the organization from the donor of the vehicle. Material improvements don't include cleaning, minor repairs, routine maintenance, painting, removal of dents or scratches, cleaning or repair of upholstery, and installation of theft deterrent devices.

Penalties.

If your charitable organization receives contributions of used motor vehicles, boats, and airplanes valued over $500, it may be subject to a penalty if it knowingly:

.Other penalties may apply. See Part O in the current General Instructions for Certain Information Returns..

An acknowledgment containing a certification will be presumed to be false or fraudulent if the qualified vehicle is sold to a buyer other than a needy individual without a significant intervening use or material improvement within 6 months of the date of the contribution.

If a charity sells a donated vehicle at auction, the IRS won't accept as substantiation an acknowledgment from the charity stating that the vehicle is to be transferred to a needy individual for significantly below fair market value. Vehicles sold at auction aren't sold at prices significantly below fair market value, and the IRS won't treat vehicles sold at auction as qualifying for this exception.

The penalty for a false or fraudulent acknowledgment where the donee certifies that the vehicle won't be transferred for money, other property, or services before completion of material improvements or significant intervening use or the donee certifies that the vehicle is to be transferred to a needy individual for significantly below fair market value in furtherance of the donee's charitable purpose is the larger of $5,000 or the claimed value of the vehicle multiplied by 39.6%.

The penalty for an acknowledgment relating to a qualified vehicle being sold in an arm's length transaction to an unrelated party is the larger of the gross proceeds from the sale or the sales price stated in the acknowledgment multiplied by 39.6%.

Independent organizations.

If an organization isn't required to file an annual information return, but files a Form 990-T, it can change its annual accounting period by timely filing the Form 990-T. If neither an information return nor a Form 990-T is required to be filed, an organization must notify the IRS by letter that it has changed its fiscal period.

If an organization changed its annual accounting period at any time within the previous 10 years and within that time it had a filing requirement, the organization must file a Form 1128, Application to Adopt, Change, or Retain a Tax Year, with its timely filed annual information return or Form 990-T, as appropriate, whether or not the filing of the information return or Form 990-T would have otherwise been required for that year.

Central organizations.

A central organization can obtain approval for a group change in an annual accounting period for its subordinate organizations on a group basis only by filing Form 1128 with the IRS Service Center where it files its annual information return. For more information, see Rev. Proc. 76-10, 1976-1 C.B. 548, as modified by Rev. Proc. 79-3, 1979-1 C.B. 483, or any later updates.

Due date.

Form 1128 must be filed by the 15th day of the 5th month following the close of the short period.

Policy statement.

The school must include a statement of its racially nondiscriminatory policy in all its brochures and catalogs dealing with student admissions, programs, and scholarships. Also, the school must include a reference to its racially nondiscriminatory policy in other written advertising that it uses to inform prospective students of its programs.

Publicity requirement.

The school must make its racially nondiscriminatory policy known to all segments of the general community served by the school. Selective communication of a racially nondiscriminatory policy that a school provides solely to leaders of racial groups won't be considered an effective means of communication to make the policy known to all segments of the community. To satisfy this requirement, the school must use one of the following three methods.

Method one.

The school can publish a notice of its racially nondiscriminatory policy in a newspaper of general circulation that serves all racial segments of the community. Such publication must be repeated at least once annually during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. When more than one community is served by a school, the school can publish the notice in those newspapers that are reasonably likely to be read by all racial segments in the communities that the school serves.

Method two.

The school can use the broadcast media to publicize its racially nondiscriminatory policy if this use makes the policy known to all segments of the general community the school serves. If the school uses this method, it must provide documentation showing that the means by which this policy was communicated to all segments of the general community was reasonably expected to be effective. In this case, appropriate documentation would include copies of the tapes or scripts used and records showing that there was an adequate number of announcements. The documentation also would include proof that these announcements were made during hours when they were likely to be communicated to all segments of the general community, that they were long enough to convey the message clearly, and that they were broadcast on radio or television stations likely to be listened to by substantial numbers of members of all racial segments of the general community. Announcements must be made during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period.

Method three.

Rev. Proc. 2019-22, 2019-22 I.R.B. 1260 modifies Rev. Proc. 75-50, 1975-2 C.B. 587, to reflect technological advances since its publication and provides a third method for a private school to satisfy the requirement contained in section 4.03 of the revenue procedure by using its Internet website to publicize the school’s racially nondiscriminatory policy as to students. To satisfy the requirement using this method, the school may display a notice (consisting of the same language as in Method 1) of its racially nondiscriminatory policy on its primary publicly accessible Internet homepage at all times during its taxable year (excluding temporary outages due to website maintenance or technical problems) in a manner reasonably expected to be noticed by visitors to the homepage. See Rev. Proc. 2019-22 for more information about satisfying the publicity requirement using this method.

Exceptions.

The publicity requirements won't apply in the following situations.

The school can demonstrate that it follows a racially nondiscriminatory policy either by showing that it currently enrolls students of racial minority groups in meaningful numbers or, except for local community schools, when minority students aren't enrolled in meaningful numbers, that its promotional activities and recruiting efforts in each geographic area were reasonably designed to inform students of all racial segments in the general communities within the area of the availability of the school. The question as to whether a school demonstrates such a policy satisfactorily will be determined on the basis of the facts and circumstances of each case.

The IRS recognizes that the failure by a school drawing its students from local communities to enroll racial minority group students may not necessarily indicate the absence of a racially nondiscriminatory policy when there are relatively few or no such students in these communities. Actual enrollment is, however, a meaningful indication of a racially nondiscriminatory policy in a community in which a public school or schools became subject to a desegregation order of a federal court or are otherwise expressly obligated to implement a desegregation plan under the terms of any written contract or other commitment to which any federal agency was a party.

The IRS encourages schools to satisfy the publicity requirement by using either of the methods described earlier, even though a school considers itself to be within one of the Exceptions. The IRS believes that these publicity requirements are the most effective methods to make known a school's racially nondiscriminatory policy. In this regard, it is each school's responsibility to determine whether either of the exceptions applies. Such responsibility will prepare the school, if it is audited by the IRS, to demonstrate that the failure to publish its racially nondiscriminatory policy in accordance with either one of the publicity requirements was justified by one of the exceptions. Also, a school must be prepared to demonstrate that it has publicly disavowed or repudiated any statements purported to have been made on its behalf (after November 6, 1975) that are contrary to its publicity of a racially nondiscriminatory policy as to students, to the extent that the school or its principal official was aware of these statements.

Facilities and programs.

A school must be able to show that all of its programs and facilities are operated in a racially nondiscriminatory manner.

Scholarship and loan programs.

As a general rule, all scholarship or other comparable benefits obtainable at the school must be offered on a racially nondiscriminatory basis. This must be known throughout the general community being served by the school and should be referred to in its publicity. Financial assistance programs, as well as scholarships and loans made under financial assistance programs, that favor members of one or more racial minority groups and that don't significantly detract from or are designed to promote a school's racially nondiscriminatory policy won't adversely affect the school's exempt status.

Certification.

An individual authorized to take official action on behalf of a school that claims to be racially nondiscriminatory as to students must certify annually, under penalties of perjury, on Schedule E (Form 990) or Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax, whichever applies, that to the best of their knowledge and belief the school has satisfied all requirements that apply, as previously explained.

Failure to comply with the guidelines ordinarily will result in the proposed revocation of the exempt status of a school.

Exceptions.

The school doesn't have to independently maintain these records for IRS use if both of the following are true.

Failure to maintain records.

Failure to maintain or to produce the required records and information, upon proper request, will create a presumption that the organization has failed to comply with these guidelines.

See Rev. Proc. 2019–22 for more information on private school's racially nondiscriminatory policy requirements.

General

Effect of state law.

A private foundation's governing instrument will be considered to meet these charter requirements if valid provisions of state law have been enacted that:

The IRS has published a list of states with this type of law. The list is in Revenue Ruling 75-38, 1975-1 C.B. 161 (or later update).

Church.

The characteristics of a church are discussed earlier in this chapter under Religious Organizations.

Educational organizations.

An educational organization that qualifies as a public charity under section 170(b)(1)(A)(ii) is one whose primary function is to present formal instruction that normally maintains a regular faculty and curriculum and that normally has a regularly enrolled body of pupils or students in attendance at the place where it regularly carries on its educational activities. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes federal, state, and other publicly supported schools that otherwise come within the definition. It doesn't include organizations engaged in both educational and noneducational activities, unless the latter are merely incidental to the educational activities. A recognized university that incidentally operates a museum or sponsors concerts is an educational organization. However, the operation of a school by a museum doesn't necessarily qualify the museum as an educational organization.

An exempt organization that operates a tutoring service for students on a one-to-one basis in their homes, maintains a small center to test students to determine their need for tutoring, and employs tutors on a part-time basis isn't an educational organization for these purposes. Nor is an exempt organization that conducts an internship program by placing college and university students with cooperating government agencies an educational organization.

Hospitals and medical research organizations.

A hospital described in section 170(b)(1)(A)(iii) is an organization whose principal purpose or function is to provide hospital or medical care or either medical education or medical research. A rehabilitation institution, outpatient clinic, or community mental health or drug treatment center may qualify as a hospital if its principal purpose or function is providing hospital or medical care. If the accommodations of an organization qualify as being part of a skilled nursing facility, that organization may qualify as a hospital if its principal purpose or function is providing hospital or medical care.

Exceptions.

The term hospital doesn't include convalescent homes, homes for children or the aged, or institutions whose principal purpose or function is to train handicapped individuals to pursue a vocation. An organization that mainly provides medical education or medical research won't be considered a hospital, unless it is also actively engaged in providing medical or hospital care to patients on its premises or in its facilities, on an in-patient or out-patient basis, as an integral part of its medical education or medical research functions.

A cooperative hospital service organization that meets the requirements of section 501(e) will qualify as a hospital.

Hospitals participating in provider-sponsored organizations.

An organization can be treated as organized and operated exclusively for a charitable purpose even if it owns and operates a hospital that participates in a provider-sponsored organization, whether or not the provider-sponsored organization is tax exempt. For section 501(c)(3) purposes, any person with a material financial interest in the provider-sponsored organization is treated as a private shareholder or individual with respect to the hospital.

Requirements for section 501(c)(3) hospitals under the Affordable Care Act.

The Affordable Care Act (ACA), enacted March 23, 2010, added requirements that hospital organizations must satisfy in order to be described in section 501(c)(3), as well as reporting and excise taxes.

Requirements for charitable hospitals. Section 501(r), added to the Code by the ACA, imposes requirements on section 501(c)(3) organizations that operate one or more hospital facilities (hospital organizations). Each section 501(c)(3) hospital organization is required to meet four general requirements on a facility-by-facility basis:

The ACA also added section 4959, which imposes an excise tax for failure to meet the CHNA requirements, and added reporting requirements under section 6033(b) related to sections 501(r) and 4959. See Regulations sections 1.501(r)-1 through 1.501(r)-7.

Correction and disclosure procedures under section 501(r).

Revenue Procedure 2015–21 provides correction and disclosure procedures under which certain failures to meet the requirements of section 501(r) will be excused for purposes of sections 501(r)(1) and 501(r)(2)(B). See Rev. Proc. 2015–21, 2015-13 I.R.B. 817, or later guidance.

Medical research organization.

A medical research organization must be directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and that activity must be the organization's principal purpose or function.

Endowment funds.

Organizations operated for the benefit of certain state and municipal colleges and universities may be endowment funds described in section 170(b)(1)(A)(iv). They are organized and operated exclusively to:

The phrase “expenditures to or for the benefit of a college or university” includes expenditures made for any one or more of the normal functions of a college or university. These expenditures include those for:

The organization must normally receive a substantial part of its support from the United States or any state or political subdivision, or from direct or indirect contributions from the general public, or from a combination of these sources.

Support.

Support doesn't include income received in the exercise or performance by the organization of its charitable, educational, or other purpose or function constituting the basis for exemption.

In determining the amount of support received by an organization for a contribution of property when the value of the contribution by the donor is subject to reduction for certain ordinary income and capital gain property, the fair market value of the property is taken into account.

Indirect contribution.

An example of an indirect contribution from the public is the receipt by the organization of its share of the proceeds of an annual collection campaign of a community chest, community fund, or united fund.

Governmental units.

A governmental unit described in section 170(b)(1)(A)(v) includes a state, a territory of the United States, or a political subdivision of either of the foregoing, or the United States or the District of Columbia.

Agricultural research organizations.

Agricultural research organizations described in section 170(b)(1)(A)(ix) operated in conjunction with a land-grant college or university or a non-land-grant college of agriculture may now qualify for public charity status. See the Instructions for Form 1023 for more information.

Publicly supported organizations.

An organization is a publicly supported organization if it is one that normally receives a substantial part of its support from a governmental unit or from the general public.

Types of organizations that generally qualify are:

One-third support test.

An organization will qualify as publicly supported under section 170(b)(1)(A)(vi) if it normally receives at least one-third of its total support from governmental units, from contributions made directly or indirectly by the general public, or from a combination of these sources. For a definition of support, see Support, later.

Definition of normally for one-third support test.

An organization will be considered as normally meeting the one-third support test under section 170(b)(1)(A)(vi) for its current tax year and the next tax year if, for the current tax year and the 4 tax years immediately before the current tax year, the organization meets the one-third support test on an aggregate basis. See also Computation period for public support (Special computation period for new organizations) later, in this discussion.

Facts and circumstances test.

The facts and circumstances test is for organizations failing to meet the one-third support test. If your organization fails to meet the one-third support test, it may still be treated as a publicly supported organization described in section 170(b)(1)(A)(vi) if it normally receives a substantial part of its support from governmental units, from direct or indirect contributions from the general public, or from a combination of these sources. To qualify, an organization must meet the ten-percent-of-support requirement and the attraction of public support requirement. These requirements establish, under all the facts and circumstances, that an organization normally receives a substantial part of its support from governmental units or from direct or indirect contributions from the general public. The organization must also be in the nature of a publicly supported organization, taking into account five different factors. See Additional requirements (the five public support factors), later.

Ten-percent-of-support requirement.

The percentage of support normally received by an organization from governmental units, from contributions made directly or indirectly by the general public, or from a combination of these sources must be substantial. An organization won't be treated as normally receiving a substantial amount of governmental or public support unless the total amount of governmental and public support normally received is at least 10% of the total support normally received by that organization.

Attraction of public support requirement.

An organization must be organized and operated in a manner to attract new and additional public or governmental support on a continuous basis. An organization will meet this requirement if it maintains a continuous and bona fide program for solicitation of funds from the general public, community, or membership group involved, or if it carries on activities designed to attract support from governmental units or other charitable organizations described in section 509(a)(1). In determining whether an organization maintains a continuous and bona fide program for solicitation of funds from the general public or community, consideration will be given to whether the scope of its fundraising activities is reasonable in light of its charitable activities. Consideration will also be given to the fact that an organization may, in its early years of existence, limit the scope of its solicitation to persons who would be most likely to provide seed money sufficient to enable it to begin its charitable activities and expand its solicitation program.

Definition of normally for facts and circumstances test.

An organization will normally meet the requirements of the facts and circumstances test for its current tax year and the next tax year if, for the current tax year and the 4 tax years immediately before the current tax year, the organization meets the ten-percent-of-support and the attraction of public support requirements on an aggregate basis and satisfies a sufficient combination of the factors discussed later. The combination of factors that an organization normally must meet doesn't have to be the same for each 4-year period as long as a sufficient combination of factors exists to show compliance.

Additional requirements (the five public support factors).

In addition to the two requirements of the facts and circumstances test, the following five public support factors will be considered in determining whether an organization is publicly supported. However, an organization generally doesn't have to satisfy all of the factors. The factors relevant to each case and the weight accorded to any one of them may differ depending upon the nature and purpose of the organization and the length of time it has existed. The combination of factors that an organization normally must meet doesn't have to be the same for each 4-year period as long as a sufficient combination of factors exists to show that the organization is publicly supported.

1. Percentage of financial support factor.

When an organization normally receives at least 10% but less than one-third of its total support from public or governmental sources, the percentage of support received from those sources will be considered in determining whether the organization is publicly supported. As the percentage of support from public or governmental sources increases, the burden of establishing the publicly supported nature of the organization through other factors decreases, while the lower the percentage, the greater the burden.

If the percentage of the organization's support from the general public or governmental sources is low because it receives a high percentage of its total support from investment income on its endowment funds, the organization will be treated as complying with this factor if the endowment fund was originally contributed by a governmental unit or by the general public. However, if the endowment funds were originally contributed by a few individuals or members of their families, this fact will increase the burden on the organization to establish compliance with other factors. Facts pertinent to years before the 4 tax years immediately before the current tax year may also be considered.

2. Sources of support factor.

If an organization normally receives at least 10% but less than one-third of its total support from public or governmental sources, the fact that it receives the support from governmental units or directly or indirectly from a representative number of persons, rather than receiving almost all of its support from the members of a single family, will be considered in determining whether the organization is publicly supported. In determining what is a representative number of persons, consideration will be given to the type of organization involved, the length of time it has existed, and whether it limits its activities to a particular community or region or to a special field that can be expected to appeal to a limited number of persons. Facts pertinent to years before the 4 tax years immediately before the current tax year may also be considered.

3. Representative governing body factor.

The fact that an organization has a governing body that represents the broad interests of the public rather than the personal or private interest of a limited number of donors will be considered in determining whether the organization is publicly supported.

An organization will meet this requirement if it has a governing body composed of:

4. Availability of public facilities or services factor.

The fact that an organization generally provides facilities or services directly for the benefit of the general public on a continuing basis is evidence that the organization is publicly supported. Examples are:

Similarly, the following factors are also evidence that an organization is publicly supported.

5. Additional factors pertinent to membership organizations.

The following are additional factors in determining whether a membership organization is publicly supported.

Special rule.

The fact that an organization has normally met the one-third support test requirements for a current tax year, but is unable normally to meet the requirements for a later tax year, won't in itself prevent the organization from meeting the requirements of the facts and circumstances test for the later tax year.

Special computation period for new organizations (Computation period for public support).

If, at the time of applying for tax-exempt status, an organization can reasonably be expected to meet the one-third support test or the facts and circumstances test during its first 5 tax years, the organization will qualify as publicly supported for its first 5 years. The organization will be classified as a public charity for its first 5 years, regardless of the public support actually received during this period. Beginning with the organization's sixth tax year, the organization will qualify as publicly supported if it meets the one-third support test or the facts and circumstances test for its sixth year (based on support received in its second through sixth tax years), or as a carryover for its fifth tax year (based on support received in its first through fifth tax years). If the organization is required to file Form 990 or 990-EZ, it must establish that it meets the public support test each year on Schedule A (Form 990).

Reasonable expectation of public support.

An organization that can reasonably be expected to meet the one-third support test or the facts and circumstances test during its first 5 years is one that can show that its organizational structure, current or proposed programs and activities, and actual or intended method of operation can reasonably be expected to attract the type of broadly based support from the general public, public charities, and governmental units that is necessary to meet the public support requirements discussed earlier under Qualifying As Publicly Supported.

Example.

Organization Y was formed in January 2017 and uses a December 31 tax year. After September 9, 2017, and before December 31, 2017, Organization Y filed a Form 1023 requesting recognition of exemption as an organization described in section 501(c)(3) and in sections 170(b)(1)(A)(vi) and 509(a)(1). In its application, Organization Y established that it can reasonably be expected to meet the one-third support test. Organization Y receives a determination letter that it is an organization described in section 501(c)(3) and sections 170(b)(1)(A)(vi) and 509(a)(1) effective as of the date of formation.

Organization Y is described in sections 170(b)(1)(A)(vi) and 509(a)(1) for its first 5 tax years (tax years ending December 31, 2017, through December 31, 2021). Organization Y can qualify as a public charity beginning with the tax year ending December 31, 2021, if Organization Y meets the one-third support test or facts and circumstances test for the tax years ending December 31, 2018, through December 31, 2022, or for the tax years ending December 31, 2017, through December 31, 2021.

Determinations of public support status.

An organization may request a determination letter that it is described in section 170(b)(1)(A)(vi). This request is made on Form 1023 or Form 1023-EZ, or at such other time as the organization believes it is described in section 170(b)(1)(A)(vi). The IRS may revoke the section 170(b)(1)(A)(vi) determination letter if, on examination, the organization has not met the requirements. The IRS may also revoke the section 170(b)(1)(A)(vi) determination letter if the organization's application for a determination contained an omission or inaccurate material information.

Reliance by grantors or contributors.

As a general rule, grantors or contributors may rely on a determination that an organization is described in section 170(b)(1)(A)(vi) until notice of change of status of the organization is made to the public. The IRS publishes such notices from time to time in the Internal Revenue Bulletin, IRS.gov/irb/. Grantors and contributors can also find information about an organization’s exempt status under section 501(c)(3) and its status as a public charity or private foundation from Tax-Exempt Organization Search. However, a grantor or contributor can’t rely on a detrermination letter or information on Tax-Exempt Organization Search if the grantor or contributor was responsible for, or aware of, the act or failure to act that resulted in the organization's loss of classification as a publicly supported organization.

Support.

For purposes of publicly supported organizations, the term support includes (but isn't limited to):

Amounts that aren't support.

The term support doesn't include:

Organizations dependent primarily on gross receipts from related activities.

Organizations won't satisfy the one-third support test or the ten-percent-of-support requirement if they receive:

For the rules that apply to organizations that fail to qualify as section 509(a)(1) publicly supported organizations because of these provisions, see Section 509(a)(2) Organizations, later. See also Gross receipts from a related activity in the discussion on section 509(a)(2) organizations.

Membership fees.

Membership fees are included in the term support if they are paid to provide support for the organization rather than to buy admissions, merchandise, services, or the use of facilities.

Support from a governmental unit.

For purposes of the one-third support test and the ten-percent-of-support requirement, the term support from a governmental unit includes any amounts received from a governmental unit, including donations or contributions and amounts received on a contract entered into with a governmental unit for the performance of services, or from a government research grant. However, these amounts aren't support from a governmental unit for these purposes if they constitute amounts received from the exercise or performance of the organization's exempt functions.

Any amount paid by a governmental unit to an organization won't be treated as received from the exercise or performance of its exempt function if the purpose of the payment is primarily to enable the organization to provide a service to, or maintain a facility for, the direct benefit of the public (regardless of whether part of the expense of providing the service or facility is paid for by the public), rather than to serve the direct and immediate needs of the payor. This includes:

Medicare and Medicaid payments.

Medicare and Medicaid payments are received from contracts entered into with state and federal governmental units. However, payments are made for services already provided to eligible individuals, rather than to encourage or enable an organization to provide services to the public. The individual patient, not a governmental unit, actually controls the ultimate recipient of these payments by selecting the health care organization. As a result, these payments aren't considered support from a governmental unit. Medicare and Medicaid payments are gross receipts derived from the exercise or performance of exempt activities and, therefore, aren't included in the term support.

Support from the general public.

In determining whether the one-third support test or the ten-percent-of-support requirement is met, include in your computation support from direct or indirect contributions from the general public. This includes contributions from an individual, trust, or corporation but only to the extent that the total contributions from the individual, trust, or corporation, during the current tax year and the 4-year period immediately before the current tax year, aren't more than 2% of the organization's total support for the same period.

Thus, a contribution by any one individual will be included in full in the denominator of the fraction used in the one-third support test or the ten-percent-of-support requirement. However, the contribution will be included in the numerator only to the extent that it isn't more than 2% of the denominator. In applying the 2% limit, all contributions made by a donor and by any person in a special relationship to the donor (certain Disqualified persons discussed under Absence of control by disqualified persons, later) are considered made by one person. The 2% limit doesn't apply to support received from governmental units or to contributions from other publicly supported charities, except as provided under Grants from public charities, later.

Indirect contributions.

The term indirect contributions from the general public includes contributions received by the organization from organizations (such as publicly supported organizations) that normally receive a substantial part of their support from direct contributions from the general public, except as provided under Grants from public charities, next.

Grants from public charities.

Contributions received from a governmental unit or from a publicly supported organization (including a church that meets the requirements for being publicly supported) aren't subject to the 2% limit unless the contributions represent amounts either expressly or impliedly earmarked by a donor to the governmental unit or publicly supported organization as being for, or for the benefit of, the particular organization claiming a publicly supported status.

Unusual grants.

In applying the 2% limit to determine whether the one-third support test or the ten-percent-of-support requirement is met, exclude contributions that are considered unusual grants from both the numerator and denominator of the appropriate percent-of-support fraction. Generally, unusual grants are substantial contributions or bequests from disinterested parties if the contributions:

Characteristics of an unusual grant.

A grant or contribution will be considered an unusual grant if the previous three factors apply and if it has all of the following characteristics. If these factors and characteristics apply, then even without the benefit of an advance ruling, grantors or contributors have assurance that they won't be considered responsible for substantial and material changes in the organization's sources of support status. See section 7.08 of Rev. Proc. 2018-32, 2018-23 I.R.B. 739.

Determination request.

Before any grant or contribution is made, a potential grantee organization can request a determination as to whether the grant or contribution may be excluded as an unusual grant. This request can be filed by the grantee organization by submitting Form 8940, Request for Miscellaneous Determination, supporting documents described in the Instructions for Form 8940, and the appropriate user fee. The organization must submit all information necessary to support a determination, including information relating to the factors and characteristics listed in the preceding paragraphs. If a favorable determination is issued, the determination can be relied upon by the grantor or contributor of the particular contribution in question. The issuance of the determination will be at the sole discretion of the IRS.

Grants and contributions that fail to qualify for exclusion will affect the way the support tests are applied. See Additional requirements (the five public support factors), earlier.

If a determination is requested, in addition to the characteristics listed earlier under Characteristics of an unusual grant, the following factors may be considered by the IRS in determining if the grant or contribution is an unusual grant.

Separate trusts or funds.

Any community trust may be treated as a single entity for public support purposes, rather than as an aggregation of separate funds, in which case all qualifying funds associated with that organization (whether a trust, not-for-profit corporation, unincorporated association, or a combination thereof) will be treated as component parts of the organization for public support purposes.

Single entity.

To be treated as a single entity for public support purposes, a community trust must meet all of the following requirements.

A community trust can meet the requirement in (3) above even if its exercise of the powers in (3)(a), (b), or (c) is reviewable by an appropriate state authority.

Component part.

To be treated as a component part of a community trust (rather than as a separate trust or a not-for-profit corporation for public support purposes), a trust or fund:

Grantors and contributors.

Grantors, contributors, or distributors to a community trust may rely on the public charity status, which the organization has claimed in a timely filed notice, on or before the date the IRS informs the public (through such means as publication in the Internal Revenue Bulletin) that such reliance has expired. However, if the grantor, contributor, or distributor acquires knowledge that the IRS has notified the community trust that it has failed to establish that it is a public charity, then reliance on the claimed status expires at the time such knowledge is acquired.

One-third support test.

The one-third support test will be met if an organization normally receives more than one-third of its support in each tax year from any combination of:

For this purpose, the support must be from permitted sources, which include:

Limit on gross receipts.

In computing the amount of support received from gross receipts under (2) above, gross receipts from related activities received from any person or from any bureau or similar agency of a governmental unit are includible in any tax year only to the extent the gross receipts aren't more than the greater of $5,000 or 1% of the organization's total support in that year.

Not-more-than-one-third support test.

This test will be met if an organization normally receives no more than one-third of its support in each tax year from the total of:

Gross investment income.

Gross investment income means the gross amount of income from interest, dividends, payments with respect to securities loans, rents, and royalties, but it doesn't include any income that would be included in computing tax on unrelated business income from trades or businesses.

Definition of normally.

Both support tests are computed on the basis of the nature of the organization's normal sources of support. An organization will be considered to have normally met both tests for its current tax year and the tax year immediately following, if it meets those tests on the basis of the total support received for the current tax year and the 4 tax years immediately before the current tax year.

Computation period for public support.

If at the time of applying for tax-exempt status, an organization can reasonably be expected to meet the one-third support test and the not-more-than-one-third support test during its first 5 tax years, the organization will qualify for classification as a public charity under section 509(a)(2) for its first 5 years. Beginning with the organization's sixth tax year, the organization will be described in section 509(a)(2) if it meets the one-third support test and not-more-than-one-third support test for its sixth year (based on support received in its second through sixth tax years) or as a carryover for its fifth tax year (based on support received in its first through fifth tax years). If the organization is required to file Form 990 or 990-EZ, it must establish that it meets the one-third support test and not-more-than-one-third support test each year on Schedule A (Form 990).

Reasonable expectation of public support.

An organization that can reasonably be expected to meet the one-third support test and not-more-than-one-third support test under section 509(a)(2) during its first 5 tax years is one that can show that its organizational structure, current or proposed programs and activities, and actual or intended method of operation can reasonably be expected to attract the type of broadly based support from the general public, public charities, and governmental units that is necessary to meet these tests. The facts that are relevant to this determination and the weight accorded each fact may differ from case to case. An organization can't reasonably be expected to meet the one-third support test and the not-more-than-one-third support test when the facts indicate that an organization is likely, during its first 5 tax years, to receive less than one-third of its support from permitted sources or to receive more than one-third of its support from gross investment income and unrelated business taxable income.

All pertinent facts and circumstances are taken into account in determining whether the organizational structure, programs, or activities, and method of operation of an organization will give that organization a reasonable expectation that it will meet the support tests. Some pertinent factors considered are:

Unusual grants.

An unusual grant can be excluded from the support test computation if it:

Characteristics of an unusual grant.

A grant or contribution will be considered an unusual grant if the above three factors apply and it has all of the following characteristics. If these factors and characteristics apply, then even without the benefit of an advance ruling, grantors or contributors have assurance that they won't be considered responsible for an act that results in an organization's change of support status. See Rev. Proc. 2018-32, 2018-23 I.R.B. 739.

Determination request.

If there is any doubt that a grant or contribution can be excluded as an unusual grant, the grantee organization can request a determination by submitting Form 8940, Request for Miscellaneous Determination, supporting documents described in the Instructions for Form 8940 and the appropriate user fee. The IRS has the sole discretion of issuing a determination, but if a favorable determination is issued, it can be relied on by the grantor or contributor for purposes of a charitable contributions deduction and by the organization for purposes of the exclusion for unusual grants.

In addition to the characteristics listed above, the following factors may be considered by the IRS in determining if the grant or contribution is an unusual grant.

Gifts, contributions, and grants distinguished from gross receipts.

In determining whether an organization normally receives more than one-third of its support from permitted sources, include all gifts, contributions, and grants received from permitted sources in the numerator of the support fraction in each tax year. However, gross receipts from admissions, sales of merchandise, performance of services, or furnishing facilities, in an activity that isn't an unrelated trade or business, are includible in the numerator of the support fraction in any tax year only to the extent that the amounts received from any person or from any bureau or similar agency of a governmental unit aren't more than the greater of $5,000 or 1% of support.

Determinations of public support status.

An organization may request a determination letter that it is described in section 509(a)(2). This request is made on Form 1023 or Form 1023-EZ, or at such other time as the organization believes it is described in section 509(a)(2). The IRS may revoke the section 509(a)(2) determination letter if, upon examination, the organization has not met the requirements. The IRS may also revoke the section 509(a)(2) determination letter if the organization’s application for determination contained an omission or inaccurate material information.

Reliance by grantors or contributors.

Grantors or contributors may rely on a determination that an organization is described in section 509(a)(2) until notice of change of status of the organization is made to the public (such as by publication in the Internal Revenue Bulletin, or Tax-Exempt Organization Search, either of which can be searched at IRS.gov). See Rev. Proc. 2018-32, 2018-23 I.R.B. 739. Tax-Exempt Organization Search is only available online at Tax-Exempt Organization Search. However, this won't apply if the grantor or contributor was responsible for, or aware of, the act or failure to act that resulted in the organization's loss of classification as a publicly supported organization.

Gifts and contributions.

Any payment of money or transfer of property without adequate consideration is considered a gift or contribution. When payment is made or property is transferred as consideration for admissions, sales of merchandise, performance of services, or furnishing facilities to the donor, the status of the payment or transfer under section 170(c) determines whether and to what extent the payment or transfer is a gift or contribution as distinguished from gross receipts from related activities.

The amount includible in computing support from gifts, grants, or contributions of property or use of property is the fair market or rental value of the property at the date of the gift or contribution.

Grants.

Grants often contain certain terms and conditions imposed by the grantor. Because of the imposition of terms and conditions, the frequent similarity of public purposes of grantor and grantee, and the possibility of benefit to the grantor, amounts received as grants for carrying on exempt activities are sometimes difficult to distinguish from amounts received as gross receipts from carrying on exempt activities.

In distinguishing the term gross receipts from the term grants, the term gross receipts means amounts received from an activity that isn't an unrelated trade or business, if a specific service, facility, or product is provided to serve the direct and immediate needs of the payor rather than primarily to confer a direct benefit on the general public. In general, payments made primarily to enable the payor to realize or receive some economic or physical benefit as a result of the service, facility, or product obtained will be treated as gross receipts by the payee.

For example, a profit-making organization, primarily for its own betterment, contracts with a nonprofit organization for a service from that organization. Any payments received by the nonprofit organization (whether from the profit-making organization or from another nonprofit) for similar services are primarily for the benefit of the payor and are therefore gross receipts, rather than grants.

Research leading to the development of tangible products for the use or benefit of a payor generally will be treated as a service provided to serve the direct and immediate needs of the payor, while basic research or studies carried on in the physical or social sciences generally will be treated as primarily to confer a direct benefit upon the general public.

Medicare and Medicaid payments are gross receipts from the exercise or performance of an exempt function. The individual patient, not a governmental unit, actually controls the ultimate recipient of these payments. Therefore, Medicare and Medicaid receipts for services provided to each patient are included as gross receipts to the extent they aren't more than the greater of $5,000 or 1% of the organization's total support for the tax year.

Membership fees distinguished from gross receipts.

The fact that a membership organization provides services, admissions, facilities, or merchandise to its members as part of its overall activities won't, in itself, result in the classification of fees received from members as gross receipts subject to the $5,000 or 1% limit rather than membership fees. However, if an organization uses membership fees as a means of selling admissions, merchandise, services, or the use of facilities to members of the general public who have no common goal or interest (other than the desire to buy the admissions, merchandise, services, or use of facilities), the fees aren't membership fees but are gross receipts.

On the other hand, to the extent the basic purpose of the payment is to provide support for the organization rather than to buy admissions, merchandise, services, or the use of facilities, the payment is a membership fee.

Bureau defined.

The term bureau or similar agency of a governmental unit for determining amounts subject to the $5,000 or 1% limit means a specialized operating unit of the executive, judicial, or legislative branch of government in which business is conducted under certain rules and regulations. Since the term bureau refers to a unit functioning at the operating, as distinct from the policy-making, level of government, it normally means a subdivision of a department of government. The term wouldn't usually include those levels of government that are basically policy-making or administrative, such as the office of the Secretary or Assistant Secretary of a department, but would consist of the highest operational level under the policy-making or administrative levels.

Amounts received from a unit functioning at the policy-making or administrative level of government are treated as received from one bureau or similar agency of the unit. Units of a governmental agency above the operating level are combined and considered a separate bureau for this purpose. Thus, an organization that has gross receipts from both a policy-making or administrative unit and an operational unit of a department will be treated as having gross receipts from two bureaus. For this purpose, the Departments of Air Force, Army, and Navy are separate departments and each has its own policy-making, administrative, and operating units.

Grants from public charities.

For purposes of the one-third support test, grants received from a section 509(a)(1) organization (public charity) are generally includible in full in computing the numerator of the support fraction for that tax year.

However, if the amount received is considered an indirect contribution from one of the public charity's donors, it will retain its character as a contribution from the donor, and if, for example, the donor is a substantial contributor to the ultimate recipient, the amount is excluded from the numerator of the support fraction. If a public charity makes both an indirect contribution from its donor and an additional grant to the ultimate recipient, the indirect contribution is treated as made first.

An indirect contribution is one that is expressly or impliedly earmarked by the donor as being for, or for the benefit of, a particular recipient rather than for a particular purpose.

Method of accounting.

An organization's support is determined under the same accounting method that it uses in keeping its books and that it otherwise uses to report on its Form 990 or 990-EZ, if it is required to file Form 990 or 990-EZ. For example, if a grantor makes a grant to an organization payable over a term of years, the grant will be includible in the support fraction of the grantee organization under the accounting method it regularly uses in keeping its books.

Gross receipts from a related activity.

When the charitable purpose of an organization described in section 501(c)(3) is accomplished through furnishing facilities for a rental fee or loans to a particular class of persons, such as aged, sick, or needy persons, the support received from those persons will be considered gross receipts from a related exempt activity rather than gross investment income or unrelated business taxable income.

However, if the organization also furnishes facilities or loans to persons who aren't members of a particular class and furnishing the facilities or funds doesn't contribute importantly to accomplishing the organization's exempt purposes, the support received from furnishing the facilities or funds will be considered rents or interest and will be treated as gross investment income or unrelated business taxable income.

Supported organizations.

Supported organizations are organizations described in section 509(a)(1) or 509(a)(2) for whose benefit the supporting organization is organized and operated. A section 501(c)(4), (c)(5), or (c)(6) organization that would be described in section 509(a)(2) if it were a 501(c)(3) organization may be treated as a 509(a)(2) organization for purposes of these rules, and therefore may be a supported organization as well, subject to certain restrictions. See Supporting other than section 501(c)(3) organizations, later.

Organizations controlled by donors.

Generally, if a Type I or Type III supporting organization supports an organization that is controlled by a donor, the supporting organization is treated as a private foundation (rather than as a public charity). Type I and Type III organizations may not accept any gifts or contributions from:

Category one - Type I and Type II supporting organizations.

This category includes organizations either operated, supervised, or controlled by (Type I) or supervised or controlled in connection with (Type II) organizations described in section 509(a)(1) or 509(a)(2) (which can be either domestic or foreign).

These kinds of organizations have a governing body that either includes a majority of members elected or appointed by one or more publicly supported organizations (Type I) or that consists of the same persons that control or manage the publicly supported organizations (Type II). If an organization is to qualify under this category, it must also meet an organizational test and an operational test, and mustn't be controlled by disqualified persons. These requirements are covered later in this discussion.

Type I - Operated, supervised, or controlled by.

The Type I relationship presupposes a substantial degree of direction over the policies, programs, and activities of a supporting organization by its supported organizations. The relationship required is comparable to that of a parent and subsidiary, in which the subsidiary is under the direction of, and is accountable or responsible to, the parent organization. This relationship is typically established when the supported organization(s) may regularly appoint or elect a majority of the directors or trustees of the supporting organization.

Type II - Supervised or controlled in connection with.

An organization that is supervised or controlled in connection with one or more section 509(a)(1) or 509(a)(2) organizations is a Type II supporting organization. The control or management of the supporting organization must be vested in the same persons that control or manage the publicly supported organization. In order for an organization to be supervised or controlled in connection with a supported organization, common supervision or control by the persons supervising or controlling both organizations must exist to ensure that the supporting organization will be responsive to the needs and requirements of the supported organization. This relationship is typically established when a majority of the directors or trustees of the supporting organization also serve as directors or trustees of one or more supported organizations.

Organizational and operational tests.

Like all supporting organizations, Type I and II supporting organizations must be both organized and operated exclusively for the purposes set out in requirement (1) at the beginning of this section. If an organization fails to meet either the organizational or the operational test, it can't qualify as a supporting organization.

Organizational test.

An organization is organized exclusively for one or more of the purposes specified in requirement (1) only if its articles of organization:

In meeting the organizational test, the organization's purposes as stated in its articles can be as broad as, or more specific than, the purposes set forth in requirement (1) at the beginning of the discussion of Section 509(a)(3) Organizations. Therefore, an organization that by the terms of its articles is formed for the benefit of one or more specified publicly supported organizations will, if it otherwise meets the other requirements, be considered to have met the organizational test.

For example, articles stating that an organization is formed to perform the publishing functions of a specified university are enough to comply with the organizational test. A Type I or Type II supporting organization meets these requirements if the purposes set forth in its articles are similar to but no broader than the purposes set forth in the articles of its controlling organizations. However, a Type I or Type II supporting organization that supports a publicly supported section 501(c)(4), 501(c)(5), or 501(c)(6) organization (see Supporting other than section 501(c)(3) organizations, later) meets these requirements if its articles require it to carry on charitable, etc., activities within the meaning of section 170(c)(2).

Limits.

An organization isn't organized exclusively for the purposes specified in requirement (1) if its articles expressly permit it to operate to support or to benefit any organization other than the specified publicly supported organizations. It won't meet the organizational test even though the actual operations of the organization have been exclusively for the benefit of the specified publicly supported organizations.

Specified organizations.

All supporting organizations must ensure that their supported organizations are specified in their articles. However, Type I and Type II supporting organizations have greater flexibility regarding how their supported organizations may be “specified.”

Type I and Type II supporting organizations may specify their supported organizations:

Operational test — permissible beneficiaries.

A supporting organization must engage solely in activities that support or benefit its specified supported organizations. These activities may include making payments to or for the use of, or providing services or facilities for, individual members of the charitable class benefited by its supported organization(s).

For example, a supporting organization may make a payment indirectly through another unrelated organization to a member of a charitable class benefited by a specified publicly supported organization, but only if the payment is a grant to an individual rather than a grant to an organization. Similarly, a supporting organization may support or benefit a section 501(c)(3) organization, other than a private foundation, that is operated, supervised, or controlled directly by or in connection with its supported organization(s). However, a supporting organization's activities may not further its purpose other than supporting or benefiting its supported organization(s).

Operational test — permissible activities.

A supporting organization may make payments to its supported organization(s) or to permissible beneficiaries, or may carry on independent activities or programs that support or benefit its supported organization(s). All such support, however, must be limited to permissible beneficiaries described earlier. The supporting organization may also engage in fundraising activities, such as solicitations, fundraising dinners, and unrelated trade or business, to raise funds for its supported organization(s) or for the permissible beneficiaries.

Absence of control by disqualified persons.

The third requirement an organization must meet to qualify as a supporting organization requires that the organization not be controlled directly or indirectly by one or more disqualified persons (other than foundation managers or one or more publicly supported organizations).

Disqualified persons.

For the purposes of the rules discussed in this publication, the following persons are considered disqualified persons:

Remember, however, that foundation managers and publicly supported organizations aren't disqualified persons for purposes of this control requirement.

If a person who is a disqualified person with respect to a supporting organization, such as a substantial contributor, is appointed or designated as a foundation manager of the supporting organization by a supported organization to serve as its representative, that person is still a disqualified person.

An organization is considered controlled for this purpose if the disqualified persons, by combining their votes or positions of authority, can require the organization to perform any act that significantly affects its operations or can prevent the organization from performing the act. This includes, but isn't limited to, the right of any substantial contributor or spouse to designate annually the recipients from among the supported organizations of the income from the contribution. Except as explained under Proof of independent control, next, a supporting organization will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of those persons is 50% or more of the total voting power of the organization's governing body, or if one or more of those persons has the right to exercise veto power over the actions of the organization.

Thus, if the governing body of a foundation is composed of five trustees, none of whom has a veto power over the actions of the foundation, and no more than two trustees are at any time disqualified persons, the foundation isn't considered controlled directly or indirectly by one or more disqualified persons by reason of this fact alone. However, all pertinent facts and circumstances (including the nature, diversity, and income yield of an organization's holdings, the length of time particular stocks, securities, or other assets are retained, and its manner of exercising its voting rights with respect to stocks in which members of its governing body also have some interest) are considered in determining whether a disqualified person does in fact indirectly control an organization.

Proof of independent control.

An organization is permitted to establish to the satisfaction of the IRS that disqualified persons don't directly or indirectly control it. For example, in the case of a religious organization operated in connection with a church, the fact that the majority of the organization's governing body is composed of lay persons who are substantial contributors to the organization won't disqualify the organization under section 509(a)(3) if a representative of the church, such as a bishop or other official, has control over the policies and decisions of the organization.

Category two - Type III supporting organizations.

This category includes organizations operated in connection with one or more organizations described in section 509(a)(1) or 509(a)(2).

All supporting organizations must be responsive to the needs and demands of, and must constitute an integral part of or maintain significant involvement in, their supported organizations. Type I and Type II supporting organizations are deemed to accomplish these responsiveness and integral part requirements by virtue of the control relationships discussed earlier. However, a Type III supporting organization isn't subject to the same level of control by its supported organization(s). Therefore, Type III supporting organizations must pass separate responsiveness and integral part tests, in addition to the organizational and operational tests applicable to all supporting organizations. Type III supporting organizations mustn't be controlled by disqualified persons (as described earlier), and may not receive contributions from certain controlling donors (see Contributions from controlling donors, later). In addition, a Type III supporting organization may not support any organization not organized in the United States.

Functional integration. A Type III supporting organization may be “functionally-integrated” or “non-functionally integrated” depending on the manner in which it meets the integral part test (see Integral part test - functionally-integrated, and Integral part test - non-functionally integrated, later). Type III functionally-integrated supporting organizations are subject to fewer restrictions and requirements than Type III non-functionally integrated supporting organizations. In particular, distributions from private foundations to Type III non-functionally integrated supporting organizations aren't qualifying distributions for purposes of satisfying a private foundation's required annual distributions under section 4942, and may be taxable expenditures under section 4945.

Organizational test.

The organizational test for a Type III supporting organization is generally the same as for a Type I or Type II supporting organization (described earlier). However, Type III supporting organizations are more limited regarding how their supported organizations must be “specified” in their articles. A Type III supporting organization's articles must specify its supported organization(s) by name, or the organization must demonstrate that the supporting organization and its supported organization(s) have a historic and continuing relationship, because of which a substantial identity of interests has developed between or among the organizations. “Class or purpose” designations don't satisfy the organizational test for Type III supporting organizations. However, a Type III supporting organization's articles may:

If the remote possibility referred to in (2) comes to pass and the supporting organization thereafter operates for the benefit of an organization that isn't a publicly supported organization, it will no longer qualify under section 509(a)(3).

Operational test.

The operational rules described earlier for Type I and Type II supporting organizations apply as well to Type III supporting organizations (see Operational test - permissible beneficiaries, and Operational test - permissible activities, earlier). In addition, a Type III supporting organization must operate in a manner consistent with the requirements of the responsiveness test and the integral-part test, discussed later

Responsiveness test.

A Type III supporting organization must be responsive to the needs or demands of its supported organization(s). To meet this test, the supported organizations must (1) elect one or more officers, directors, or trustees; (2) have one or more officers, directors, or trustees of the supported organization(s) serving simultaneously as officers, directors, or trustees of the supporting organization; or (3) maintain a close and continuous working relationship with the officers, directors, or trustees of the supporting organization. In addition, as a result of this representation or close working relationship, the supported organization(s) must have a significant voice in the investment policies of the supporting organization, the timing of grants and the manner of making them, the selection of recipients, and generally the use of the income or assets of the supporting organization.

Notification requirement.

In each tax year, the Type III supporting organization must notify each supported organization of its support and provide a copy of the supporting organization's most recently filed Form 990 or 990-EZ and copies of any amendments to its articles, bylaws, or other governing documents.

Integral part test - functionally integrated.

A Type III supporting organization may satisfy the integral part test as functionally-integrated in one of three ways:

Direct furtherance activities. For purposes of the test in item (1), activities “directly further” a supported organization's exempt purposes only if conducted by the supporting organization itself. Direct furtherance activities include holding title to and managing exempt-use assets, but not fundraising or investing and managing non-exempt-use assets. Grantmaking may qualify as direct furtherance activities if the requirements of Regulations section 1.509(a)-4(i)(4)(ii)(D) are met.

Integral-part test - non-functionally integrated. A Type III supporting organization that doesn't satisfy the integral part test as functionally-integrated will still qualify as a Type III non-functionally integrated supporting organization if it satisfies a distribution requirement and an attentiveness requirement. Alternatively, certain trusts established before November 20, 1970 may qualify if they meet the requirements of Regulations section 1.509(a)-4(i)(5)(i)(9).

Distribution requirement. A Type III non-functionally integrated supporting organization must distribute a certain amount annually to or for the benefit of its supported organization(s). That amount is equal to the greater of 85% of the organization's adjusted net income and 3.5% of the fair market value of the organization's non-exempt-use assets (with certain adjustments). See Regulations section 1.509(a)-4(i)(5) and (8) for more information regarding the distribution requirement and valuation of non-exempt-use assets. See Regulations section 1.509(a)-4(i)(6) for more information regarding what distributions or expenditures count towards the distribution requirement.

Attentiveness requirement. Each year, a Type III non-functionally integrated supporting organization must distribute one-third or more of the amount that it must distribute that year to one or more supported organizations that are attentive to the operations of the supporting organization and to which the supporting organization is responsive. A supported organization is “attentive” for these purposes if the amount received by the supported organization from the supporting organization:

Supporting other than section 501(c)(3) organizations.

An organization operated in conjunction with a social welfare organization, labor or agricultural organization, business league, chamber of commerce, or other organization described in section 501(c)(4), 501(c)(5), or 501(c)(6) may qualify as a supporting organization under section 509(a)(3) and therefore not be classified as a private foundation if both the following conditions are met.

Special rules of attribution.

To determine whether an organization meets the not-more-than-one-third support test in section 509(a)(2), amounts received by the organization from an organization that seeks to be a section 509(a)(3) organization because of its support of the organization are deemed gross investment income (rather than gifts or contributions) to the extent they are gross investment income of the distributing organization. (This rule also applies to amounts received from a charitable trust, corporation, fund, association, or similar organization that is required by its governing instrument or otherwise to distribute, or that normally does distribute, at least 25% of its adjusted net income to the organization, and whose distribution normally comprises at least 5% of its adjusted net income.) All income that is gross investment income of the distributing organization will be considered distributed first by that organization. If the supporting organization makes distributions to more than one organization, the amount of gross investment income considered distributed will be prorated among the distributees.

Also, treat amounts paid by an organization to provide goods, services, or facilities for the direct benefit of an organization seeking section 509(a)(2) status (rather than for the direct benefit of the general public) in the same manner as amounts received by the latter organization. These amounts will be treated as gross investment income to the extent they are gross investment income of the organization spending the amounts. An organization seeking section 509(a)(2) status must file a separate statement with its annual information return, Form 990 or 990-EZ, listing all amounts received from supporting organizations.

Relationships created for avoidance purposes.

If a relationship between an organization seeking section 509(a)(3) status and an organization seeking section 509(a)(2) status is established or used to avoid classification as a private foundation with respect to either organization, then the character and amount of support received by the section 509(a)(3) organization will be attributed to the section 509(a)(2) organization for purposes of determining whether the latter meets the support tests under section 509(a)(2). If this type of relationship is established or used between an organization seeking 509(a)(3) status and two or more organizations seeking 509(a)(2) status, the amount and character of support received by the former organization will be prorated among the latter organizations.

In determining whether a relationship exists between an organization seeking 509(a)(3) status (supporting organization) and one or more organizations seeking 509(a)(2) status (beneficiary organizations) for the purpose of avoiding private foundation status, all pertinent facts and circumstances will be taken into account. The following facts may be used as evidence that such a relationship wasn't established or availed of to avoid classification as a private foundation.

Effect on section 509(a)(3) organizations.

If a beneficiary organization fails to meet either of the support tests of section 509(a)(2) due to these provisions, and the beneficiary organization is one for whose support the organization seeking section 509(a)(3) status is operated, then the supporting organization won't be considered to be operated exclusively to support or benefit one or more section 509(a)(1) or 509(a)(2) organizations and therefore wouldn't qualify for section 509(a)(3) status.

Request change in public charity classification.

A section 501(c)(3) tax-exempt organization seeking to change its public charity classification from a section 509(a)(3) supporting organization to a section 509(a)(1) or 509(a)(2) organization must file Form 8940, Request for Miscellaneous Determination. See the Instructions for Form 8940 for more information regarding supporting material and applicable user fees.

Classification under section 509(a).

If an organization is described in section 509(a)(1), and is also described in either Section 509(a)(2) or Section 509(a)(3), it will be treated as a section 509(a)(1) organization. The organization should file Form 8940, Request for Miscellaneous Determination, if it wishes to receive a letter showing a change in classification.

Reliance by grantors and contributors.

Once an organization has received a ruling or determination letter classifying it as an organization described in Section 509(a)(1), Section 509(a)(2), or Section 509(a)(3), the treatment of grants and contributions and the status of grantors and contributors to the organization will generally not be affected by reason of a later revocation by the IRS of the organization's classification until the date on which notice of change of status is made to the public (generally by publication in the Internal Revenue Bulletin) or another applicable date, if any, specified in the public notice. In appropriate cases, however, the treatment of grants and contributions and the status of grantors and contributors to an organization described in Section 509(a)(1), Section 509(a)(2), or Section 509(a)(3) may be affected pending verification of the continued classification of the organization. Notice to this effect will be made in a public announcement by the IRS. In these cases, the effect of grants and contributions made after the date of the announcement will depend on the statutory qualification of the organization as an organization described in Section 509(a)(1), Section 509(a)(2), or Section 509(a)(3).

.The preceding paragraph shall not apply if the grantor or contributor: .

Interim guidance for supporting organizations and grantors.

Notice 2014-4 provides further interim guidance for section 509(a)(3) supporting organizations and their grantors about the application of certain requirements enacted as part of the Pension Protection Act of 2006. The notice provides transitional rules for Type III supporting organizations that want to qualify as “functionally integrated” because they support governmental entities. The notice also provides additional interim guidance for private foundations and sponsoring organizations that maintain donor-advised funds on the procedures to be followed in determining whether a potential grantee is a Type I, Type II or functionally integrated Type III supporting organization. See Notice 2014–4, 2014-2 I.R.B. 274 (extended as described in the preamble to the 2015 final regulations regarding the distribution requirement for non-functionally integrated Type III supporting organizations (T.D. 9746)).