A SIGNATURE PROGRAM OF
INDIANA PHILANTHROPY ALLIANCE
COMMUNITY FOUNDATIONS: WHAT DOES THE
INDIANA CODE AND THE INTERNAL REVENUE
CODE REALLY SAY ABOUT THEM?
Phil Purcell, JD
GIFT Consultant
Vice President, Ball State University Foundation
Indiana State Law
3
Indiana State Law
• Indiana Nonprofit Corporation Law
• Uniform (Prudent) Management of Institutional
Funds Act (UPMIFA)
• Donations - Government Units
• Donations - School Corporations
• Donations – Libraries
• Donations – Cemetery Perpetual Care Funds
• Sales and Property Tax Exemption
• Other States
4
Indiana Nonprofit
Corporation Law
5
Nonprofit Corporation Defined
IC 23-17-2-7: (a) "Corporation" means a public
benefit, mutual benefit, or religious corporation
incorporated under or subject to this article.
(b) The term does not include a foreign
corporation.
(c) For purposes of IC 23-17-24, the term does
not include a homeowners association (as
defined in IC 34-6-2-58).
6
Federal Tax Exemption Tests
7
Organizational Test
• The organizing documents (bylaws and articles of
incorporation) must limit the organization's
purposes to exempt purposes set forth in section
501(c)(3).
• Must not expressly empower it to engage, other
than as an insubstantial part of its activities, in
activities that are not in furtherance of one or
more of those purposes.
• Met if the purposes stated in the organizing
documents are limited in some way by reference
to section 501(c)(3).
8
Organizational Test
• Assets must be permanently dedicated to an
exempt purpose.
• If an organization dissolves, its assets must be
distributed for an exempt purpose.
• Organizing documents should contain a
provision ensuring their distribution for an
exempt purpose in the event of dissolution.
9
Operational Test
• An organization will be regarded as operated
exclusively for one or more exempt purposes
only if it engages primarily in activities that
accomplish exempt purposes specified in
section 501(c)(3).
• An organization will not be so regarded if
more than an insubstantial part of its activities
does not further an exempt purpose.
10
Taking Action!
11
Means of Participating in a Meeting
IC 23-17-15-1(c) Unless articles of incorporation or
bylaws provide otherwise, a board of directors may
permit a director to:
(1) participate in a regular or special meeting by; or
(2) conduct the meeting through the use of; any
means of communication by which all directors
participating may simultaneously hear each other
during the meeting. A director participating in a
meeting by this means is considered to be present
in person at the meeting.
12
Action Taken Without A Meeting
IC 23-17-15-2(a) Unless articles of incorporation or bylaws provide
otherwise, action required or permitted by this article to be taken at
a meeting of a board of directors may be taken without a meeting if
the action is taken by all members of the board of directors. The
action must be evidenced by at least one (1) written consent:
(1) describing the action taken; (2) signed by each director; and (3)
included in the minutes or filed with the corporate records reflecting
the action taken.
(b) Action taken under this section is effective when the last director
signs the consent, unless the consent specifies a prior or subsequent
effective date.
(c) A consent signed under this section has the effect of a meeting
vote and may be described as such in any document.
13
U(P)MIFA: Endowment Law
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What’s in a Name?
• Uniform Management of Institutional Funds
Act - former and current name of the Indiana
law of charitable endowments.
• Indiana adopted most of the provisions of the
Uniform Prudent Management of Institutional
Funds Act (UPMIFA) recommended by the
Uniform Law Commission, replacing the
former UMIFA statute in 2007-08.
16
Endowment Fund
IC 30-2-12-2: "Endowment fund" means an
institutional fund, or any part of the fund, not
wholly expendable by the institution on a
current basis under the terms of the applicable
gift instrument. The term does not include
assets that an institution designates as an
endowment fund for the institution's use (i.e.,
quasi-endowment or board designated
endowment).
17
Institution
IC 30-2-12-5: "Institution" means any of the
following:
(1) A person, other than an individual, that is organized
and operated exclusively for charitable purposes.
(2) The state, including any agency or instrumentality of
the state, or a unit of local government to the extent that
the state or unit holds funds exclusively for charitable
purposes.
(3) A trust that has only charitable interests …
Person
IC 30-2-12-6.4: "Person" means an individual, a
corporation, a business trust, an estate, a trust,
a partnership, a limited liability company, an
association, a joint venture, a public
corporation, the state of Indiana, a state agency
or instrumentality, a unit of local government, or
any other legal or commercial entity.
19
Institutional Fund
IC 30-2-12-6: "Institutional fund" means a fund held by
an institution exclusively for charitable purposes. The
term does not include the following:
(1) A fund held for an institution by a trustee that is not
an institution.
(2) A fund in which a beneficiary that is not an
institution has an interest, other than possible rights
that could arise upon violation or failure of the
purposes of the fund.
(3) Assets held by an institution primarily for charitable
purposes and not primarily for investment purposes.
Difference: UPMIFA – FASB/990
• FASB definition of endowment is broader.
• FASB encompasses all funds established to
provide income for the support of an
institution, including unrestricted funds set
aside by the board.
• FASB Statement 117 requires both
identification of funds as endowment and the
allocation of each such fund to one of three
categories: permanently restricted,
temporarily restricted or unrestricted.
• See: FASB Statement 117, Glossary
21
FASB 117 Definition of Endowment
An established fund of cash, securities, or other
assets to provide income for the maintenance of a
nonprofit organization. The use of the assets may
be permanently restricted, temporarily restricted
or unrestricted. Endowment funds generally are
established by donor restricted gifts and bequests
to provide a permanent endowment, which is to a
permanent source of income, or a term
endowment, which to provide income for a
specified period.
22
FASB 117 Definition
The portion of a permanent endowment that must
be maintained permanently – not used up,
expended or otherwise exhausted – is classified as
permanently restricted net assets. The portion of a
term endowment that must be maintained for a
specified term is classified as temporarily restricted
net assets. An organization’s governing board may
earmark a portion of its unrestricted net assets as a
board-designated endowment (sometimes called
funds functioning as endowment or quasiendowment funds) to be invested to provide income
for long but unspecified period. A board-designated
endowment …is not donor restricted and is classified
as unrestricted net assets.
23
Need for Guidance
In 2008, the Financial
Accounting Standards
Board (FASB) issued staff
Position 117-1 to provide
guidance on the net asset
classification of
endowments in states
that have adopted
UPMIFA.
24
FASB 117-1: Disclosures in Financial
Statements
• Board’s interpretation of law (UPMIFA) that
underlies net asset classification
• Inclusion of adherence to UPMIFA in bylaws
• Description of spending policy
• Description of investment policy
• End of period net asset class totals and by type
of fund, showing donor vis-à-vis board
restricted endowment funds
• Reconciliation of beginning and ending balance
of endowment in total and by asset class
25
Gift Instrument
IC 30-2-12-3: "Gift instrument" means a record,
including any institutional solicitations, under which
property is granted or transferred to or held by an
institution as an institutional
fund.
IC 30-2-12-6.7: "Record“ means information that
is: (1) inscribed on a tangible medium; or (2) stored
in an electronic or other medium; and is retrievable
in a perceivable form.
26
UPMIFA – A “Default” Statute
Current agreements that reference or promise
the provisions of the former UMIFA statute –
such as observing “historic dollar value” as a
“shut off” valve for a fund - remain valid unless
expressly revoked
27
UPMIFA – A “Default” Statute
If an agreement does not reference any
applicable law, UPMIFA will apply
28
Spending/Investing Authority
IC 30-2-12-9 (a) Subject to the terms of a gift
instrument, an institution may appropriate for
expenditure or accumulate so much of an
endowment fund that the institution
determines is prudent for the uses, benefits,
purposes, and duration of the endowment fund.
Except as provided in a gift instrument, the
assets in an endowment fund are donor
restricted until appropriated by the institution.
Prudence Defined
(b) In determining to appropriate or accumulate endowment
funds, an institution shall:
(1) act in good faith and with the care a prudent person acting
in a like position would use under similar circumstances; and
(2) consider the following factors:
(A) The duration and preservation of the endowment fund.
(B) The purposes of the institution and the endowment fund.
(C) General economic conditions.
(D) The possible effects of inflation or deflation.
(E) The expected total return from income and the
appreciation of investments.
(F) Other resources of the institution.
(G) The investment policy of the institution.
UPMIFA
IC 30-2-12-14
Duties of Person or Institution
Managing or Investing
Institutional Funds
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Managing or
Investing Duties
IC 30-2-12-14 (a) An institution that manages or
invests an institutional fund shall consider the
following:
(1) The intent of a donor expressed in a gift
instrument.
(2) The charitable purposes of the institution.
(3) The purposes of the institutional fund.
Duties of Loyalty and Prudent Care
(b) A person who is responsible for managing or
investing an institutional fund shall:
(1) comply with the duty of loyalty imposed by any
law; and
(2) manage or invest the fund in good faith and with
the care a prudent person acting in a like position
would use under similar circumstances.
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Costs/Verify Facts/Pooling
(c) An institution that manages or invests an
institutional fund:
(1) may only incur costs that are appropriate and
reasonable in relation to: (A) the assets of; (B) the
purposes of; and (C) the skills available to … the
institution; and
(2) shall make a reasonable effort to verify facts
relevant to the management and investment of the
fund.
(d) An institution may pool two (2) or more
institutional funds for purposes of management or
investment.
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Factors to Consider in Investing and
Managing
(e)(1)… (A) General economic conditions.
(B) The possible effects of inflation or deflation.
(C) The possible tax consequences of investment decisions or
strategies.
(D) The role of each investment or course of action in relation
to the overall investment portfolio of the institutional fund.
(E) The expected total return from income and the appreciation
of investments.
(F) Other resources of the institution.
(G) The needs of the institution and institutional fund to make
distributions and to preserve capital.
(H) The relationship or value of an asset to the charitable
purposes of the institution.
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Individual Assets
(e)(2) An institution shall make management
and investment decisions about an individual
asset:
(A) in the context of an institutional fund's
portfolio of investments as a whole and not in
isolation; and
(B) as part of an overall investment strategy that
has risk and return objectives reasonably suited
to the institutional fund and to the institution.
37
Diversification
(e)(3) Except as otherwise provided in law, an
institution may invest in any kind of property or
type of investment.
(4) An institution shall diversify the investments
of an institutional fund unless the institution
reasonably determines that, due to special
circumstances, the purposes of the institutional
fund are better served without diversification.
38
Disposition of Gifts
(e)(5) Within a reasonable time after receiving
property, an institution shall:
(A) retain or dispose of the property; or
(B) otherwise rebalance the investment
portfolio; to bring the institutional fund into
compliance with the purposes, terms, and
distribution requirements of the institution.
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Use of Skills/Retain Assets
(e)(6) A person that has, or represents to have,
special skills or expertise shall use the skills or
expertise to manage or invest institutional
funds.
(7) Notwithstanding any other provision in this
chapter, an institution may retain property
contributed by a donor to an institutional fund
as long as the governing board of the institution
considers it advisable.
40
Delegation - IC 30-2-12-15
(a) Subject to the terms of a gift instrument … an institution may
delegate to an agent the management or investment of an
institutional fund. The institution shall act in good faith and with the
care a prudent person acting in a like position would use under
similar circumstances in doing the following:
(1) Selecting an agent.
(2) Establishing the scope and terms of the delegation, subject to
the purposes of the institution and the institutional fund.
(3) Periodically reviewing the agent's actions to monitor the agent's
performance of and compliance with the scope and terms of the
delegation.
An institution that complies with this subsection is not liable for the
decisions or actions of an agent to whom the management or
investment of an institutional fund is delegated.
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Delegation
(b) An agent shall exercise reasonable care to perform
a delegated function in compliance with the scope and
terms of the delegation.
(c) An agent that accepts the delegation of a
management or investment function from an
institution submits to the jurisdiction of Indiana courts
in all proceedings concerning the delegation or the
performance of a delegated function.
(d) An institution may delegate management or
investment functions to its committees, officers, or
employees as otherwise provided by law.
42
Donations:
Government Units
44
Governmental Unit
IC 36-1-2-23: "Unit" means county, municipality,
or township.
45
Gaming Revenue
IC 36-1-14-1(b) As used in this section, "gaming
revenue" means either of the following:
(1) Tax revenue received by a unit under IC 4-33-12-6,
IC 4-33-13, or an agreement to share a city's or
county's part of the tax revenue.
(2) Revenue received by a unit under IC 4-35-8.5 or an
agreement to share revenue received by another unit
under IC 4-35-8.5.
Donations to Community Foundations
IC 36-1-14-1 (c). Notwithstanding IC 8-1.5-2-6(d), a
unit may donate the proceeds from the sale of a
utility or facility or from a grant, a gift, a donation,
an endowment, a bequest, a trust, or gaming
revenue to a foundation under the following
conditions:
(1) The foundation is a charitable nonprofit
community foundation.
(2) The foundation retains all rights to the donation,
including investment powers.
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Community Foundation Terms
(3) The foundation agrees to do the following:
(A) Hold the donation as a permanent endowment.
(B) Distribute the income from the donation only to
the unit as directed by resolution of the fiscal body
of the unit.
(C) Return the donation to the general fund of the
unit if the foundation: (i) loses the foundation's
status as a public charitable organization; (ii) is
liquidated; or (iii) violates any condition of the
endowment set by the fiscal body of the unit.
48
Use of Income
• IC 36-1-14-2: A unit may use income received
under this chapter from a community
foundation only for purposes of the unit.
49
Donations:
School Corporations
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Donations from School Corporations
• IC 20-47-1-5(a) The governing body of a school
corporation may donate the proceeds of a grant,
a gift, a donation, an endowment, a bequest, a
trust, an agreement to share tax revenue
received by a city or county under IC 4-33-12-6 or
IC 4-33-13, or an agreement to share revenue
received by a political subdivision under IC 4-358.5, or other funds not generated from taxes
levied by the school corporation, to a foundation
under the following conditions:
51
Riverboat Gaming Revenue Included
• IC 20-47-1-1 "Proceeds from riverboat
gaming“ means tax revenue received by a
political subdivision under IC 4-33-12-6, IC 433-13, or an agreement to share a city's or
county's part of the tax revenue.
52
Conditions of Donations from
School Corporations
IC 20-47-1-5(a) The governing body of a school
corporation may donate … to a foundation
under the following conditions:
(1) The foundation is a charitable nonprofit
community foundation.
(2) The foundation retains all rights to the
donation, including investment powers, except
as provided in subdivision (3).
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Conditions of Donations from
School Corporations
(3) The foundation agrees to do the following:
(A) Hold the donation as a permanent endowment.
(B) Distribute the income from the donation only to the
school corporation as directed by resolution of the
governing body of the school corporation.
(C) Return the donation to the general fund of the school
corporation if the foundation: (i) loses the foundation's
status as a public charitable organization; (ii) is liquidated;
or (iii) violates any condition of the endowment set by the
governing body of the school corporation.
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Use by School Corporation
(b) A school corporation may use income
received under this section from a community
foundation only for purposes of the school
corporation.
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Donations: Libraries
56
Library Funds
IC 36-12-3-11: (5) Money or securities accepted and
received by the library board as a grant, a gift, a donation,
an endowment, a bequest, or a trust may be: ….
(B) set aside in an account with a nonprofit corporation
established for the sole purpose of building permanent
endowments within a community (referred to as a
"community foundation").
57
Library Funds
The earnings on the funds in the account, either:
(i) deposited by the library; or
(ii) accepted by the community foundation on behalf
of the library;
may be distributed back to the library for
expenditure, without appropriation, in accordance
with the conditions and purposes specified by the
donor. A community foundation that distributes
earnings under this clause is not required to make
more than one (1) distribution of earnings in a
calendar year.
58
Cemetery Perpetual
Care Funds
59
Applies to …
IC 23-14-48-10. (a) This section applies to a
corporation that:
(1) is organized under Indiana law for the
purpose of establishing and maintaining a
cemetery; or
(2) is organized for another purpose but has
established and maintains a cemetery.
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Not Applicable
IC 23-14-48-1 (a) Except as provided in subsection (b), this
chapter does not apply to:
(1) a cemetery owned by a municipal corporation or other
governmental unit;
(2) a religious cemetery; or
(3) a cemetery:
(A) that is ten (10) acres or less in size;
(B) that is owned and operated entirely and exclusively by
a nonprofit mutual association in existence on June 14,
1939; and
(C) in which burials have taken place before June 14, 1939.
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Duties of Owner/Name of Fund
IC 23-14-48-2(a) The owner of each cemetery
shall provide for the creation and establishment
of an irrevocable perpetual care fund.
(b) The principal of a perpetual care fund
established under this section shall permanently
remain intact, except as provided in this chapter.
The principal shall be known as the "perpetual
care fund" or "endowment care fund" of the
cemetery.
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Terms of the Fund
(c) Fifty percent (50%) of any appreciation of the
principal of the fund may be withdrawn annually not
more than forty-five (45) days after the end of the
fund's fiscal year.
(d) Any income earned by the fund during the fiscal
year may be withdrawn quarterly during the fund's
fiscal year.
(e) The income from a fund established under this
section and any withdrawal of the appreciation of the
principal under subsection (c) shall be devoted to the
perpetual care of the cemetery.
63
Special Requirements
• IC 23-14-48-3: Required Payment Terms
• IC 23-14-48-4: Duties of cemetery organized
after March 6, 1953, and before July 1, 1997
• IC 23-14-48-5: Duties of cemetery organized
after June 30, 1997
• IC 23-14-48-7: Accounting, report and audit by
the “custodian or trustee” (community
foundation)
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Talk of Taxes
66
State Sales Tax
IC 6-2.5-5-21 (b) Sales of food and food
ingredients are exempt from the state gross
retail tax if:
the seller meets the filing requirements under
subsection (d) and is any of the following:
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Qualifying Organizations
(1)(B) Any:
(i) institution;
(ii) trust;
(iii) group;
(iv) united fund;
(v) affiliated agency of a united fund;
(vi) nonprofit corporation;
(vii) cemetery association; or
(viii) organization;
that is organized and operated exclusively for religious, charitable,
scientific, literary, educational, or civic purposes if no part of its
income is used for the private benefit or gain of any member,
trustee, shareholder, employee, or associate.
68
Purchases Exempt from Sales Tax
IC 6-2.5-5-25(a) Transactions involving tangible personal
property or service are exempt from the state gross retail
tax, if the person acquiring the property or service:
(1) is an organization described in section 21(b)(1) of this
chapter;
(2) primarily uses the property or service to carry on or to
raise money to carry on its not-for-profit purpose; and
(3) is not an organization operated predominantly for
social purposes.
Sales Exempt from Collection of Sales Tax
IC 6-2.5-5-26(a) Sales of tangible personal property
are exempt from the state gross retail tax, if:
(1) the seller is an organization that is described in
section 21(b)(1) of this chapter;
(2) the organization makes the sale to make money
to carry on a not-for-profit purpose; and
(3) the organization does not make those sales
during more than thirty (30) days in a calendar year.
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Sales Exempt from Collection of Sales Tax
IC 6-2.5-5-26(b) Sales of tangible personal property are exempt
from the state gross retail tax, if:
(1) the seller is an organization described in section 21(b)(1) of this
chapter;
(2) the seller is not operated predominantly for social purposes;
(3) the property sold is designed and intended primarily either for
the organization's educational, cultural, or religious purposes, or
for improvement of the work skills or professional qualifications of
the organization's members; and
(4) the property sold is not designed or intended primarily for use
in carrying on a private or proprietary business.
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Tax Forms for
Indiana Department of Revenue
• NP – 20: Nonprofit Organization's Annual
Report (Attach 990)
• NP-20A: Nonprofit Application for Sales Tax
Exemption
• IT-20 NP: Current Year Nonprofit Organization
Unrelated Business Income Tax Booklet with
Forms and Schedules
72
Property Tax Exemption
6-1.1-10-16(a) All or part of a building is exempt
from property taxation if it is owned, occupied,
and used by a person for educational, literary,
scientific, religious, or charitable purposes.
IC 6-1.1-1-10 "Person" includes a sole
proprietorship, partnership, association,
corporation, limited liability company, fiduciary,
or individual.
73
Property Tax Exemption Forms for
Indiana Department of
Local Government Finance
• Form 136 - Application for Property Tax
Exemption
• Form 120 - Notice of Action on Exemption
Application
• Form 136 - Notice of Change of Ownership of
Exempt Property
74
Loss of Exemption
IC 6-1.1-10-36.5 (a) Tangible property is not
exempt from property taxation under sections
16 through 28 of this chapter or under section
33 of this chapter if it is used by the exempt
organization in a trade or business, not
substantially related to the exercise or
performance of the organization's exempt
purpose.
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Other States
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Gift Annuity Registration
• No registration in Indiana
• Other states require registration and fulfillment
of other requirements for reserve, contract
terms, etc.
• Register in states where donors reside
• See website of American Council on Gift
Annuities at www.acga-web.org for summary
• Consultants for registration: Crescendo, PG Calc
77
Fundraising Registration
• No need to register in Indiana
• Must register in many other states if you
solicit gifts in those states (mail, email, events,
send staff, etc.)
• See www.nasconet.org for links to various
state registration laws
• Consultants: Charitable Registry, LLC
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Federal Law
80
OVERVIEW OF TAX EXEMPT
ORGANIZATIONS
Section 501(c) – Tax Exempt Organizations
Mutual Benefit Orgs
• 501(c)(4)-Civic leagues
• 501(c)(6)-Business leagues,
chambers of commerce,
real estate boards
• 501(c)(7)-Social &
recreational clubs
• 501(c)(8)-Fraternal benefit
societies, associations.
• 501(c)(13)-Credit unions
• 501(c)(19)-Veterans
organizations
Traditional
Charities 509(a)(1)
No Public Support Test:
• Hospitals
• Schools
• Churches
• Government
Public Support Test
Required:
• Community
Foundations and
Other Publicly
Supported Charities
Public Charities
501(c)(3)
Private Foundations
501(c)(3)
Other Publicly
Supported
Charities
509(a)(2)
Supporting
Organizations
509(a)(3)
Public Safety
Organizations
509(a)(4)
Public Support
Test required
Type 1
Type 2
Functionally
Integrated
Type 3
Non-functionally
Integrated
TAX CODE NUMBERS MATTER!
 Your fund agreements reference grants to
Internal Revenue Code section 170 and 509
organizations and purposes
 IRS determination letters for tax exempt
organizations reference these same numbers
 The numbers indicate whether the organization
and purpose is charitable.
TWO TYPES OF TAX EXEMPT ORGANIZATIONS
Mutual Benefit Organizations that require
expenditure responsibility: 501(c)(4), etc.
organizations
Public Benefit Organizations/Charities that do
not generally require expenditure
responsibility: 501(c)(3), 170 and 509
organizations
WHAT IS “CHARITABLE”?
 Definition of “charitable” expanded over time
to evolve from care for the poor and needy to
now include organizations (charities) that serve
a “public benefit.”
 “Mutual benefit” organizations serve members
– and do not generally provide public benefit
qualifying as charitable.
MUTUAL BENEFIT ORGANIZATIONS
 501(c)(4)
Civic leagues
 501(c)(6)
Business leagues,
chambers of commerce,
real estate boards
 501(c)(7)
Social and recreational
clubs
 501(c)(8)
Fraternal benefit societies,
associations
 501(c)(13)
Credit unions
 501(c)(19)
Veterans organizations
MUTUAL BENEFIT ORGANIZATIONS
 Tax exempt
No tax on income.
 Not “charitable”
So no income tax
charitable deduction for
donors. Note: some
exceptions.
 May perform charitable
activities such as grants
for scholarships or disaster
relief aid. Expenditure
responsibility required.
 May have related
501(c)(3) foundations
for charitable activities Expenditure responsibility is
not required for grants to
such charitable foundations,
assuming you confirm
501(c)(3) status by copy of
IRS determination letter and
recipients signs grant receipt
confirming qualified use of
grant funds.
PUBLIC BENEFIT ORGANIZATIONS (CHARITIES):
SECTION 501(C)(3) REQUIREMENTS
1. Organized and operated exclusively for an
exempt purpose (i.e., religious, charitable,
scientific, test for public safety, literary or
educational…”)
2. No private inurement.
3. No substantial amount of lobbying.
4. No political activities.
PRIVATE FOUNDATIONS
 Qualify per 501(c)(3): Presumed to be a private
foundation unless proven otherwise
 Must file 990-PF and fulfill private foundation rules:
1. 5% payout requirement
2. 2% excise tax
3. No lobbying or campaigning
4. No jeopardy investments
5. No self-dealing
PUBLIC BENEFIT CHARITIES
 Organizations described in 501(c)(3) – except
churches - are presumed private foundations
unless proven otherwise.
 Six categories of public charities pursuant to
501(c)(3) are described in IRC Sec. 509(a)(1)
which incorporates by reference IRC Sec.
170(b)(1)(A)(i) to (vi).
 Two categories of public charities pursuant to
501(c)(3) are described in 509(a)(2) and
509(a)(3).
PUBLIC BENEFIT CHARITIES – NO PUBLIC SUPPORT TEST
Section 509(a)(1): Organizations described in
Section 170(b)(1)(A) other than subsections (vii)
and (viii) that do not require passing a public
support test:
• Section 170(b)(1)(A)(i): Churches
• Section 170(b)(1)(A)(ii): Schools
• Section 170(b)(1)(A)(iii): Hospitals and
Medication Research Organizations
• Section 170(b)(1)(A)(iv): State University
Foundations
• Section 170(b)(1)(A)(v): Governmental Units
PUBLIC BENEFIT CHARITIES – PUBLIC SUPPORT TEST
(INCLUDING COMMUNITY FOUNDATIONS)
Section 509(a)(1):
 Section 170(b)(1)(A)(vi)-Publicly Supported
Charities – requires a public support test:
oOne-third of the charity’s total support is
from the general public.
oNo one contributor’s donation can count
toward public support more than 2% of
total support.
PUBLIC BENEFIT CHARITIES – PUBLIC SUPPORT TEST
Section 509(a)(2):
 Other Public Benefit Charities that require a
different public support test:
o One-third of the charity’s total support is from the
general public and from fees for services rendered.
o Examples: Zoo, Museum, Symphony
o No more than one-third of the charity’s total support is
from investment income and UBIT (unrelated business
income).
PUBLIC BENEFIT CHARITIES
509(a)(3):
 Supporting organizations - not a private
foundation by virtue of a close and continuing
relationship with a public benefit charity – and
not controlled by a disqualified person.
TYPES OF SUPPORTING ORGANIZATIONS
 Type I: “operated, supervised or controlled by” the
supported organization. Expenditure responsibility
may be required.
 Type II: “supervised or controlled in connection with”
the supported organization. Expenditure
responsibility may be required.
 Type III: “operated in connection with” the
supported organization. Expenditure responsibility is
required depending on type of Type III SO.
Community Foundation Defined
Treasury Regulations Section 1.170A-9(e)(10)(14) create the six “single entity” requirements
to combine multiple trusts, nonprofit
corporations or unincorporated associations into
a single entity known as a community
foundation for tax purposes.
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Single Entity Requirements
1. Commonly known as a “Community Foundation”,
“Community Trust” or “Community Fund”
2. Common instrument – master trust or agency
agreement – binding separate entities
3. Common governing body
4. Committed to a reasonable return on
investments – balancing return of income with
growth of principal
5. Financial reports required – showing all funds as
components of the single entity
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Variance Power
6. The power of the governing body to modify any
restriction or condition on the distribution of
funds for any specified charitable purpose or to
any specified organization, if in the sole
judgment of the governing body, such restriction
becomes unnecessary, incapable of fulfillment,
illegal or inconsistent with the needs of the
community.
Treas. Reg. Sec. 1.170A-9(e)(11)(v)(B)(1).
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Limits on Variance Power
• Exercised by the governing board
• Must be done in good faith
• Must be relative to charitable purpose or
organizational recipient – beware of
undesignating a restriction for endowment
• While a federal requirement, there may be state
law considerations pursuant to signed
agreements or contracts – resulting in review by
the Attorney General and local court of
jurisdiction
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