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Understanding
Public Support Test and
What it Means to Your
Public Charity
GWSCPA’s Not-for-Profit Symposium
Stephen J. Kelin, CPA, JD
Richard J. Locastro, CPA, JD
Nonprofit Tax Principals
December 14, 2011
Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
STEPHEN J. KELIN, CPA, JD
RICHARD J. LOCASTRO, CPA, JD
• Nonprofit tax principals at Gelman, Rosenberg & Freedman, CPAs
• Combined 55+ years of experience providing tax services to taxexempt organizations, private foundations, colleges, healthcare
organizations, museums and other large nonprofit institutions
• Co-lead the firm’s consulting and tax compliance services to more
than 600 nonprofit clients
• Coordinate tax planning, return preparation and representation on
IRS audits
• Monitor changing statutory and regulatory environments
concerning reporting and operational requirements
2
Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Agenda
•
•
•
•
Private Foundations Versus Public Charities
509 (a)(1) Test
509 (a)(2) Test
509(a)(3) Test – Supporting Organizations
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Are You a Private Foundation?
IRC Section 509(a)
• General Rule ― …, the term “private
foundation” means a domestic or foreign
organization described in section 501(c) other
than – (emphasis added)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Private Foundation Rules
•
•
•
•
•
•
•
4940 – Excise Tax Investment Income
4941 – Self Dealing
4942 – Minimum Distributions
4943 – Excess Business Holdings
4944 – Jeopardizing Investments
4945 – Taxable Expenditures
4946, 4947, 4948 – Special Rules
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Minimum Distributions
• IRC section 4942(g) – Qualifying Distributions
Defined
•
(1) …, the term “qualifying distribution” means
• (A) any amount … paid to accomplish one or more
purposes described in section 170(c)(2)(B) … other
than any contribution to … a private foundation
which is not an operating foundation (emphasis
added)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Private Foundation “Exceptions”
• 509(a)(1) – “Contribution-based” organizations ???
– Described in 170(b)(1)(A) [other than clauses (vii)
and (viii)]
• 509(a)(2)– “Fee-based” organizations (???)
• 509(a)(3)– Supporting organizations
• 509(a)(4)– Testing for the public safety
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Definition of a Public Charity
• A public charity is defined under IRC § 509(a)(1)
as an organization described in § 170(b)(1)(A)
other than in clauses (vii) and (viii) - (certain
private foundations; and (a)(2) & (a)(3) entities);
• § 170(b)(1)(A)(i)-(v) includes churches, schools,
hospitals and governmental units
• No support test required
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Qualification for 509(a)(1) – 170(b)(1)(A)(vi)
• Normally receives a substantial part of its
support from a governmental unit referred to
in subsection (c)(1) or from direct or indirect
contributions from the general public
• “Normally” is a five-year rolling average
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Qualification for 509(a)(1) – 170(b)(1)(A)(vi)
(cont.)
• “Substantial part” is generally 33 1/3% or 10% or
more under the “facts and circumstances” test
• “Support” for § 509(a)(1) test does not include
income in exercise of its exempt purpose
(program service fees)
• Realized gains not included in numerator or
denominator
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
“Benefits” of (a)(1) test over (a)(2) test
• Substantial donors
• Only excludes excess over 2% threshold
• Exception for government and other (a)(1)
donors from 2% cap
• “Facts and circumstances” test has 10%
safety net threshold
• No restriction on investment income
• Benefit for heavily endowed organizations
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Eligibility for 509(a)(1)
• Not eligible if it receives:
• Almost all of its support from gross receipts
• An insignificant amount of contributions from
government and general public
• Regulatory example: 1% from contributions is not
more than insignificant
• Conclusion: must be > 1% (10%??) and can be <50%
(doesn’t say “majority”)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Eligibility for 509(a)(1) (cont.)
• Grants vs. Gross Receipts [Reg. 1.509(a)-3(g)]
• Designation by parties as “grant” or “contract”
is not controlling
• Grant normally made to encourage grantee to
carry on exempt activities
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Eligibility for 509(a)(1) (cont.)
Gross Receipts
• Serve direct and immediate needs of payor rather than
confer a benefit upon the general public
• Sales/services delivered to government
• Service to public funded by government
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Eligibility for 509(a)(1) (cont.)
• Dues
• New Form 990 and instructions require
allocation among:
• Contributions (general support of organization)
• Fees for service (direct benefit to payor)
• Part contributions and part fees
• Fees portion treated like other fees (ignored)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
509(a)(1) – 170(b)(1)(A)(vi)
Not all contributions are good support!
• Numerator does not include excess amount from a
person greater than 2% of the revenue over the
five year testing period
• Amounts from governments and other
§ 509(a)(1) – 170(b)(1)(a)(vi) publicly supported
organizations are not limited
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
509(a)(1) – 170(b)(1)(A)(vi) (cont.)
Example:
• § 509(a)(1) organization had total support
for 2006-2010 of $60,000,000 (excluding
gross exempt-purpose receipts)
• Any amount from a donor who gave over
$1,200,000 (2%) is not “good” money
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
509(a)(1) – 170(b)(1)(A)(vi) (cont.)
• During testing period:
Gift
Corp A
Good Money
10,000,000
1,200,000
Individual X
1,900,000
1,200,000
Individual Y
900,000
900,000
3,000,000
3,000,000
DC Government
Only “good money” goes in numerator
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unusual Grants
• Contributions may be excluded from both the
numerator and denominator
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unusual Grants (cont.)
• Intended for gifts/bequests from disinterested
parties which are:
– Attracted by publicly supported nature of
organization;
– “Unusual or unexpected” with respect to the
amount; and
– Would, by reason of their size, adversely affect
public charity status
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unusual Grants: Factors to Consider
• “All pertinent facts and circumstances,” including:
• Person is creator or previous substantial
contributor of organization (unfavorable)
• Bequest (favorable) vs. lifetime gift
• Gift was in furtherance of exempt purpose of
organization, such as painting to museum
(favorable)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unusual Grants: Factors to Consider (cont.)
• Whether the organization has previously conducted
public solicitations and programming and been
successful (favorable)
• Reasonable expectation to attract future public
support (favorable)
• Prior success at passing 1/3 test (favorable)
• Whether contributor or related party continues to
exercise control over the organization (unfavorable)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unusual Grants: Factors to Consider (cont.)
• Whether there is a representative governing
body (favorable)
• Whether there are material conditions for
restrictions on the gift (unfavorable?)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unusual Grants
• Reliance on public charity status
• Can rely on IRS records, unless grantor was
responsible for or aware of substantial or
material change
• Can request written confirmation from charity
that grant will not “tip” the charity
• Can request IRS ruling as to “unusual” prior to
receipt of gift
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Facts and Circumstances Test
Available if public support is less than 33 1/3%,
but at least 10%:
• Test is “subjective”
• Measures both financial and non-financial
factors
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Facts and Circumstances Test (cont.)
• Must:
• Public support is 10% or higher
• Be organized to attract public support
• Continuous and bona fide program for solicitation of
public funds (includes government funding)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Facts and Circumstances Test (cont.)
• And subjective factors:
• % of public support – closer to 33% (favorable);
closer to 10% (unfavorable)
• “Representative number” of donors who are not
single family
• Representative governing body: public officials,
subject matter expertise, community leaders
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Facts and Circumstances Test (cont.)
• And subjective factors:
• Availability of public facilities or services, public
participation in programs, and
• For membership organizations, broad solicitation or
revenue, members and programming
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Form 990 Schedule A Part II
Examples – See Slides
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Foreign Government Support
• Rev Rul 75-435
• Foreign government support of a foreign
organization is treated as government support for
(a)(1) test
• Reg. Section 1.509(a)-2
• GCM 38327 (1980) – Rev Rul is inconsistent with
Code section 170(c)(1) – United States or political
subdivision
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Foreign Government Support (cont.)
• Rev Rul remains “unrevoked”
• Impact on government support of domestic
organization?
• If foreign goverment support is okay, how about:
• United Nations
• World Bank
• International Monetary Fund (IMF)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
How to Treat Contributions from Foreign Charities
• 2% limit does not apply to contributions from
organizations described in § 170(b)(1)(A)(vi)
• Requirement that organization be created or
organized in the U.S. (See § 170(c)(2))
• Treas. Reg. § 1.509(a)-2(a) provides that an
organization may qualify even if organized
outside the U.S.
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
How to Treat Contributions from Foreign Charities (cont.)
• Mexico and Canada treaties have provisions
for reciprocal recognition of § 501(c)(3) status
• Can this be used to include all support as good
support?
33
Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
§509(a)(2) Test
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Form 990 Schedule A Part III:
§ 509(a)(2) Test Mechanics
• Must have more than 33 1/3% public support and
• Not more than 33 1/3% investment income
percentage
• Investment income percentage is the total of interest,
dividends, rents, royalties and UBTI from business
acquired after June 30, 1975 over total support
• No facts and circumstances test available under
this test
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Form 990 Schedule A Part III:
§ 509(a)(2) Test Mechanics (cont.)
• Public Support (numerator) includes:
• Gifts, grants and contributions
• Membership fees
• Gross receipts from activities that are not an
unrelated trade or business under §513
• Admissions
• Merchandise sold or services performed or
• Facilities furnished
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Form 990 Schedule A Part III:
§ 509(a)(2) Test Mechanics (cont.)
• Total Support (denominator) includes public
support and:
• Interest, dividends, rents, royalties
• UBTI (less taxes) from business acquired after
June 30, 1975
• Net income form unrelated business activities not
included in above – whether or not regularly
carried on
• Other income
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Form 990 Schedule A Part III:
§ 509(a)(2) Test Mechanics (cont.)
Note: Income from the sale of capital assets is
excluded from both public support and total
support
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Not All Support is Good Support
• § 509(a)(2) – the following are not included in the
numerator as good support:
• All contributions, membership fees or gross receipts
from a disqualified person AND
• Amounts from gross receipts in carrying out the
organization’s exempt purpose received from a person
(other than a disqualified person) that exceed the > of
$5,000 or 1% of the support for the year
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Not All Support is Good Support (cont.)
• Disqualified person includes substantial contributors,
officers, directors or trustees
• A substantial contributor is person who contributes
more than $5,000 if the amount is more than 2% of
the total contributions received by the organization
through the end of the taxable year (from inception of
the organization!)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Important Notes
• IRC § 507(d)(2)(C) outlines rules to cease being a
substantial contributor and includes:
• Ten years of no contributions by individual or related
persons and contributor and related persons cannot be
a “foundation manager”
• Contributions must be insignificant when compared to
at least one other person
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Important Notes (cont.)
• The exclusion on gross receipts in excess of 1%
of support for the year includes amounts from
federal government agencies/bureaus and
§170(b)(1)(A)(i)-(vi) organizations
• Unlike the § 509(a)(1) test, not all
government/ § 509(a)(1) money is good
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Important Notes (cont.)
• Contributions versus gross receipts
• Distinction is important because all contributions are good money
except for those from DPs
• All gross receipts are subject to the limitation > of $5,000 or 1% of
the support for the year
• If the payment is serving the direct and immediate needs
of the payor – it’s gross receipts
• If the payment is primarily to provide a direct benefit to
the general public – it’s a grant
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unrelated Business Activities
• Gross receipts from activities that are not
unrelated activities under § 513 are included
in public support
• § 513 exclusions include:
•
•
•
•
Volunteer exception
Donated goods exception
Convenience exception
Trade show exception
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Unrelated Business Activities (cont.)
• UBTI (less taxes) from businesses acquired
after June 30, 1975 is included in total support
• Net income from unrelated activities, whether
or not regularly carried on, is also included in
total support
Question: How to report gross/net proceeds from
fundraising events?
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Investment Income Percentage
• Not more than 33 1/3%
• Total of interest, dividends, rents, royalties and
UBTI from business acquired after June 30, 1975
over total support
• Capital gains and losses are excluded from both
the numerator and denominator
46
Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Form 990 Schedule A Part III
Examples – See Slides
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
§509(a)(3) Supporting Organizations
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Supporting Organizations (SO)
• Carry out their exempt purpose by
supporting other exempt organizations
• Usually supports a §509(a)(1) or (a)(2)
organization but can also support a
§501(c)(4), (5) or (6) organization
• Must be organized and operated for
§501(c)(3) purposes
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Supporting Organizations (cont.)
• Must be organized and operated exclusively
for the benefit of, to perform the functions
of, or to carry out the purpose of one or
more specified organizations described in
§509(a)(1) or (2)
• Can’t be controlled directly or indirectly by
DPs other than foundation managers
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Supporting Organizations (cont.)
• Must have one of the following relationships with
an organization described in §509(a)(1) or (2):
• Operated, supervised or controlled by (Type I);
• Supervised or controlled in connection with (Type II); or
• Operated in connection with (Type III)
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Understanding the Public Support Test and
What it Means to Your Public Charity
GWSCPA’s Not-for-Profit Symposium
Supporting Organizations (cont.)
• Type III SOs must meet a:
• Notification requirement
• Responsiveness test and
• Integral part test
• Type III SOs are categorized as either
• Functionally integrated or
• Other (non-functionally integrated)
• Non-functionally integrated SOs are subject to payout
requirements and other operational restrictions
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4550 Montgomery Avenue, Suite 650N • Bethesda, MD 20814
Questions & Answers
Stephen J. Kelin, CPA, JD
skelin@grfcpa.com
Richard J. Locastro, CPA, JD
rlocastro@grfcpa.com
Phone: (301)951-9090
Website: www.grfcpa.com