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The Publicly Supported Charity-The features, the basic rules and requirements of the most common publicly supported charity under subsection 509(a)(1)

This article was edited and reviewed by FindLaw Attorney Writers | Last reviewed March 26, 2008

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Introduction

Of the four different kinds of public charities recognized under Section501(c)(3) of the Internal Revenue Code, the traditional publicly supported charity is the most common form. The tax exempt letter will refer to it as a subsection509(a)(1) organization or a subsection 170(b)(1)(A)(vi) organization. It contains churches, schools, nonprofit hospitals, a lot of small supporting organizations for schools, hospitals, etc., and includes governmental units, and publicly supported charities and community foundations. Unlike the private independent foundation it relies principally on public support and contributions from individuals, businesses, other charitable entities or the government for its main sources of support.

For an overview of the different kinds of charitable organizations see the report on types of charitable organizations>.

QUESTION: What is a publicly supported charity?

ANSWER: A publicly supported charity is an organization that is formed to achieve a charitable goal such as the relief of poverty, the advancement of religion, education or science, the lessening of the burdens of government, community beautification and maintenance, the promotion of health, social welfare, environmental conservation, patriotism or the arts, caring for orphans or animals, promoting amateur sports and maintaining public confidence in the legal system.

QUESTION: How does it come into existence?

ANSWER: The first step is to prepare and sign either a trust agreement or an application to form a corporation to be filed with the Secretary of State's Office.

QUESTION: What are the tax benefits?

  1. ANSWER:

  2. Contributions to the charity will give the donor a tax deduction.

  3. Earnings will not be subject to income tax (earnings from commercial activities may be subject to income taxes).

QUESTION: How does it qualify as a public charity?

ANSWER: You file an application with the Internal Revenue Service (Form1023). This application is very detailed and must be filed within fifteen (15) months of the formation of the charity. The Internal Revenue Service will take between four to six months to send the tax exempt letter, however, once issued the exempt status will be effective retroactively to the date the charitable organization was formed (either as a trust or as a corporation).

QUESTION: Are there any charities exempt from filing Form1023?

ANSWER: Yes - - - churches and their auxiliary groups and any charity (not a private foundation) which expects its gross receipts to be less than $5,000 per year. NOTE: The Internal Revenue may not recognize a charity as a church just because it calls itself one.

QUESTION: What are the requirements for the charity to be recognized by the Internal Revenue Service?

ANSWER: The publicly supported charity can qualify by meeting either one of two tests. The first test, called a mechanical test, requires it to receive at least one-third (1/3) of its support from the general public, businesses, other charitable organizations or governmental sources. The second test, called a facts and circumstances test, requires that at least ten (10%) percent of its support come from the same sources as listed in the first test and that by other facts and circumstances it operates like a public charity.

QUESTION: What is the mechanical test?

ANSWER: At least one-third (1/3) of support must come from individuals, businesses, other charitable organizations or from governmental sources, or from membership dues collected to support the charity (not to purchase goods, services or use of facilities). There is no flexibilityin the mechanical tests. NOTE: See the two (2%) percent rule explained below.

QUESTION: Explain the facts and circumstances test?

ANSWER: The facts and circumstances test is a more flexible qualification requirement in that the organization must receive at least ten (10%) percent of its support from the public or from governmental sources and must be "in the nature of a publicly supported organization" meaning that its directors or trustees must be representative of the general public and its services must be offered to and available to the general public. NOTE: See the two (2%) percent rule explained below.

QUESTION: What is the two (2%) percent rule and why is it important?

ANSWER: In both the mechanical test and the facts and circumstances test a certain percentage of support must come from the general public or other organizations. To determine whether the charity meets either one of the percentage tests will require the use of a fraction involving a numerator (top portion) and a denominator (bottom portion). All support received from all sources is included in total in the denominator of the fraction. Contributions from individuals, corporations or trusts are counted and included in the numerator only to the extent they do not exceed two (2%) percent of the total support for the test period. All contributions from persons related to a donor are grouped together as coming from that one donor. The two (2%) percent limitation, however, does not apply to contributions from governmental units or contributions from other charitable organizations.

QUESTION: Must a charity to be qualified satisfy both tests?

ANSWER: No. The organization can be qualified by satisfying either one of the two tests.

QUESTION: Do these tests have to be met only once?

ANSWER: To qualify initially the charity will have to project that it will meet the test chosen. Each year thereafter the test must be met as shown by the information listed on the annual tax return filed by the charity.

QUESTION: After initial qualification if a charity cannot satisfy either one of the tests in a particular year, will it lose its tax exempt status?

ANSWER: No. If an organization cannot qualify under one of the tests in a particular year it will not lose its tax exempt status, but rather will be qualified or listed by the Internal Revenue Service as a private independent foundation. However in later years once the organization can again satisfy either the mechanical or the facts and circumstances test it will then be re-qualified as a publicly supported charity.

QUESTION: Do any state reports have to be filed in connection with the application of the organization to be recognized as tax exempt?

ANSWER: Yes, to the Office of the Attorney General in Massachusetts. When the organization is formed as a corporation the Secretary of State's Office will automatically send a copy to that office. If the organization is formed as a trust, then a copy of the trust should be filed with the Attorney General. In all cases a copy of the tax determination letter as received by the Internal Revenue Service should be filed with the Office of the Attorney General and with the state division of corporation taxes. Also, any charity intending to solicit funds from the general public (except churches) has to register for this purpose with the Office of the Attorney General (limited exception applies if less than $5,000 per year).

QUESTION: Does the public charity have to distribute a set amount per year?

ANSWER: No. While there are no percentage limitations on the distributions of funds received, most publicly supported charities distribute a substantial amount of support received in carrying out their charitable mission.

QUESTION: Does the publicly supportedorganization have to file annual federal tax returns?

ANSWER: Yes. An information return specifically called Form990 must be filed each year due four and one-half (4=) months after the close of the charity's year. While no taxes will be due the return is very detailed and requires a great deal of information to be reported and is used to record the necessary information to continue to qualify the organization as a charitable organization.

QUESTION: Are annual returns due to the State of Massachusetts?

ANSWER: A corporation should file its federal exempt status letter with the state corporation division - - - then no state corporation return is due - - - a certificate of condition should be filed each year with the Secretary of State. If the charity is a trust - an information return (Form2) should be filed each year. In addition to this all registered charities must file an annual form with the Attorney General's Office (Form PC) with copies of Form990 attached.

QUESTION: Are any public charities exempt from filing the annual tax return Form990?

ANSWER: Yes - a church and its auxiliary groups, and any public charity whose gross receipts do not normally exceed $25,000 are exempt.

QUESTION: Can salaries and reimbursement of expenses be paid?

ANSWER: Yes. Reasonable salaries for services rendered on behalf of the charity and required for the carrying out of its mission and reimbursement of expenses similarly required are allowed. As with all charitable organizations the Internal Revenue Service and the Attorney General's Office will be diligent in monitoring unreasonable salaries or unreasonable reimbursement of expenses or providing benefits for persons who have a close relationship to the charity or persons related to them.

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