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Qualifying As A Publicly Supported 501(C)(3) Organization

  To be a 501(a)(2) publicly supported charity more than one-third of an organization’s support must be received from permitted sources. For these purposes, subject to certain limitations or exclusions, “support” is constituted by both (i) “gifts, contributions, or membership fees” and (ii) “gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities” provided the receipts do not amount to unrelated trade or business income

Permitted sources are defined exhaustively as (1) persons other than disqualified persons as defined in section 4946) . . . , (2) Section 170(c)(3) governmental units [States, their political subdivisions, and the District of Columbia], and (3) “organizations described in Section 170(b)(1)(A) (other than in clauses (vii) and (viii).”

Category (3) introduces two limitations which completely exclude from the one-third of support tests gifts from certain donors, namely, disqualified persons within the meaning of Section 4946 and Section 170(b)(1)(A)(vii) and (viii) organizations. The latter exclusion means gifts or receipts from (1) a private foundation [Section 179(b)(1)(A)(vii)] and from (2) organizations described in Section 509(a)(2) [Section 179(b)(1)(A)(viii), namely publicly supported organizations or supporting organizations], cannot be counted towards the one-third support test.

This still leaves open the question whether contributions from Section 509(a)(1) public organizations (churches, non-profit hospitals, and non-profit educational institutions, Section 179(b)(1)(A)(i)-(vi)) can count and, if so, whether there are limitations on the amount contributed by any one such institution that can count towards the one-third public support goal. As will be seen, this question leads ultimately into a discussion of the other class of completely excluded gifts, namely, gifts from disqualified persons, that is, it appears that a Section 509(a)(1) organizations can be disqualified persons under certain circumstances.

Section 501 defines a “disqualified person” by cross-reference to Section 4946. Under Section 4946, one finds that one instance of a disqualified person is a “substantial contributor”. A “substantial contributor” is in turn defined by cross-reference to Section 507(d)(2). This Section states that if a “person” has made gifts equal to more than the greater of $5,000 or 2% of all contributions historically given to the organization claiming 509(a)(2) status, that person’s gifts cannot be counted towards the one-third support test. So it’s clear that gifts from individuals are limited in being taken into account for the test and, if the limit is exceeded, excluded.

But how about Section 170(b)(1)(A)(i)-(vi) organizations [= 509(a)(1) organizations] that gives above this level? The Regulations under Section 507 state that “person” has the same meaning ascribed to it under Section 7701(a), the Code’s general definition section. Section 7701(a) extends the reach of “person” beyond individuals to, among other things, corporations. So unless an exception exists, 509(a)(1), (2), and (3) organizations can only give up to the substantial contributor limit. There is in fact a “special rule” under Treas. Regs. that provides for such exceptions, but it does not apparently relate to gifts given from Section 509(a)(1), (2), and (3) organizations to a Section 509(a)(2) organization. Specifically, the exception provided by Treas. Regs. Section 1.507-6(a)(2) reads:

(2) Special rules. For purposes of sections 170(b)(1)(E)(iii), 507(d)(1), 508(d), 509(a)(1) and (3), and chapter 42, the term “substantial contributor” shall not include an organization which is described in section 509(a)(1), (2), or (3) or any other organization which is wholly owned by such section 509(a)(1), (2), or (3) organization.

“For purposes of Sections . . . 509(a)(1) and (3),” but not Section 509(a)(2). The consequence of this appears to be, then, that a Section 509(a)(1) organization making contributions to an organization claiming Section 509(a)(2) status that exceed the greater of $5,000 or 2% of historical giving to that organization will be a disqualified person. As a result, gifts from a 509(a)(1) organization that count toward the one-third support standard are limited by the greater of $5,000 or 2% of historical giving standard (and may, I believe, be completely excluded if the limit is exceeded).

As noted above, gifts from 509(a)(2) and 509(a)(3) organizations cannot assist an organization in meeting the 509(a)(2) one-third public support test by right of the statute’s exclusion of gifts or receipts from both Section 170(b)(1)(A)(vii) and (viii) organizations. The conclusion, then, is that insofar as gifts are concerned, the broad public support requirement cannot be avoided by an isolated gift to a 509(a)(2) candidate made by a 509(a)(9)(1), (2), or (3) organization; such a gift either does not count at all towards the one-third public support test or is subject to a substantial limitation.

Individuals and 509(a)(1) organizations are subject to the substantial contributor limitations in so far as assisting an organization in meeting the one-third public support test, but government contributors are not. Treas. Regs. Section 1.507-(6)(a)(1) specifically provides:

“Such term does not include a governmental unit described in section 170(c)(1).” As noted above, Section 170(c)(1) governmental unit is a “State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia.”

It is also of some interest that 100% of receipts from a 509(a)(1) entity can be counted towards the one third support test. The standard for receipts is akin to the substantial contributor standard which applies to receipts, namely, payments for goods and services cannot, generally, count toward the one-third support test to the extent they exceed the greater of $5,000 or 1% of total support for the year. This rule does not apply to payments for goods and services made by a Section 509(a)(1) organizations. Private Letter Ruling 8015001 states:

The $5,000.00 or 1% limitation does not apply however, to income received from 509(a)(1) organizations as indicated in section 1.509(a)-3(2)(ii) of the Income Tax Regulations. This being the case, all of the income received in rent from OIC would be considered income from permitted sources. Thus, . . . more than 1/3 of its support came from permitted sources.

In the case of receipts, payments made by a governmental unit described in section 170(c)(1) are limited by the $5,000 or 1% standard.
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