LegalEASE: Notes from the Experts - A Brief Introduction to Public Charity Classifications

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As mentioned in our prior post, a nonprofit organization that is organized and operated for charitable purposes may be deemed a public charity (and not a private foundation) if it falls into one of three primary categories.

  • It is specifically defined in the Internal Revenue Code (IRC) as a qualifying charity (by the nature of its activities).
  • It meets a mathematical public support test.
  • It qualifies as a supporting organization.

In this post we'll briefly introduce the public charity types that are specifically defined in the IRC. Future posts will address each individual category in greater detail, as well as cover the mathematical public support test and what it means to qualify as a supporting organization.

The IRS considers the following organizations charities by the nature of their activities.

Churches

A church — or a convention or association of churches — refers to any religious body that, at a minimum, has a distinct legal existence, a congregation, and regularly holds religious services. A church may be a synagogue, a mosque, a temple, or any other religious denomination that meets a combination of characteristics identified by the IRS.

An organization need not satisfy all of these characteristics to qualify as a church. A combination of these characteristics, together with other facts and circumstances, generally determine whether an organization is considered a church. However, a church's principal means of accomplishing its religious purposes must be to assemble regularly a group of individuals related by common worship and faith.

Churches are classified under §170(b)(1)(A)(i) of the IRC and are not required to satisfy any mathematical public support test.

Schools

A school is an educational organization that normally

  • Maintains a regular faculty and curriculum
  • Has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on

While many charities are primarily educational, not all qualify as schools for this purpose. Schools include public and private schools, at all levels of education (lower and higher), as well as nonacademic institutions — for example, a school of ballet or an outdoor survival program as long as, again, they have (i) a regular curriculum, (ii) a regular faculty; and (iii) a regular enrollment of students in attendance at the place where their educational activities are carried on.

Schools are classified under §170(b)(1)(A)(ii) of the IRC and are not required to satisfy any mathematical public support test.

Hospitals and Medical Research Organizations

A hospital is an organization whose principal purpose or function is the providing of medical or hospital care or medical education or medical research. Hospitals, as well as other health care organizations, must meet a community benefit standard, showing that the organization primarily promotes the health of a class of persons that is broad enough to benefit the community.

A medical research organization (which is distinct from a hospital) is an organization whose principal purpose or function is medical research. It must be directly engaged in the continuous, active conduct of medical research in conjunction with a hospital.

Hospitals and medical research organizations are classified under §170(b)(1)(A)(iii) of the IRC.

The rules around qualification of hospitals and medical research organizations are complex and case-specific. For applicable definitions and rules, see Treasury Regulation 1.170A-9(d). If an organization meets one of these standards, it will not be required to satisfy a mathematical public support test. Medical research organizations must instead satisfy a mathematical asset or endowment test.

Support Arms of State Universities

A support arm of a government university is an organization that is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university. The college or university must itself qualify as a school and must be owned or operated by, or be an agency or instrumentality of, a state or political subdivision.

Support arms of state universities are classified under §170(b)(1)(A)(iv) of the IRC. Unlike schools, a support arm of a state university must still satisfy a specific public support test.

How Classifications Apply to Foreign Charities

In addition to the above categories, as noted, a foreign charity may qualify as equivalent to a U.S. public charity by satisfying a mathematical public support test or by being organized and operated as a supporting organization. Some foreign organizations might alternatively qualify as the equivalent of a foreign government or instrumentality thereof. Each of these categories will be individually addressed in subsequent posts, so stay tuned.

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This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.