Previous LegalEASE posts addressed 501(c)(3) public charities and 501(c)(3) private foundations. Another type of organization that we often encounter is the government entity. This type of organization is neither a private business nor a traditional charity. In this post, we'll discuss what it means to be a domestic or foreign government entity under U.S. tax law and why it matters to funders.
Government entities typically do not owe taxes, and they often give and receive charitable grants. Yet they differ significantly from 501(c)(3) charitable organizations. Government entities often have unique founding documents, distinct governance structures, and different rules regarding their acceptance and expenditure of charitable grants.
What Qualifies as a Government Entity
Under U.S. tax law, the questions whether an organization qualifies as a government entity, and what kind of government entity, are complicated. As described by the Internal Revenue Service (IRS):
"In most cases it is clear that an entity is governmental; however, in some cases it may not be immediately clear. The identity of an entity as a government is based on constitutional, federal, and state law, as well as on court decisions."
Determining whether a foreign organization is a government entity (or equivalent to one) presents additional complexities.
Private foundations and donor advised funds can make grants to government entities. If the grant is made exclusively for charitable purposes, such grants may also count as qualifying distributions and will generally not require expenditure responsibility. See Treas. Reg. §§ 53.4942(a)-3(a); 53.4945-5(a)(4)(ii).
Government entities may include U.S. and foreign state governments, local governments and political subdivisions, and Indian tribal governments, as well as government affiliates and instrumentalities. Americorps, the European Commission, the East Asia Summit, and the Norwegian Agency for Development Cooperation are prominent examples of government entities. In addition, many public universities, museums, and libraries are government entities.
Here we'll provide a high-level overview of the primary types of government entities.
Governmental units include federal agencies, U.S. territories and commonwealths ("possessions"), state agencies and departments, and political subdivisions. (Political subdivisions may include cities, counties, municipal corporations (municipalities), and certain other funds or authorities.) Governmental units are empowered to exercise at least one of three "sovereign powers": eminent domain, police power, and taxing power. See Internal Revenue Code §§170(c)(1) and 170(b)(1)(A)(v).
In the U.S., governmental units are not (and cannot be) 501(c)(3) public charities. Public charities must be separately organized and operated. Rev. Rul. 60-384.
Affiliates of governmental units (instrumentalities, as discussed below) may qualify as 501(c)(3) public charities if they are separate entities. Other affiliates will not be considered separate entities if they function as an "integral part" of a governmental unit. Such entities are treated as governmental units.
"Determining whether an organization is an integral part of a state or municipal government requires consideration of the particular facts. If a state is substantially involved in the activities of an organization, that organization will be considered an integral part of the state or municipal government. Factors that indicate state involvement include (1) creation of the organization by executive order of the governor of a state, (2) creation of the organization by executive order of the governor of a state as an official state agency, (3) a state or a state agency having the power to appoint and remove the organization's board, (4) a state or a state agency having the power to abolish the organization, (5) a state or a state agency monitoring the organization's activities, and (6) the organization using government employees to conduct its activities."
A list of federal governmental departments and agencies can be found at https://www.usa.gov/federal-agencies/a. State and local departments and agencies are also typically found on official websites.
An entity may be "affiliated" with a governmental unit and therefore be a "quasi-government" organization. In the U.S., such government affiliates are known as government instrumentalities. Instrumentalities are subject to some but not all of the same benefits and restrictions as governmental units.
A government instrumentality is an organization created by, or pursuant to, a government statute and operated for public purposes. It is closely affiliated (generally by government control) with the government but is not itself a governmental unit or an integral part of one.
Whether an entity is an instrumentality of a governmental unit is determined by taking the following six factors into consideration.
1. Whether it is used for a governmental purpose and performs a governmental function
2. Whether it performs its function on behalf of one or more states or political subdivisions
3. Whether private interests are involved, or whether states or political subdivisions have the powers and interests of an owner
4. Whether control and supervision of the organization is vested in public authority or authorities
5. Whether express or implied statutory or other authority is needed to create or use the entity
6. The degree of the organization's financial autonomy and the source of its operating expenses —
"[a] municipal hospital or municipal hospital district, fire department, public library, park district, state college or university, Indian tribal economic development organization, and port authority are examples of organizations that are closely affiliated with state or local governments."
Unlike governmental units, government instrumentalities may qualify as 501(c)(3) public charities if they are distinct legal entities organized and operated for charitable purposes. (For a discussion of what it means to be charitable, see our prior post on this topic.)
Similar to governmental units, because instrumentalities perform functions on behalf of governmental units, private foundations and donor advised funds may make grants to government instrumentalities without exercising expenditure responsibility. The grants must be made for exclusively charitable purposes. See Treas. Reg. §53.4945-5(a)(4)(ii). As noted above, such grants would also constitute qualifying distributions for private foundations. See Treas. Reg. §53.4942(a)-3(a).
Foreign Government Agencies or Instrumentalities and International Organizations
According to the Treasury Regulations, for grantmaking purposes, private foundations and donor advised funds can treat certain foreign "public organizations" as equivalent to public charities. Public organizations, for this purpose, include "a foreign government or any agency or instrumentality thereof [(as discussed herein)], or an international organization designated as such by Executive order under 22 U.S.C. 288, even if it is not described in section 501(c)(3)." Treas. Reg. §53.4945-5(a)(4)(iii).
As noted throughout, private foundations and donor advised funds may make grants to these types of entities without exercising expenditure responsibility or obtaining a foreign public charity equivalency determination, if the grant is made for exclusively charitable purposes. Treas. Reg. §53.4945-5(a)(4)(iii).
Like U.S. government agencies and instrumentalities, foreign government agencies or instrumentalities might include government universities, hospitals, or multinational agencies created by more than one government in order to accomplish a public purpose. Examples of international organizations specifically designated by executive order under 22 U.S.C. 288 include the United Nations, various continental development banks, the World Health Organization, the European Space Research Organization, the Criminal Police Organization, and the Universal Postal Union, among many others.
Ask Us About Government Entities
At NGOsource, we are sometimes able to make a determination that an organization is a foreign government agency or instrumentality for funders seeking such a determination, especially where the organization does not otherwise qualify as equivalent to a 501(c)(3) public charity. Please contact us if you are a funder and would like to discuss this option regarding one of your grantees.
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.