The firm has experience consulting with organizers, fiduciaries and managers in the formation, governance and tax compliance of tax-exempt charitable organizations. There are hundreds of thousands of tax-exempt charitable organizations in the United States. Charitable organizations are not-for-profit entities granted exemption by the Internal Revenue Service from U.S. federal income tax under Section 501(c)(3) of the Internal Revenue Code (the Code), including churches, benevolence organizations, animal welfare agencies, educational organizations and the like. Public charities have strict federal income tax compliance mandates because, generally, of their tax-exempt status under the Code. Charitable organizations are subdivided into two broad classes under the Code based, generally, upon their endowment, funding and charitable activities and objectives: (i) private foundations, which are further subdivided into operating private foundations and non-operating private foundations; and (ii), public charities.
Private Foundations – Private Foundations are a viable and valuable type of nonprofit organization unique in that they are funded by the income from their endowment, typically by a particular family or small number of persons, including as more broadly and lesser-known examples, the David and Lucile Packard Foundation (www.packard.org) and the Kenneth Kirchman Foundation (www.kirchmanfoundation.org). All charitable organizations are classified by default under the Code as private foundations unless each can document its non-private foundation charitable function in the course of its application for tax exempt status on Form 1023, Application for Exempt Status Under Section 501(c)(3).
Generally, charitable organizations are significantly motivated to attain tax-exempt status in order to enable their funding by tax deductible donations from public and/or governmental donors. Because private foundations are tax-exempt entities commonly endowed by private individuals and funded by the earnings on those private endowments instead of public donations, and because of the benefit of the tax exemption accorded them, as well as in many cases the involvement in their operation of persons related to the endowing parties, there is an even much more complex regulatory regime that private foundations must abide by to maintain their tax-exempt status. As a result, there is a logical initiative for organizers of charitable organizations possessing altruistic objectives to be funded by donations from the public (i.e. requiring the applicant’s rebuttal of the presumption that it should be classified as a private foundation) to tailor their activities to comport with those associated with public charities, thereby being relieved of the heightened regulatory tax regime governing private foundations.
Public Charities – A public charity is generally defined by the IRS as “not a private foundation”. As noted, a pubic charity receives exclusive or a significant funding from the general public or from government. In order to remain a public charity (and not a private foundation), among other things, a 501(c)(3) organization must obtain at least a third of its donated revenue from a fairly broad base of public support. Public support can be from individuals, companies and/or other public charities. Examples of more broadly and lesser know public charities include the National Audibon Society (https://fl.audubon.org) and the Get Kids Fishing Foundation. Donations to public charities can be tax deductible to the individual donor up to 50% of the donor’s income. Corporate limits are generally 10%. Additionally, public charities must maintain a governing body that is mostly made up of unrelated individuals. Public charities are what most people recognize as those organizations with active programs.