If your organization is one of the organizations described in this publication and is seeking rec­ognition of tax-exempt status from the IRS, you should follow the procedures and the instructions that accompany the appropriate application forms.

If your organization is seeking exemption under one of the other paragraphs of section 501(c).

Topics

• Application procedures that generally ap­ply to all organizations discussed in this publication, including the application forms,
• Rulings and determination letters (approv­ als/disapprovals),
• Appeal procedures available if an adverse determination letter is proposed, and
• Group exemption letters.

Oral requests for recognition of exemption will not be considered by the IRS. Your application for tax-exempt status must be in writing using the appropriate forms as discussed below.

Most organizations seeking recognition of ex­emption from federal income tax must use spe­cific application forms prescribed by the IRS. Two forms currently required by the IRS are Form 1D23, Application for Recognition of Ex­emption Under Section 501(c)(3) of the Internal Revenue Code, and Form 1024, Application for Recognition of Exemption Under Section 501 (a). For information about how to obtain the latest revision.

Forms 1023 and 1024 contain instructions and checklists to help you provide the informa­tion required to process your application. Incom­plete applications will not be processed.

Some organizations do not have to use spe­cific application forms. The application your or­ganization must use is specified in the chapter in this publication dealing with your kind of organi­zation. It is also shown in the Organization Ref­ erence Chart.

When no specific application form is pre­scribed for your organization, application for ex­emption is by letter to the IRS. Send the application to the appropriate address shown on Form 8718, User Fee for Exempt Organization Determination Letter Request. The letter must be signed by an authorized individual such as an officer of the organization or a person authorized by a power of attorney. (See Power of attorney under Miscellaneous Procedures, later.) Send the power of attorney with the application letter when you file it. The letter should also contain the name and telephone number of the person to contact. The information described below under Required Inclusions must be sent with the letter.

User fee. The law requires the payment of a user fee for determination letter requests such as your application for recognition of tax-exempt status. You should use Form 8718 to figure the amount of your fee and to pay it. Your payment must accompany your request. The IRS will not process a request unless the fee has been paid.

Every exempt organization must have an em­ ployer identification number(EIN), whetheror not it has any employees.

If your organization does not have an EIN, your application for recognition of exemption should include a completed Form SS-4, Appli­ cation for Employer Identification Number.

Organizing documents. Each application for exemption must be accompanied by a con­formed copy of your organization's Articles of Incorporation (and the Certificate of Incorpora

tion , if available), Articles of Association, Trust Indenture, Constitution, or other enabling docu­ ment. If the organization does not have an or­ganizing document, it will not qualify for exempt status.

Bylaws. Bylaws alone are not organizing documents. However, if your organization has adopted bylaws, include a current copy. The bylaws need not be signed if submitted as an attachment.

If your organization's name has been offi­cially changed by an amendment to your or­ganizing instruments, you should also attach a conformed copy of that amendment to your ap­ plication.

Conformed copy. A conformed copy is a copy that agrees with the original and all amend­ments to it. If the original document required a signature, the copy should either be signed by a principal officer or, if not signed, be accompa­nied by a written declaration signed by an au­thorized officer of the organization. With either option, the officer must certify that the document is a complete and accurate copy of the original. A certificate of incorporation should be approved and dated by an appropriate state official.

Every attachment should show your organization's name, address, and EIN. It should also state that it is an attachment to your application form and identify the part and line item number to which it applies.

Do not submit original documents be­cause they become part of the IRS file and cannot be returned.

Description of activities. Your application must include a full description of the purposes and the activities of your organization. When describing the activities in which your organiza­tion expects to engage, you must include the standards, criteria, procedures, or other means that your organization adopted or planned for carrying out those activities.

To determine the information you need to provide, you should study the part of this publi­cation that applies to your organization. The appropriate chapter will describe the purposes and activities that your organization must pur­ sue, engage in, and include in your application in order to achieve exempt status.

Often your organization's articles of organi­zation (or other organizing instruments) contain descriptions of your organization's purposes and activities.

Financial data. You must include in your ap­plication financial statements showing your re­ceipts and expenditures for the current yea rand the 3 preceding years (or for the number of years your organization was in existence, if less than 4 years). For each accounting period, you must describe the sources of your receipts and the nature of your expenditures. You must also include a balance sheet for the current year.

If you have not yet begun operations, or have operated for less than 1 year, a proposed budget for 2 full accounting periods and a current state­ment of assets and liabilities will be acceptable.

Other information. The IRS may require you to provide additional information necessary to clarify the nature of your organization. Some examples are:

For prompt action on your application, be sure to attach all schedules, statements, and other doc­ uments required by the application form. If you do not attach them, you may have to resubmit your application or you may otherwise encoun­ ter a delay in obtaining recognition of exemption.

Incomplete application. If the application does not contain the required information, it may be returned with a letter of explanation without being considered on its merits. If the completed application is resubmitted within the time period indicated in the letter from the IRS, it will be considered received on the original submission date. In that case, if the original submission was timely, the application will be considered timely filed as discussed, under Applica­ tion for Recognition of Exemption.

Application made under wrong paragraph of section 501{c). Occasionally, an organization may appear to qualify for exemption under a paragraph of section 501 (c) that is different from the one for which the organization applied. If the application was made on Form 1024, which ap­plies to more than one paragraph of section 501 (c), the organization may be recognized as exempt under any paragraph to which the form applies if the organization has agreed to have its application considered under that paragraph. It must also supply any additional information re­quired for the application under the new para­ graph.

Different application form needed. If a dif­ ferent application form is required for your or­ganization, the IRS will so advise your organization and will provide the appropriate application form for your convenience in reapp -lying under that paragraph, if you wish to do so. Although supporting information previously fur­nished need not be duplicated, you must provide any necessary additional information required for the application. If your reply is not received within a limited time, your application will be processed only for the paragraph under which you originally applied.

When a specific application form is needed for the paragraph under which yourorganization qualifies, that form is required before a letter recognizing exemption can be issued. This in­cludes cases in which an exemption letter is modified to recognize an organization's exempt status under a paragraph other than the para­graph under which it originally established ex­ emption.

IRS responses. Organizations that submit a complete application will receive an acknowl­edgment from the IRS. Others will receive a letter requesting more information or returning

an incomplete application. Applicants also will be notified if the application is forwarded to the Headquarters of the IRS for consideration. These letters will be sent out as soon as possi­ ble after receipt of the organization's application.

Withdrawal of application. An application may be withdrawn at any time before the issu­ance of a ruling or determination letter upon the written request of a principal officer or author­ized representative of your organization. How­ever, the withdrawal will not prevent the information contained in the application from being used by the IRS in any subsequent exami­ nation of your organization's returns. The infor­mation forwarded with an application will not be returned to your organization and, generally, when an application is withdrawn, the user fee paid will not be refunded.

Requests for withholding of information from the public. The law requires many ex­empt organizations and private foundations to make their application forms and annual infor­mation returns available for public inspection. The law also requires the IRS to make available for public inspection, in accordance with section 6104 of the Code and the related regulations, your approved application for recognition of ex­emption (including any papers submitted in sup­port of the application) and the ruling or determination letter (discussed later, under Rul­ ings and Determination Letters).

1. Identify the material to be withheld (the document, page, paragraph, and line) by clearly marking it, "Not Subject To Public Inspection."

2. include the reasons for your organization's position that the information is of the type that may be withheld from public inspec­ tion.

3. Be filed with the documents in which the material to be withheld is contained.

Where to file. Your application for recognition of tax-exempt status must be filed with the IRS at the address shown on Form 8718.

Your application will be considered by the Manager, EO Determinations, who will either issue a favorable determination letter to your organization, issue an adverse determination letter denying the exempt status claimed in the application, or refer the case to the Exempt Organizations Technical Office (EO Technical) in the Headquarters of the IRS for a ruling.

Internal Revenue Service Attention: EO Letter Rulings P.O. Box 27720, McPherson Station Washington, DC 20038

These requests, like applications for recogni­ tion of exemption, must be accompanied by the appropriate user fee.

Referral to Headquarters. EO Examinations Area Manager, EO Determinations Area Man­ ager, or Appeals Area Director, SB/SE - TE/GE, will refer to Headquarters any exempt organiza­ tion issue concerning qualification for exemption or foundation status for which there is no pub­lished precedent or for which there is reason to believe that nonuniforrnity exists. An EO Exami­ nations, an EO Determinations, or an Appeals Office may request technical advice on any technical or procedural question that cannot be resolved on the basis of law, regulations, or a clearly applicable revenue ruling or other pub­lished precedent. An organization may request that an issue be referred to EO Technical, Head­quarters, for technical advice if it feels that a lack of uniformity exists as to the disposition of the issue or if an issue is so unusual or complex as to warrant consideration by Headquarters. If a determination letter is issued based on technical advice from Headquarters regarding qualifica­tion for exemption or foundation status, no fur­ther administrative appeal is available on the issue that was the subject of technical advice.

Power of attorney. If your organization ex­ pects to be represented by an agent or attorney, whether in person or by correspondence, you must file a power of attorney with your exemp­tion application specifically authorizing the agent or attorney to represent your organization. Form 2848, Power of Attorney and Declaration of Representative, may be used for this pur­ pose.

Reminder. The law requires payment of a user fee for determination letter requests. Use Form 8718 to figure the amount and pay the fee. Payment must accompany each request.

A ruling or determination letter will be issued to your organization if its application and support­ing documents establish that it meets the partic­ular requirements of the section under which it is claiming exemption. However, the IRS will not ordinarily issue rulings or determination letters recognizing exemption if an issue involving the organization's exempt status is pending in litiga­tion or is under consideration within the IRS.

Advance ruling. A ruling or determination let­ter may be issued in advance of operations if yourorganization can describe its proposed op­erations in enough detail to permit a conclusion that it will clearly meet the particular require­ments of the section under which it is claiming exemption. A restatement of the organization's purpose or a statement that it will be operated in furtherance of that purpose will not satisfy this requirement. The organization must describe fully the activities in which it expects to engage.

This includes standards, procedures, or other means adopted or planned by the organization for carrying out its activities, expected sources of funds, and the nature of its contemplated expenses.

When an organization does not supply the information previously mentioned under Appli­cation Procedures, or fails to furnish a suffi­ciently detailed description of its proposed activities to permit a conclusion that it will clearly be exempt, a record of actual operations may be required before a ruling or determination letter is issued.

Adverse determination. If an organization is unable to describe fully its purposes and activi­ties, resulting in a refusal by the IRS to issue a ruling or determination letter, that refusal is con­sidered an adverse determination, which the organization can appeal. See Appeal Proce­ dures, later.

A ruling or determination letter recognizing ex­emption is usually effective as of the date of formation of an organization if, during the pe­ riod before the date of the ruling or determina­tion letter, its purposes and activities were those required by the law. (See Application for Recog­ nition of Exemption for the special rule for organizations applying for recognition of exemption under section 501(c)(3).) Upon ob­taining recognition of exemption, the organiza­tion may file a claim for a refund of income taxes paid for the period for which its exempt status is recognized.

If an organization is required to alter its activi­ ties or substantially amend its charter to qualify, the ruling or determination letter recognizing ex­ emption will be effective as of the date speci­ fied in the letter. If a nonsubstantive amendment is made, such as correction of a clerical error in the enabling instrument or the addition of a dissolution clause, exemption will ordinarily be recognized as of the date of forma­ tion if the activities of the organization before the ruling or determination are consistent with the exemption requirements.

A ruling or determination letter recognizing exemption may not be relied upon if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization.

A ruling or determination letter recognizing ex­emption may be revoked or modified by:

1. A notice to the organization to which the ruling or determination letter originally was issued,
2. Enactment of legislation or ratification of a tax treaty,
3. A decision of the United States Supreme Court,
4. Issuance of temporary or final regulations, or
5. Issuance of a revenue ruling, a revenue procedure, or other statement published in

the Internal Revenue Bulletin or Cumula­ tive Bulletin.

. If the organi­ zation omitted or misstated a material fact, oper­ ated in a manner materially different from that originally represented, or, with regard to organi­ zations to which section 503 applies, engaged in a prohibited transaction (such as diverting corpus or income from its exempt purpose), the revocation or modification may be retroactive.

Material change in organization. If there is a material change, inconsistent with exemption, in the character, purpose, or method of operation of the organization, revocation or modification will ordinarily take effect as of the date of that material change.

Relief from retroactivity. If a ruling or de­ termination letter was issued in error or is no longer in accord with the holding of the IRS, and if section 7805(b) relief is granted, retroactivity of the revocation or modification ordinarily will be limited to a date not earlier than that on which the original ruling or determination letter was modified or revoked. For more information on requesting section 7805(b) relief, see Revenue Procedure 2003-4 (or later update).

Foundations. The determination of the ef­fective date is the same for the revocation or modification of foundation status or operating foundation status unless the effective date is expressly covered by statute or regulations.

Written notice. If an EO area manager con­cludes, as a result of examining an information return or considering information from any other source, that a ruling or determination letter should be revoked or modified, the organization will be advised in writing of the proposed action and the reasons for it.

The organization will also be advised of its right to protest the proposed action by request­ing Appeals Office consideration. The appeal procedures are discussed next.

If an organization applies for tax-exempt status and receives an adverse determination letter, the organization will be advised of its right to protest the determination by requesting Appeals Office consideration. The organization must send its protest to the EO area manager of the office issuing the adverse letter. The letter must be sent within 30 days from the date of the adverse determination letter and must state whether it wishes an Appeals Office conference.

Representation. A principal officer or trustee may represent an organization at any level of appeal within the IRS. Or, the organization may be represented by an attorney, certified public accountant, or individual enrolled to practice before the IRS.

If the organization's representative attends a conference without a principal officer or trustee, the representative must file a proper power of attorney or a tax information authorization before receiving or inspecting confidential infor­mation. Form 2848, or Form 8821, Tax informa­tion Authorization, as appropriate (or any other properly written power of attorney or authoriza -

tion ), may be used for this purpose. These forms may be obtained from the IRS. For more infor­mation, get Publication 947, Practice Before the IRS and Power of Attorney.

The protest to the Appeals Office should be filed with the local Appeals Office considering the application and contain all of the following infor­ mation.

1. The organization's name, address, and employer identification number.
2. A statement that the organization wants to protest the determination.
3. The date and symbols on the determina­tion letter.
4. A statement of facts supporting the organization's position in any contested factual issue.
5. A statement outlining the law or other au­thority the organization is relying on.
6. A statement as to whether a conference at the Appeals Office is desired.

The statement of facts (item 4) must be de­clared true under penalties of perjury. This may be done by adding to the protest the following signed declaration:

"Under penalties of perjury, I declare that I have examined the statement of facts presented in this protest and in any accompanying schedules and statements and, to the best of my knowledge and belief, it is true, correct, and complete."

Persons who are not consid­ered to be in a position to exercise substantial influence over the affairs of an organization in­ clude:

• An employee who receives benefits that total less than the highly compensated amount in section 414{q){1 ){B)( i ) and who does not hold the executive or voting pow­ers mentioned earlier in the discussion on Disqualified person, is not a family mem­ ber of a disqualified person, and is not a substantial contributor,
• Tax-exempt organizations described in section 501{c){3), and
• *Section 501(c){4) organizations with re­spect to transactions engaged in with other section 501(c)(4) organizations.

The determina­ tion of whether a person has substantial influ­ence over the affairs of an organization is based on all the facts and circumstances. Facts and circumstances that show a person has substan­tial influence over the affairs of an organization include, but are not limited to, the following.

* The person founded the organization.

» The person is a substantial contributor to the organization under the section 507{d)(2)(A) definition, only taking into ac­count contributions to the organization for the past 5 years.

* The person's compensation is primarily based on revenues derived from activities of the organization that the person con­ trols.

« The person has or shares authority to con­trol or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for em­ployees.

* The person manages a discrete segment or activity of the organization that repre­sents a substantial portion of the activities, assets, income, or expenses of the organi­ zation, as compared to the organization as a whole.

* The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person.

* The person is a non-stock organization controlled directly or indirectly by one or more disqualified persons.

Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following.

* The person has taken a bona fide vow of poverty as an employee, agent, or on be­ half of a religious organization.

* The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with re­spect to transactions from which the inde­pendent contractor will not economically benefit either directly or indirectly aside from customary fees received for the pro­fessional advice rendered.

» Any preferential treatment the person re­ceives based on the size of the person's donation is also offered to others making comparable widely solicited donations.

* The direct supervisor of the person is not a disqualified person.

* The person does not participate in any management decisions affecting the or­ganization as a whole or a discrete seg­ment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole.

In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made sepa­rately for each applicable tax-exempt organiza­tion. A person may be a disqualified person with respect to transactions with more than one or­ ganization.

An excess benefit transaction occurs on the date the disqualified person receives the eco­nomic benefit from the organization for federal income tax purposes. However, when a single contractual arrangement provides for a series of compensation payments or other payments to a disqualified person during the disqualified person's tax year (or part of a tax year), any excess benefit transaction with respect to these payments occurs on the last day of the tax year (or if the payments continue for part of the year, the date of the last payment in the series).

In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or prop­ erty, the transaction occurs on the date the prop­ erty, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the dis­qualified person receives the economic benefit for federal income tax purposes.

Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. The section 162 standard will apply in determining the reasonableness of compensation. The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonable­ ness of compensation.

To determine the reasonableness of com­pensation, all items of compensation provided by an applicable tax-exempt organization in ex-

change for performance of services are taken into account in determining the value of com­pensation (except for economic benefits that are disregarded under the discussion, Disregarded benefits, later). Items of compensation include:

* All forms of cash and noncash compensa­ tion, including salary, fees, bonuses, sev­ erance payments, and deferred noncash compensation.

* The payment of liability insurance premi­ums for, or the payment or reimbursement by the organization of penalties, taxes or certain expenses under section 4958, un­less excludable from income as a de minimis fringe benefit under section 132(3X4),

* All other compensatory benefits, whether or not included in gross income for income tax purposes,

* Taxable and nontaxable fringe benefits, except fringe benefits described in section 132 of the Code, and

* Foregone interest on loans.

An economic benefit is not treated as consid­eration for the performance of services unless the organization providing the benefit clearly in­dicates its intent to treat the benefit as compen­sation when the benefit is paid.

An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicat­ ing its intent to provide an economic benefit as compensation for services only if the organiza­tion provides written substantiation that is con­temporaneous with the transfer of the economic benefits under consideration. Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as com­pensation include:

* The organization produces a signed writ­ten employment contract,

* The organization reports the benefit as compensation on an original Form W-2, Form 1099 or Form 990, or on an amended form filed before starting an IRS examination, or

* The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination.

Pay­ments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met.

1. The transaction is approved by an author­ized body of the organization (or an entity it controls) which is composed of individu­als who do not have a conflict of interest concerning the transaction.

2. Before making its determination, the au­thorized body obtained and relied upon ap­propriate data as to comparability. (There is a special safe harbor for small organiza­tions. If the organization has gross receipts of less than $1 million, appropriate compa­rability data includes data on compensa­tion paid by three comparable organizations in the same or similar com­munities for similar services.)

3. The authorized body adequately docu­ments the basis for its determination con­currently with making that determination. The documentation should include:

a. The terms of the approved transaction and the date approved,

b. The members of the authorized body exchange for the provision of specified services or property.

A fixed formula may, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a pay­ment or deciding whether to make a payment (such as a bonus).

An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract.

A binding written contract providing it may be terminated or cancelled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial pen­alty, is treated as a new contract, as of the earliest date any termination o sarily qualify the museum as an educational organization.

An exempt organization that operates a tutoring service for students on a one-to-one basis in their homes, maintains a small center to test students to determine their need for tutor­ing, and employs tutors on a part-time basis is not an educational organization for these pur­poses. Nor is an exempt organization that con­ducts an internship program by placing college and university students with cooperating gov­ernment agencies an educational organization

Section 4958 does not apply to any fixed pay­ ment made to a person under an initial contract.

A fixed payment is an amount of cash or other property specified in the contract, or deter­ mined by a fixed formula that is specified in the contract, which is to be part of or transferred in school or college,

3. A hospital or medical research organiza­tion operated in conjunction with a hospi­ tal,

4. Endowment funds operated for the benefit of certain state and municipal colleges and universities,

5. A governmental unit, and

6. A publicly supported organization.

Church.

Educational organizations. An educational organization is one whose primary function is to present formal instruction, that normally main­tains a regular faculty and curriculum, and that normally has a regularly enrolled body of pupils or students in attendance at the place where it regularly carries on its educational activities. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes federal, state, and other publicly supported schools that otherwise come within the definition. It does not include organizations engaged in both educa­tional and noneducational activities, unless the latter are merely incidental to the educational activities. A recognized university that inciden­ tally operates a museum or sponsors concerts is an educational organization. However, the oper­ ation of a school by a museum does not necesary on an in-patient or out-patient basis, as an inte­gral part of its medical education or medical research functions.

Hospitals participating in provider-spon­sored organizations. An organization can be treated as organized and operated exclusively for a charitable purpose even if it owns and operates a hospital that participates in a provider-sponsored organization, whether or not the provider-sponsored organization is tax ex­empt. For section 501(c)(3) purposes, any per­son with a material financial interest in the provider-sponsored organization is treated as a private shareholder or individual with respect to the hospital.

Medical research organization. A medical research organization must be directly engaged in the continuous active conduct of medical re­search in conjunction with a hospital, and that activity must be the organization's principal pur­ pose or function.

Publicly supported. A hospital or medical research organization that wants the additional classification of a publicly-supported organiza­tion may specifically request that classification. The organization must establish that it meets the public support requirements of section 170(b)(1)(A)(vi).

An organization will qualify as publicly supported if it passes the one-third support test. If it fails that test, it may qualify under the facts and circumstances test.

One-third support test. An organization will qualify as publicly supported if it normally re­ceives at least one-third of its total support from governmental units, from contributions made di­rectly or indirectly by the general public, or from a combination of these sources. For a definition of support, see Support, later.

Definition of normally for one-third sup­port test. An organization will be considered as normally meeting the one-third support test for its current tax year and the next tax year if, for the 4 tax years immediately before the current tax year, the organization meets the one-third support test on an aggregate basis. See also Special computation period for new organiza­ tions, later, in this discussion.

X organization meets the one-third support test in its 2002 tax year on the basis of support received during 1998, 1999, 2000, and 2001. It therefore normally meets the requirements for both 2002 and 2003. For the 2003 tax year, X is unable to meet the one-third support test on the basis of support received during 1999, 2000, 2001, and 2002. If X can meet the facts and circumstances test on the basis of those years, X will normally meet the requirements for 2004 (the tax year immediately after 2003). However, if on the basis of both 4-year periods (1999 through 2002 and 2000 through 2003), X fails to meet both the one-third and the facts and circumstances tests, X will not be a publicly-supported organization for 2004.

However, X will not be disqualified as a publicly-supported organization for the 2003 tax year because it normally met the one-third sup­port test requirements on the basis of the tax years 1998 through 2001 unless the provisions governing the Exception for material changes in sources of support (discussed later) become applicable.

In addition to the two re­quirements of the facts and circumstances test, the following five public support factors will be considered in determining whether an organization is publicly supported. However, an organi­zation generally does not have to satisfy all of the factors. The factors relevant to each case and the weight accorded to any one of them may differ depending upon the nature and purpose of the organization and the length of time it has existed. The combination of factors that an or­ganization normally must meet does not have to be the same for each 4-year period as long as a sufficient combination of factors exists to show that the organization is publicly supported.

When an organization normally receives at least 10% but less than one-third of its total support from public or governmental sources, the per­centage of support received from those sources will be considered in determining whether the organization is publicly supported. As the per­centage of support from public or governmental sources increases, the burden of establishing the publicly supported nature of the organization through other factors decreases, while the lower the percentage, the greater the burden.

If the percentage of the organization's sup­port from the general public or governmental sources is low because it receives a high per­centage of its total support from investment in­come on its endowment funds, the organization will be treated as complying with this factor if the endowment fund was originally contributed by a governmental unit or bythe general public. How­ ever, if the endowment funds were originally contributed by a few individuals or members of their families, this fact will increase the burden on the organization of establishing compliance with other factors. Facts pertinent to years before the 4 tax years immediately before the current tax year also may be considered.

The fact that an organization has a governing body that represents the broad interests of the public rather than the personal or private interest of a limited number of donors will be considered in determining whether the organization is pub­ licly supported.

An organization will meet this requirement if it has a governing body composed of:

1. Public officials acting in their public capaci­ ties,

2. Individuals selected by public officials act­ing in their public capacities,

3. Persons having special knowledge or ex­pertise in the particular field or discipline in which the organization is operating, and

4. Community leaders, such as elected or ap­pointed officials, members of the clergy, educators, civic leaders, or other such per­ sons representing a broad cross-section of the views and interests of the community.

In a membership organization, the governing body also should include individuals elected by a broadly based membership according to the organization's governing instrument or bylaws.

The fact that an organization gen­ erally provides facilities or services directly for the benefit of the general public on a continuing basis, is evidence that the organization is pub­ licly supported. Examples are:

* A museum or library that is open to the public,

* A symphony orchestra that gives public performances,

* A conservation organization that provides educational services to the public through the distribution of educational materials, or

* An old-age home that provides domiciliary or nursing services for members of the general public.

regularly publishes scholarly studies widely used by colleges and universities or by mem­bers of the general public is also evidence that the organization is publicly supported.

Similarly, the following factors are also evi­ dence that an organization is publicly supported.

1. Participating in, or sponsoring of, the pro­grams of the organization by members of the public having special knowledge or ex­ pertise, public officials, or civic or commu­nity leaders.

2. Maintaining a definitive program by the or­ganization to accomplish its charitable work in the community, such as slum clearance or developing employment op­ portunities.

3. Receiving a significant part of its funds from a public charity or governmental agency to which it is in some way held accountable as a condition of the grant, contract, or contribution.

Additional factors pertinent to member­ ship organizations. The following are addi­ tional factors in determining whether a membership organization is publicly supported.

1. Whether the solicitation for dues-paying members is designed to enroll a substan­tial number of persons in the community or area, or in a particular profession orfieid of special interest (taking into account the size of the area and the nature of the organization's activities).

2. Whether membership dues for individual (rather than institutional) members have been fixed at rates designed to make membership available to a broad cross section of the interested public, rather than to restrict membership to a limited number of persons.

3. Whether the activities of the organization will be likely to appeal to persons having some broad common interest or purpose, such as educational activities in the case of alumni associations, musical activities in the case of symphony societies, or civic affairs in the case of parent-teacher as­ sociations.

If for the current tax year substantial and material changes occur in an organization's sources of support other than changes arising from unusual grants (discussed later, under Un­usual grants), then in applying either the one-third or the facts and circumstances test, the 4-year computation period applicable to that year, either as an immediately following tax year or as a current tax year, will not apply. Instead of using these computation periods, a computation period of 5 years will apply. The 5-year period consists of the current tax year and the 4 tax years immediately before that year.

For example, if substantial and material changes occur in an organization's sources of support for the 2000 tax year, then, even though the organization meets the one-third or the facts and circumstances test using a computation pe­riod of tax years 1995-1998 or 1996-1999, the organization will not meet either test unless it meets the test using a computation period of tax years 1996-2000 (substituted period).

Substantial and material change. An ex­ample of a substantial and material change is the receipt of an unusually large contribution or bequest that does not qualify as an unusual grant.

If as a result of this substituted period, an organization is not able to meet either the one-third support or the facts and circumstances test for its current tax year, its status with respect to a grantor or contributor will not be affected until notice of change of status is made to the public (such as by publication in the Internal Revenue Bulletin}, This does not apply, however, if the grantor or contributor was responsible for or was aware of the substantial and material change or acquired knowledge that the IRS had given notice to the organization that it would be deleted from classi­fication as a publicly-supported organization.

A grantor or contributor (other than one of the organization's founders, creators, or foundation managers) will not be considered responsible for, or aware of, the substantial and material change, if the grantor or contributor made the grant or contribution relying upon a written state­ ment by the grantee organization that the grant or contribution would not result in the loss of the organization's classification as a publicly-sup­ported organization. The statement must be signed by a responsible officer of the grantee organization and must give enough information, including a summary of the pertinent financial data for the 4 preceding years, to assure a reasonably prudent person that the grant or con­ tribution would not result in the loss of the grantee organization's classification as a publicly-supported organization. If a reasonable doubt exists as to the effect of the grant or contribution, or, if the grantor or contributor is one of the organization's founders, creators, or foundation managers, the grantee organization may request a ruiing from the EO area manager before accepting the grant or contribution for the protection of the grantor or contributor.

If there is no written statement, a grantor or contributor will not be considered responsibie for a substantiai and materiai change if the total gifts, grants, or contributions received from that grantor or contributor for a tax year are 25% or less of the total support received by the organi­zation from all sources for the 4 tax years imme­diately before the tax year. (If the organization has not qualified as publicly supported for those 5 years, see Special computation period for new organizations, next.) For this purpose, total sup­ port does not include support received from that particular grantor or contributor. The grantor or contributor cannot be a person who is in a posi­ tion of authority, such as a foundation manager, or who obtains a position of authority or the ability to exercise control over the organization because of the grant or contribution.

If an organ i- zation has received an advance ruling, the com­putation is based on all the years in the 5-year advance ruling period. Advance rulings are de­scribed later, under Advance rulings to newly created organizations — Initial determination of status.

However, if the advance ruling period is ter­minated by the IRS, the computation period will be based on the period described above under F;rsf tax year at least 8 months and First tax year shorter than 8 months, or if the period is greater, the number of years to which the advance ruling applies.

For purposes of publicly-supported organizations, the term support includes (but is not limited to):

1. Gifts, grants, contributions, or membership fees,

2. Net income from unrelated business activi­ties, whether or not those activities are car­ried on regularly as a trade or business,

3. Gross investment income,

4. Tax revenues levied for the benefit of an organization and either paid to or spent on behalf of the organization, and

5. The value of services or facilities furnished by a governmental unit to an organization without charge (except services or facilities generally furnished to the public without charge).

The term support does not include:

1. Any amount received from the exercise or performance by an organization of the pur­pose or function constituting the basis for its exemption (in general, these amounts include amounts received from any activity the conduct of which is substantially re­lated to the furtherance of the exempt pur­pose or function, other than through the production of income), or

2. Contributions of services for which a de­duction is not allowed.

These amounts are excluded from both the nu­merator and the denominator of the fractions in determining compliance with the one-third sup­port test and ten-percent-of-support require­ment. The following discusses an exception to this general rule.

Organizations dependent primarily on gross receipts from related activities. Orga­ nizations will not satisfy the one-third support test or the ten-percent-of-support requirement if they receive:

1. Almost all support from gross receipts from related activities, and

2. An insignificant amount of support from governmental units (without regard to amounts referred to in (3) in the list of items included in support) and contribu­tions made directly or indirectly by the gen­ eral public.

X, an organization described in section 501(c)(3), is controlled by Thomas Blue, its president. X received $500,000 during the 4 tax years immediately before its current tax year under a contract with the Department of Trans­portation, under which X engaged in research to improve a particular vehicle used primarily by the federal government. During the same pe­riod, the only other support received by X was $5,000 in small contributions primarily from X's employees and business associates. The $500,000 is support under (1) above. Under these circumstances, X meets the conditions of (1) and (2) above and so does not meet the one-third support test or the ten-percent-of-sup­port requirement.

For the rules that apply to organizations that fail to qualify as section 509(a)(1) publicly-sup­ported organizations because of these provi­sions, see Section 509(a)(2) Organizations, later. See also Gross receipts from a related activity in the discussion on section 509(a)(2) organizations.

includes any amounts received from a governmental unit, including donations or contributions and amounts received on a contract entered into with a governmental unit for the performance of services, or from a government research grant. However, these amounts are not support from a governmental unit for these purposes if they constitute amounts received from the exercise or performance of the organization's exempt functions.

Any amount paid by a governmental unit to an organization will not be treated as received from the exercise or performance of its exempt function if the purpose of the payment is prima­rily to enable the organization to provide a serv­ice to, or maintain a facility for, the direct benefit of the public (regardless of whether part of the expense of providing the service or facility is paid for by the public), rather than to serve the direct and immediate needs of the payor . This includes:

1. Amounts paid to maintain library facilities that are open to the public,

2. Amounts paid under government programs to nursing homes or homes for the aged to provide health care or domiciliary services to residents of these facilities, and

3. Amounts paid to child placement or child guidance organizations under government programs for services rendered to children in the community.

These payments are mainly to enable the recipi­ent organization to provide a service or maintain a facility for the direct benefit of the public, rather than to serve the direct and immediate needs of the payor . Furthermore, any amount received from a governmental unit under circumstances in which the amount would be treated as a grant will generally constitute support from a govern­mental unit. See the discussion of Grants , later, under Section 509(a)(2) Organizations.

In deter­mining whether the one-third support test or the ten-percent-of-support requirement is met, in­clude in your computation support from direct or indirect contributions from the general public. This includes contributions from an individual, trust, or corporation but only to the extent that the total contributions from the individual, trust, or corporation, during the 4-year period immedi­ately before the current tax year (or substituted computation period) are not more than 2% of the organization's total support for the same period.

dudes contributions received by the organiza­ tion from organizations (such as publicly-supported organizations) that normally receive a substantial part of their support from direct contributions from the general public, ex­ cept as provided under Grants from public chari­ ties, next.

N is a national foundation for the encouragement of art and is a publicly-sup­ ported organization. Grants to N are permitted to be earmarked for particular purposes. O, which is an art workshop devoted to training young artists and which is claiming status as a initiator of the appropriate percent-of-support fraction. Generally, unusual grants are substan­ tial contributions or bequests from disinterested parties if the contributions:

1. Are attracted by the publicly-supported na­ture of the organization,

2. Are unusual or unexpected in amount, and

3. Would adversely affect, because of the size, the status of the organization as nor­mally being publicly supported. (The or­ganization must otherwise meet the support test in that year without benefit of the grant or contribution.)

For a grant (see Grants, later) that meets the requirements for exclusion, if the terms of the granting instrument require that the funds be paid to the recipient organization over a period of years, the amount received by the organiza­tion each year under the terms of the grant may be excluded for that year. However, no item of gross investment income (defined under Sec- tion 509(a)(2) Organizations, later) may be ex­ cluded under this rule. These provisions allow exclusion of unusual grants made during any of the applicable periods previously discussed under Special computation period for new orga­ nizations and to periods described in Advance rulings to newly created organizations — Initial determination of status, later.

Many newly created organizations cannot meet either the 4-year normally publicly supported provisions or the provisions for newly created organizations to qualify as normally publicly sup­ ported because they have not been in existence long enough. However, a newly created organi­zation may qualify for an advance ruling that it will be treated as an organization described in section 170(b)(1)(A)(vi) during an advance rul­ing period long enough to enable it to develop an adequate support history on which to base an initial determination as to foundation status.

Generally, the type of newly created organi­zation that would qualify for an advance ruling is one that can show that its organizational struc­ture, proposed programs and activities, and in­tended method of operation are likely to attract the type of broadly based support from the gen­eral public, public charities, and governmental units that is necessary to meet the public sup­port requirements discussed earlier, under Qualifying As Publicly Supported.

A newly created organization may request a ruling or determination letter that it will be treated as a section 170(b)(1 )(A)(vi) organization for its first 5 tax years. The request must be accompanied by a consent to extend the statute (on Form 872-C) that, in effect, states the organization will be subject to the taxes imposed under sec­tion 4940 if it fails to qualify as an organization excluded as a private foundation during the 5-year advance ruling period. The organization's first tax year, regardless of length, will count as the first year in the 5-year period. The advance ruling period will end on the last day of the organization's 5th tax year.

Between 30 and 45 days before the end of the advance ruling period, the EO area manager will contact the organization and request the financial support information necessary to make a final determination of foundation status. In general, this is the information requested in Part IV, A of Form 1023.

If a newly created organization has not obtained an advance ruling or determination letter, it cannot rely upon the possibility that it will meet the public support requirements discussed earlier. Thus, in order to avoid the risk of being classified as a private foundation, the organization may comply with the rules governing private founda­tions by paying any applicable private founda­tion taxes. If the organization later meets the public support requirements for the applicable period, it will be treated as a section 170{b)(1)(A)(vi) organization from its inception and any private foundation tax that was imposed may be refunded.

by the IRS before the expiration of the reliance period, the status of grants or contributions with respect to grantors or contrib­utors to the organization will not be affected until notice of change of status of the organization is made to the public (such as by publication in the Internal Revenue Bulletin). However, this will not apply if the grantor or contributor was responsi­ble for, or aware of, the act or failure to act that resulted in the organization's loss of classifica­tion as a publicly-supported organization.

Also, it will not apply if the grantor or contrib­ utor knew that the IRS had given notice to the organization that it would be deleted from this classification. Before any grant or contribution is made, a potential grantee organization may request a ruling on whether the grant or contri­ bution may be made without loss of classifica­tion as a publicly-supported organization.

The ruling request may be filed by the grantee organization with the EO area manager. The issuance of the ruling will be at the sole discretion of the IRS. The organization must submit all information necessary to make a de­termination on the support factors previously discussed. If a favorable ruling is issued, the ruling may be relied upon by the grantor or contributor of the particular contribution in ques­tion. The grantee organization also may rely on the ruling for excluding unusual grants.

In 1980, O organization was founded in Y City by the members of a single family to collect, preserve, interpret, and display to the public important works of art. O is gov­erned by a Board of Trustees that originally consisted almost entirely of members of the founding family.

However, since 1990, members of the found­ ing family or persons related to members of the family have annually been less than 20% of the Board of Trustees. The remaining board mem­bers are citizens of Y City from a variety of professions and occupations who represent the interests and views of the peopie of Y City in the activities carried on by the organization rather than the personai or private interests of the founding famiiy .

O soiicits contributions from the generai pub­lic and for each of its 4 most recent tax years has received totai contributions (in small sums of less than $100, none of which is more than 2% of O's total support for the period) of more than $10,000. These contributions from the general public are 25% of the organization's total sup­port for the 4-year period. For this same period, investment income from several large endow­ment funds has been 75% of its total support. O spends substantially all of its annual income for its exempt purposes and thus depends upon the funds it annually solicits from the public as well as its investment income to carry out its activities on a normal and continuing basis and to acquire new works of art. For the entire period of its existence, O has been open to the public and more than 300,000 people (from Y City and elsewhere) have visited the museum in each of its 4 most recent tax years.

Under these circumstances. O does not meet the one-third support test for its current year since it has received only 25% of its total support for the applicable 4-year period from the general public. However, O has met the ten-percent-of-support requirement as well as the attraction of public support requirement and the factors to be considered, under the facts and circumstances test, in determining whether an organization is publicly supported. Therefore, O is classified as a publicly-supported organiza­ tion for its current tax year and the next tax year.

In 1990, the P Philharmonic Orchestra was organized in Z City by a local music society and a local women's club to pres­ent to the public a wide variety of musical pro­grams intended to foster music appreciation in the community. The orchestra is composed of professional musicians who are paid by the as­sociation. Twelve performances, open to the public, are scheduled each year. A small admis­ sion charge is made for each of these perform­ances. In addition, several performances are staged annually without charge.

During its 4 most recent tax years, P re­ceived separate contributions of $200,000 each from Arnanda Green and Jackie White (not members of a single family) and support of $120,000 from the Z Community Chest, a public federated fund-raising organization operating in Z City. P depends on these funds to carry out its activities and will continue to depend on contri­butions of this type to be made in the future. P has also begun a fund-raising campaign in an attempt to expand its activities for the coming years.

P is governed by a Board of Directors com­posed of five individuals. A faculty member of a local college, the president of a local music soci­ety, the head of a local bank, a prominent doctor, and a member of the governing body of the local Chamber of Commerce currently serve on the Board and represent the interests and views of the community in the activities carried on by P. P's support from the general public, directly and indirectly, does not meet the one-third support test ($140,800/$520,000 = 27% of total sup­ port). However, it meets the ten-percent-of-sup­ port requirement. P also meets the requirement of the attraction of public support. As a result of satisfying these requirements and the public support factors, P is considered to be a publicly-supported organization.

If P were a newly created organization, it could obtain a ruling that it is a publicly-sup­ported organization by reason of its purposes, organizational structure, and proposed method of operation. Even if P had initially been founded by the contributions of a few individuals, this would not, in and of itself, disqualify P from receiving the ruling.

Q is a philanthropic organiza­tion founded in 1985 by Anne Elm for the pur­pose of making annual contributions to worthy charities. Anne created Q as a charitable trust by transferring $500,000 worth of appreciated se­curities to Q.

Under the trust agreement, Anne and two other family members are the sole trustees and are vested with the right to appoint successor trustees, in each of its 4 most recent tax years, Q received $15,000 in investment income from its original endowment. Each year Q solicits funds by operating a charity ball at Anne's home. Guests are invited and asked to make contribu­tions of $100 per couple. During the 4-year pe­riod involved, $15,000 was received from the proceeds of these events. Anne and the family have also made contributions to Q of $25,000 over the course of the organization's 4 most recent tax years. Q makes disbursements each year of substantially all of its net income to the public charities chosen by the trustees.

For Q's current tax year, Q's sources of sup­port are computed on the basis of the 4 immedi­ately preceding years as follows. Q's support from the general public does not meet the one-third support test ($17,000/ $100,000 = 17% of total support). Even though it does meet the ten-percent-of-support require­ment, its method of solicitation makes it questionable whether Q satisfies the attraction of public support requirement. Because of its method of operating, Q also has a greater bur­den of establishing its publicly supported nature under the percentage of financial support factor. Based on these facts and on Q's failure to re­ceive favorable consideration under the remain­ ing factors, Q does not qualify as a publicly-supported organization.

Community trusts are often established to at­tract large contributions of a capital or endow­ment nature for the benefit of a particular community or area. Often these contributions come initially from a small number of donors. While the community trust generally has a gov­erning body composed of representatives of the particular community or area, its contributions are often received and maintained in the form of separate trusts or funds that are subject to vary­ ing degrees of control by the governing body.

To qualify as a publicly-supported organiza­tion, a community trust must meet the one-third support test, explained earlier under Qualifying As Publicly Supported. If it cannot meet that test, it must be organized and operated so as to attract new and additional public or governmen­tal support on a continuous basis sufficient to meet the facts and circumstances test, also ex­plained earlier. Community trusts are generally able to satisfy the attraction of public support requirement (as contained in the facts and cir­cumstances test) if they seek gifts and bequests from a wide range of potential donors in the community or area served, through banks or trust companies, through attorneys or other pro­fessional persons, or in other appropriate ways that call attention to the community trust as a potential recipient of gifts and bequests made for the benefit of the community or area served. A community trust, however, does not have to engage in periodic, community-wide, fund-rais­ing campaigns directed toward attracting a large number of small contributions in a manner simi­lar to campaigns conducted by a community chest or a united fund.

Separate trusts or funds. Any community trust may be treated as a single entity, rather than as an aggregation of separate funds, in which case all qualifying funds associated with that organization (whether a trust, not-for-profit corporation, unincorporated association, or a combination thereof) will be treated as compo­nent parts of the organization.

To be treated as a single en­ tity, a community trust must meet all of the fol­ lowing requirements.

1. The organization must be commonly known as a community trust, fund, founda­ tion , or other similar name conveying the concept of a capital or endowment fund to support charitable activities in the commu­nity or area it serves.

2. All funds of the organization must be sub­ject to a common governing instrument (or a master trust or agency agreement) that may be embodied in a single (or several) document(s) containing common lan­ guage.

Section 501 (c)(3) Organizations

3. The organization must have a common governing body (or distribution committee) that either directs or, in the case of a fund designated for specified beneficiaries, monitors the distribution of a!! funds exclu- siveiy for charitabie purposes. The govern­ ing body must have the power in the governing instrument, the instrument of transfer, the resolutions or bylaws of the governing body, a written agreement, or otherwise —

a. To modify any restriction or condition on the distribution of funds for any speci­fied charitable purposes or to specified organizations if in the sole judgment of the governing body (without the neces­sity of the approval of any participating trustee, custodian, or agent), the restric­tion or condition becomes, in effect, un­necessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served,

b. To replace any participating trustee, custodian, or agent for breach of fiduci­ary duty understate law, and

c. To replace any participating trustee, etc., forfailure to produce a reasonable return of net income over a reasonable period of time. (The governing body will determine what is reasonable.)

4. The organization must prepare periodic fi­nancial reports treating all of the funds that are held by the community trust, either di­rectly or in component parts, as funds of the organization.

A community trust can meet the requirement in (3) above even if its exercise of the powers in (3)(a), (b), or (c) is reviewable by an appropriate state authority.

Component part. To be treated as a com­ ponent part of a community trust (rather than as a separate trust or a not-for-profit corporation), a trust or fund:

1. Must be created by gift, bequest, legacy, devise, or other transfer to a community trust that is treated as a single entity (de­scribed above), and

2. May not be directly subjected by the trans­feror to any material restriction or condition with respect to the transferred assets.

Grantors and contributors. Grantors, con­tributors, or distributors to a community trust may rely on the public charity status, which the organization has claimed in a timely filed notice, on or before the date the IRS informs the public (through such means as publication in the Inter­nal Revenue Bulletin) that such reliance has expired. However, if the grantor, contributor, or distributor acquires knowledge that the IRS has notified the community trust that it has failed to establish that it is a public charity, then reliance on the claimed status expires at the time such knowledge is acquired.

private foundation status. Generally, an organi­ zation described in section 509(a){2) may also fit the description of a publicly-supported organiza­ tion under section 509(a)(1). There are, how­ ever, two basic differences.

1. For section 509(a)(2) organizations, the term support includes items of support dis­cussed earlier (under Support, in the dis­cussion of Section 509(a)(1) Organizations) and income from activities directly related to their exempt function. This income is not included in meeting the support test for a publicly-supported organ­ ization under section 509(a)(1).

2. Section 509(a)(2) places a limit on the total gross investment income and unrelated business taxable income (in excess of the unrelated business tax) an organization may have, while section 509{a)(1) does not.

To be excluded from private foundation treat­ ment under section 509(a)(2), an organization must meet two support tests.

1. The one-third support test.

2. The not-more-than-one-third support test.

Both these tests are designed to insure that an organization excluded from private founda­tion treatment is responsive to the general pub­lic, rather than to the private interests of a limited number of donors or other persons.

One-third support test. The one-third sup­port test will be met if an organization normally receives more than one-third of its support in each tax year from any combination of:

1. Gifts, grants, contributions, or membership fees, and

2. Gross receipts from admissions, sales of merchandise, performance of services, or furnishing facilities in an activity that is not an unrelated trade or business, subject to certain limits, discussed below under Limit on gross receipts.

For this purpose, the support must be from permitted sources, which include:

* Section 509(a)(1) organizations, described earlier,

* Governmental units, described under Sec­ tion 509(a)(1) Organizations, and

* Persons other than Disqualified persons (defined under Section 509(a)(3) Organi­ zations).

In computing the amount of support received from gross receipts under (2) above, gross receipts from related activities received from any person or from any bureau or similar agency of a governmental unit are includible in any tax year only to the extent the gross receipts are not more than the greater of $5,000 or 1% of the organization's total sup­ port in that year.

Not-more-than-one-third support test. This test will be met if an organization normally re­ceives no more than one-third of its support in each tax year from the total of:

1. Gross investment income, and

2. The excess (if any) of unrelated business taxable income from unrelated trades or businesses acquired after June 30, 1975 over the tax imposed on that income.

Gross investment income. Gross invest­ment income means the gross amount of in­come from interest, dividends, payments with respect to securities loans, rents, and royalties, but it does not include any income that would be included in computing tax on unrelated business income from trades or businesses.

Both support tests are computed on the basis of the nature of the organization's normal sources of support. An organization will be considered to have normally met both tests for its current tax year and the tax year immediately following, if it meets those tests on the basis of the total support received for the 4 tax years immediately before the cur­rent tax year.

Exception for material changes in sources of support. If during the current tax year there are substantial and material changes in an organization's sources of support other than changes arising from unusual grants (dis­ cussed, later, under Unusual grants), neither the 4-year computation period for the current year as an immediately following tax year, nor the 4-year computation period for that year as a current tax year applies. Instead, the normal sources of support will be determined on the basis of a 5-year period consisting of the current tax year and the 4 preceding tax years.

For example, if material changes occur in support for the year 2002, then even though the organization meets the requirements of the sup­ port tests based on the years 1997-2000 or 1998-2000, it does not meetthese tests unless it meets the requirements based on the 5-year computation period of 1998-2002. An example of a substantial and material change is the re­ceipt of an unusually large contribution that does not qualify as an unusual grant.

If an or­ ganization is not able to meet either of the sup­port tests because of a substantial or material change in the sources of support, its status with respect to a grantor or contributor will not be affected until notice of a change in status is made to the public (such as by publication in the Internal Revenue Bulletin).

However, this rule does not apply to any grantor or contributor who:

1. Was responsible for the substantial or ma­terial change,

2. Was aware of it, or

3. Has acquired knowledge that the IRS gave notice to the organization that it would no longer be classified as a section 509(a)(2) organization.

A grantor or contributor (other than one of the organization's founders, creators, or foundation managers) is not considered responsible for, or aware of, the substantial and material change if the grantor or contributor made the grant or contribution relying upon a written statement by the grantee organization that the grant or contri­bution would not result in the loss of the organization's classification as an organization that is not a private foundation. The statement must be signed by a responsible officer of the grantee organization and must give enough in­formation, including a summary of the pertinent financial data for the 4 preceding years, to as­sure a reasonably prudent person that the grant or contribution would not result in the loss of the grantee organization's classification as not a private foundation. If a reasonable doubt exists as to the effect of the grant or contribution, or if the grantor or contributor is one of the organization's founders, creators, or foundation managers, the grantee organization may re­quest a ruling from its EO area manager for the protection of the grantor or contributor.

If there is no written statement, a grantor or contributor will not be considered responsible for a substantial and material change if the total gifts, grants, or contributions received from that grantor or contributor for a tax year are 25% or less of the total support received by the organi­zation from all sources for the 4 tax years imme­diately before the tax year. (If the organization has not qualified as publicly supported for those 5 years, see Special computation period for new organizations, next.) For this purpose, total support does not include support received from that particular grantor or contributor. The grantor or contributor cannot be a person who is in a position of authority, such as a foundation manager, or who obtains a position of authority or the ability to exercise control over the organi­zation because of the grant or contribution.

A newly created organization may need several years to establish its normal sources of support. Organizations generally are allowed a 5-year period to establish that they meet the section 509(a){2) support test. This is called the advance ruling period. If an organiza­tion can reasonably be expected to meet the support test by the end of its advance ruling period, the IRS may issue it an advance ruling or determination letter. See Advance rulings for newly created organizations, later. This will per­ mit the organization to be treated as a section 509(a)(2) organization for its advance ruling pe­ riod.

An advance ruling or determination is not a ruling that the organization will meet the require­ments of section 509{a)(2) during the advance ruling period. An organization that receives an advance ruling or determination letter must, at the expiration of the advance ruling period, es­ tablish that it satisfies the section 509(a){2) sup­ port requirements for the years covered by the advance ruling, or the organization will be pre­sumed to be a private foundation under section 508(b).

Unusual grants. An unusual grant may be excluded from the support test computation if it:

1. Was attracted by the publicly supported nature of the organization,

2. Was unusual or unexpected in amount, and

3. Would, because of its size, adversely af­fect the status of the organization as nor­mally meeting the one-third support test. (The organization must otherwise meet the test in that year without benefit of the grant or contribution.)

A grant or contribution will be considered an unu­sual grant if the above 3 factors apply and it has all of the following characteristics. If these fac­tors and characteristics apply, then even without the benefit of an advance ruling, grantors or contributors have assurance that they will not be considered responsible for substantial and ma­terial changes in the organization's sources of support.

1. The grant or contribution is not made by a person (or related person) who created the organization or was a substantial contribu­tor to the organization before the grant or contribution.

2. The grant or contribution is not made by a person (or related person) who is in a posi­tion of authority, such as a foundation manager, or who otherwise has the ability to exercise control over the organization. Similarly, the grant or contribution is not made by a person (or related person) who, because of the grant or contribution, ob­ tains a position of authority or the ability to otherwise exercise control over the organi­ zation.

3. The grant or contribution is in the form of cash, readily marketable securities, or as­ sets that directly further the organization's exempt purposes, such as a gift of a paint­ ing to a museum.

4. The donee organization has received ei­ther an advance or final ruling or determi­nation letter classifying it as a publicly-supported organization and, ex­cept for an organization operating under an advance ruling or determination letter, the organization is actively engaged in a program of activities in furtherance of its exempt purpose.

5. No material restrictions or conditions have been imposed by the grantor or contributor upon the organization in connection with the grant or contribution.

6. If the grant or contribution is intended for operating expenses, rather than capital items, the terms and amount of the grant or contribution are expressly limited to one year's operating expenses.

If there is any doubt that a grant or contribution may be excluded as an unusual grant, the grantee organization may re­quest a ruling, submitting all of the necessary information for making a determination to its EO area manager. The IRS has the sole discretion of issuing a ruling, but if a favorable ruling is issued, it may be relied on by the grantor or contributor for purposes of a charitable contribu­ tions deduction and by the organization for pur­poses of the exclusion for unusual grants. The organization should follow the procedures set out in Revenue Procedure 2003-4 (or later up­ date).

In addition to the characteristics listed above, the following factors may be considered by the IRS in determining if the grant or contribution is an unusual grant.

1. Whether the contribution was a bequest or a transfer while living. A bequest will ordi -

narily be given more favorable considera­tion than a transfer while living.

2. Whether, before the contribution, the or­ganization carried on an actual program of public solicitation and exempt activities and was able to attract a significant amount of public support.

3. Whether the organization may reasonably be expected to attract a significant amount of public support after the contribution. Continued reliance on unusual grants to fund an organization's current operating expenses may be evidence that the organ­ization cannot attract future support from the general public.

4. Whether the organization met the one-third support test in the past without the benefit of any exclusions of unusual grants.

5. Whether the organization has a represen­ tative governing body.

In 1998, Y, an organization de­ scribed in section 501(c)(3), was created by Marshall Pine, the holder of all the common stock in M corporation, Lisa, Marshall's wife, and Edward Forest, Marshall's business associate. Each of the three creators made small cash contributions to Y to enable it to begin opera­tions. The purpose of Y was to sponsor and equip athletic teams composed of underprivi­leged children of the community. Between 1998 and 2001, Y was able to raise small amounts of contributions through fund-raising drives and selling admission to some of the sponsored sporting events.

For its first year of operations, it was deter­mined that Y was excluded from the definition of private foundation under the provisions of sec­tion 509(a)(2). Marshall made small contribu­tions to Y from time to time. At all times, the operations of Y were carried out on a small scale, usually being restricted to the sponsor­ship of two to four baseball teams of underprivi­ leged children.

In 2002, M recapitalized and created a first and second class of 6% nonvoting preferred stock, most of which was held by Marshall and Lisa. Marshall then contributed 49% of his com­mon stock in M to Y. Marshall, Lisa, and Edward continued to be active participants in the affairs of Y from its creation through 2002. Marshall's contribution of M's common stock was 90% of Y's total support for 2002. Although Y could satisfy the one-third support test on the basis of the 4 tax years before 2002, a combination of the facts and circumstances preclude Marshall's contribution of M's common stock in 2002 from being excluded as an unusual grant. Marshall's contribution in 2002 was a substantial and mate­ rial change in Y's sources of support and on the basis of the 5-year period (1998 to 2002), Y would not be considered as normally meeting the one-third support test for the tax years 2002 (the current tax year) and 2003 (the immediately following tax year).

M. an organization described in section 501(c)(3), was organized to promote the appreciation of ballet in a particular region of the United States. Its principal activities will consist of erecting a theater for the performance of bal­let and the organization and operation of a ballet company. The governing body of M consists of nine prominent unrelated citizens living in the region who have either an expertise in baiiet or a strong interest in encouraging appreciation of baiiet . To provide sufficient capita! for M to begin its activities. X. a private foundation, makes a grant of $500,000 in cash to M. Although Albert Cedar, the creator of X, is one of the nine mem­bers of M's governing body, was one of M's original founders, and continues to lend his prestige to M's activities and fund-raising efforts, Aibert does not, directly or indirectly, exercise any controi over M. By the ciose of its first tax year, M aiso has received a significant amount of support from a number of smaiier contribu­tions and piedges from members of the generai public. Upon the opening of its first season of baiiet performances, M expects to charge ad­mission to the general public. Under these cir­cumstances, the grant by X to M may be excluded as an unusual grant.

Newly created organizations generally are allowed an advance ruling period of 5 years.

An organization that is claiming on its Form 1023 (or other section 508{b) notice) to be de­scribed undersection 509(a)(2) must have oper­ ated for at least 1 tax year consisting of at least 8 months before the IRS will make a final determi­nation of its status. However, if an organization can show that it can reasonably be expected to qualify under section 509(a)(2), the IRS will is­sue an advance ruling or determination letter on the organization's private foundation status. Generally, an advance ruling or determination provides that an organization will be treated as an organization described in section 509{a)(2) for an advance ruling period of 5 years.

A newly created organization may request a ruling or determination that it will be treated as a section 509(a)(2) organization for its first 5 tax years. This request must be filed with a consent to extend the statute (Form 872-C) that in effect states the organization will be subject to private foundation taxes ( undersection 4940) if it fails to qualify as not a private foundation during the 5-year advance ruling period.

In determining whether an organization can meet the support tests, the basic consideration is whether its organizational structure, proposed programs or activities, and intended method of operation will attract the type of br

sons having special knowledge in the par­ticular field in which the organization is operating or of community leaders, such as elected officials, members of the clergy, and educators, or, in the case of a mem­bership organization, of individuals elected under the organization's governing instru­ment or bylaws by a broadly based mem­ bership,

2. Whether a substantial part of the

organization's initial funding is to be pro­vided by the general public, by public char­ities, or by government grants rather than by a limited number of grantors or contrib­utors who are disqualified persons with re­spect to the organization,

3. Whether a substantial proportion of the organization's initial funds are placed, or will remain, in an endowment and whether the investment of those funds is unlikely to result in more than one-third of its total support being received from gross invest­ment income and from unrelated business taxable income in excess of the tax im­posed on that income,

4. Whether an organization that carries on fund-raising activities has developed a concrete plan for solicitation of funds on a community or area-wide basis,

5. Whether an organization that carries on community service activities has a con­crete program to carry out its work in the community,

6. Whether membership dues for individual (rather than institutional) members of an organization that carries on education or other exempt activities for or on behalf of members have been fixed at rates de­signed to make membership available to a broad cross section of the public rather than to restrict membership to a limited number of persons, and

7. Whether an organization that provides goods, services, or facilities is or will be required to make its services, facilities, performances, or products available (re­gardless of whether a fee is charged) to the genera! public, public charities, or gov­ernmental units rather than to a limited number of persons or organizations.

Any payment of money or transfer of property without adequate consideration is considered a gift or contribution. When payment is made or property is trans­ferred as consideration for admissions, sales of merchandise, performance of services, or fur­nishing facilities to the donor, the status of the payment or transfer under section 170(c) deter­mines whether and to what extent the payment or transfer is a gift or contribution as distin­guished from gross receipts from related activi­ ties.

The amount includible in computing support from gifts, grants, or contributions of property or use of property is the fair market or rental value of the property at the date of the gift or contribu­ tion.

The fact that a membership organi­zation provides services, admissions, facilities, or merchandise to its members as part of its overall activities will not, in itself, result in the classification of fees received from members as gross receipts subject to the $5,000 or 1% limit rather than membership fees. However, if an organization uses membership fees as a means of selling admissions, merchandise, services, or the use of facilities to members of the general public who have no common goal or interest (other than the desire to buy the admissions, merchandise, services, or use of facilities), the fees are not membership fees but are gross receipts.

On the other hand, to the extent the basic purpose of the payment is to provide support for the organization rather than to buy admissions, merchandise, services, or the use of facilities, the payment is a membership fee.

The term any bureau or similar agency of a governmental unit for determining amounts subject to the $5,000 or 1% limit means a specialized operating unit of the executive, judicial, or legislative branch of government in which business is conducted under certain rules and regulations. Since the term bureau refers to a unit functioning at the operating, as distinct from the policy-making, level of government, it normally means a subdi­vision of a department of government. The term would not usually include those levels of govern-

ment that are basically policy-making or admin­istrative, such as the office of the Secretary or Assistant Secretary of a department, but would consist of the highest operational level under the policy-making or administrative levels.

For purposes of the one-third support test, grants received from a section 509(a)(1) organization (public charity) are generally includible in full in comput­ ing the numerator of the support fraction for that tax year.

However, if the amount received is consid­ered an indirect contribution from one of the public charity's donors, it will retain its character as a contribution from the donor, and if, for example, the donor is a substantial contributor to the ultimate recipient, the amount is excluded from the numerator of the support fraction. If a public charity makes both an indirect contribu­tion from its donor and an additional grant to the ultimate recipient, the indirect contribution is treated as made first.

An indirect contribution is one that is ex­pressly or impliediy earmarked by the donor as being for, orforthe benefit of, a particular recipi­ ent rather than for a particular purpose.

An organization's support is determined solely on the cash re­ceipts and disbursements method of account­ing. For example, if a grantor makes a grant to an organization payable over a term of years, the grant will be includible in the support fraction of the grantee organization only when and to the extent amounts payable under the grant are received by the grantee.

Gross receipts from a related activity. When the charitable purpose of an organization described in section 501(c)(3) is accomplished

through furnishing facilities for a rental fee or loans to a particular class of persons, such as aged, sick, or needy persons, the support re­ceived from those persons will be considered gross receipts from a related exempt activity rather than gross investment income or unre­lated business taxable income.

However, if the organization also furnishes facilities or loans to persons who are not mem­bers of a particular class and furnishing the facilities orfunds does not contribute importantly to accomplishing the organization's exempt pur­poses, the support received from furnishing the facilities or funds will be considered rents or interest and will be treated as gross investment income or unrelated business taxable income.

Section 509{a){3) excludes from the definition of private foundation those organizations that meet all of the three following requirements.

1. The organization must be organized and at all times thereafter operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations (which can be ei­ther domestic or foreign) as described in section 509(a)(1) or 509(a){2). These sec­tion 509(a)(1) and 509(a)(2) organizations are commonly called publicly-supported organizations.

2. The organization must be operated, super­vised, or controlled by or in connection with one or more of the organizations de­scribed in section 509(a)(1) or 509(a)(2).

3. The organization must not be controlled directly or indirectly by disqualified persons (defined later) other than foundation man­agers and other than one or more organi­zations described in section 509(a)(1) or 509(a)(2).

Section 509(a)(3) differs from the other pro­ visions of section 509 that describe a publicly-supported organization. Instead of describing an organization that conducts a par­ticular kind of activity or that receives financial support from the general public, section 509(a)(3) describes organizations that have es­tablished certain relationships in support of sec­tion 509(a)(1) or 509(a)(2) organizations. Thus, an organization may qualify as other than a private foundation even though it may be funded by a single donor, family, or corporation. This kind of funding ordinarily would indicate private foundation status, but a section 509(a){3) organization has limited purposes and activities and gives up a significant degree of independence. The requirement in (2) above provides that a supporting (section 509(a)(3}) organization have one of three types of reiationships with one or more publicly- supported (section 509(a)(1) or 509(a){2)} organizations, it must be:

1. Operated, supervised, or controiled by a pubiicly -supported organization,

2. Supervised or controlied in connection with a publicly-supported organization, or

3. Operated in connection with one or more pubiicly -supported organizations.

More than one type of relationship may exist between a supporting organization and a pubiiciy -supported organization. Any relation-ship, however, must insure that the supporting organization will be responsive to the needs or demands of, and will be an integral part of or maintain a significant involvement in, the opera­tions of one or more publicly-supported organi­ zations.

The first two relationships, operated, super­ vised, or controlled by and supervised or controlled in connection with, are based on an existence of majority control of the governing body of the supporting organization by the publicly-supported organization. They have the same rules for meeting the tests under require­ment (1) and are discussed as Category one in the following discussion. The operated in con­ nection with relationship requires that the sup­porting organization be responsive to and have operational relationships with publicly-sup­ported organizations. This third relationship has different rules for meeting the requirement (1) tests and is discussed separately as Category two, later.

This category includes organi­ zations either operated, supervised, or con­ trolled by or supervised or controlled in connection with organizations described in section 509(a)(1)or509(a)(2).

These kinds of organizations have a govern­ing body that either includes a majority of mem­bers elected or appointed by one or more publicly-supported organizations or that con­sists of the same persons that control or manage the publicly-supported organizations. If an or­ganization is to qualify under this category, it also must meet an organizational test, an opera­ tional test, and not be controlled by disqualified persons. These requirements are covered later in this discussion.

Each of these terms, as used for supporting organizations, presupposes a substantial de­gree of direction over the policies, programs, and activities of a supporting organization by one or more publicly-supported organizations. The relationship required under any one of these terms is comparable to that of a parent and subsidiary, in which the subsidiary is under the direction of and is accountable or responsi­ble to the parent organization. This relationship is established when a majority of the officers, directors, or trustees of the supporting organiza­ tion are appointed or elected by the governing body, members of the governing body, officers acting in their official capacity, or the membership of one or more publicly-supported organiza­tions.

A supporting organization may be operated, supervised, or controlled by one or more publicly-supported organizations even though its governing body is not made up of representa­tives of the specified publicly-supported organi­zations for whose benefit it is operated. This occurs only if it can be demonstrated that the purposes of the publicly-supported organiza­tions are carried out by benefiting the specified publicly-supported organizations (discussed, later, under Specified organizations).

The control or management of the sup­porting organization must be vested in the same persons that control or manage the publicly-sup­ ported organization. In order for an organization to be supervised or controlled in connection with a publicly-supported organization, common su­pervision or control by the persons supervising or controlling both organizations must exist to insure that the supporting organization will be responsive to the needs and requirements of the publicly-supported organization.

An organization will not be considered super­ vised or controlled in connection with one or more publicly-supported organizations if it merely makes payments (mandatory or discre­tionary) to the pubiicly -supported organizations. This is true even if the obligation to make pay­ments is legally enforceable and the organization's governing instrument contains provisions requiring the distribution. These ar­rangements do not provide a sufficient connec­tion between the payer organization and the needs and requirements of the publicly-sup­ported organizations to constitute supervision or control in connection with the organizations.

An organization is or­ganized exclusively for one or more of the pur­poses specified in requirement (1) only if its articles of organization:

1. Limit the purposes of the organization to one or more of those purposes,

2. Do not expressly empower the organiza­tion to engage in activities that are not in furtherance of those purposes,

3. Specify (as explained, later, under Speci­fied organizations ) the publicly-supported organizations on whose behalf the organi­zation is operated, and

4. Do not expressly empower the organiza­tion to operate to support or benefit any organization other than the ones specified in item (3).

In meeting the organizational test, the organization's purposes as stated in its articles may be as broad as, or more specific than, the purposes set forth in requirement (1) at the be­ginning of the discussion of Section 509(a)(3) Organizations. Therefore, an organization that by the terms of its articles is formed for the benefit of one or more specified publicly-sup­ported organizations will, if it otherwise meets the other requirements, be considered to have met the organizational test.

For example, articles stating that an organi­zation is formed to perform the publishing func­tions of a specified university are enough to comply with the organizational test. An organi­zation operated, supervised, or controlled by, or supervised or controlled in connection with, one or more publicly-supported organizations to carry out the purposes of those organizations, will be considered to have met these require­ments if the purposes set forth in its articles are similar to but no broader than the purposes set forth in the articles of its controlling organiza­tions. If, however, the organization by which it is operated, supervised, or controlled is a publicly-supported section 501(c)(4), 501(c)(5), or 501(c)(6) organization, the supporting organi­ zation will be considered to have met these requirements if its articles require it to carry on charitable, etc., activities within the meaning of section 170(c)(2).

In order to meet requirement (1), an organization must be organ­ized and operated exclusively to support or ben­ efit one or more specified pubiiciy -supported organizations. The manner in which the publicly-supported organizations must be speci­fied in the articles will depend on whether the supporting organization is operated, super­ vised, or controlied by or supervised or con­ trolled in connection with the organizations or whether it is operated in connection with the organizations.

Generally, the articles of the supporting or­ganization must designate each of the specified organizations by name, unless:

1. The supporting organization is operated, supervised, or controlled by or super­ vised or controlled in connection with one or more publicly-supported organiza­tions and the articles of organization of the supporting organization require that it be operated to support or benefit one or more beneficiary organizations that are desig­nated by class or purpose and include:

a. The publicly-supported organizations referred to above (without designating the organizations by name), or

b. Publicly-supported organizations that are closely related in purpose or func­tion to those publicly-supported organi­zations, or

2. A historic and continuing relationship ex­ists between the supporting organization and the publicly-supported organizations, and because of this relationship, a substantial identity of interests has developed between the organizations.

If a supporting organization is operated, su­pervised, or controlled by, or is supervised or controlled in connection with, one or more publicly-supported organizations, it will not fail the test of being organized for the benefit of specified organizations solely because its arti­ cles:

1. Permit the substitution of one publicly-sup­ported organization within a designated class for another publicly-supported organ­ ization either in the same or a different class designated in the articles,

2. Permit the supporting organization to oper­ate for the benefit of new or additional publicly-supported organizations of the same or a different class designated in the articles, or

3. Permit the supporting organization to vary the amount of its support among different publicly-supported organizations within the class or classes of organizations desig­nated by the articles.

See also the rules considered under the Organi­ zational test, in the later discussion for organiza­ tions in Category two.

A supporting organization will be re­garded as operated exclusively to support one or more specified publicly-supported organiza­tions only if it engages solely in activities that support or benefit the specified organizations. These activities may include making payments to or for the use of, or providing services or facilities for, individual members of the charita­ ble class benefited by the specif led publicly-sup­ ported organization.

For example, a supporting organization may make a payment indirectly through another un­related organization to a member of a charitable class benefited by a specified publicly-sup­ported organization, but only if the payment is a grant to an individual rather than a grant to an organization. Similarly, an organization will be regarded as operated exclusively to support or benefit one or more specified publicly-supported organizations if it supports or benefits a section 501{c)(3) organization, other than a private foundation, that is operated, supervised, or con­ trolled directly by or in connection with a publicly-supported organization, or an organiza­ tion that is a publicly-owned college or univer­sity. However, an organization will not be regarded as one that is operated exclusively to support or benefit a publicly-supported organi­zation if any part of its activities is in furtherance of a purpose other than supporting or benefiting one or more specified publicly-supported orga­ nizations.

A supporting organization does not have to pay its income to the publicly-supported organiza­tions to meet the operational test. It may satisfy the test by using its income to carry on an inde­pendent activity or program that supports or benefits the specified publicly-supported organi­zations. All such support, however, must be lim­ ited to permissible beneficiaries described earlier. The supporting organization also may engage in fund-raising activities, such as solicitations , fund-raising dinners, and unrelated trade or business, to raise funds for the publicly-supported organizations or for the per­ missible beneficiaries.

Absence of control by disqualified persons. The third requirement an organization must meet to qualify as a supporting organization requires that the organization not be controlled directly or indirectly by one or more disqualified persons (other than foundation managers or one or more publicly-supported organizations).

For the purposes of the rules discussed in this publication, the fol­lowing persons are considered disqualified per­ sons:

1. All substantial contributors to the founda­ tion.

2. All foundation managers of the foundation.

3. An owner of more than 20% of:

a. The total combined voting power of a corporation that is (during such owner­ship) a substantial contributor to the foundation,

b. The profits interest of a partnership that is (during such ownership) a substantial contributor to the foundation, or

c. The beneficial interest of a trust or unin­corporated enterprise that is (during such ownership) a substantial contribu­ tor to the foundation.

4. A member of the family of any of the indi­ viduals just listed.

5. A corporation of which more than 35% of the total combined voting power is owned by persons just listed.

6. A partnership of which more than 35% of the profits interest is owned by persons described in(1), (2), (3), or (4).

7. A trust, or estate, of which more than 35% of the beneficial interest is owned by per­ sons described in (1), (2), (3), or (4).

Remember, however, that foundation manag­ ers and publicly-supported organizations are not disqualified persons for purposes of the third requirement under section 509(a)(3).

If a person who is a disqualified person with respect to a supporting organization, such as a substantial contributor, is appointed or desig­nated as a foundation manager of the support­ing organization by a publicly-supported beneficiary organization to serve as the repre­ sentative of the publicly-supported organization, that person is still a disqualified person, rather than a representative of the publicly-supported organization.

An organization is considered controlled for this purpose if the disqualified persons, by com­bining their votes or positions of authority, may require the organization to perform any act that significantly affects its operations or may pre­vent the organization from performing the act. This includes, but is not limited to, the right of any substantial contributor or spouse to desig­nate annually the recipients from among the publicly-supported organizations of the income from his or her contribution. Except as explained under Proof of independent control, next, a supporting organization will be considered to be controlled directly or indirectly by one or more disqualified persons if the voting power of those persons is 50% or more of the total voting power of the organization's governing body, or if one or more of those persons have the right to exercise veto power over the actions of the organization. Thus, if the governing body of a foundation is composed of five trustees, none of whom has a veto power over the actions of the foundation, and no more than two trustees are at any time disqualified persons, the foundation is not con­sidered controlled directly or indirectly by one or more disqualified persons by reason of this fact alone. However, all pertinent facts and circum­stances (including the nature, diversity, and in­come yield of an organization's holdings, the length of time particular stocks, securities, or other assets are retained, and its manner of exercising its voting rights with respect to stocks in which members of its governing body also have some interest) are considered in determin­ing whether a disqualified person does in fact indirectly control an organization.

This category includes organi­zations operated in connection with one or more organizations described in section 509(a)(1)or509(a)(2).

This kind of section 509(a)(3) organization is one that has certain types of operational rela­tionships, if an organization is to qualify as a section 509(a)(3) organization because it is op­erated in connection with one or more publicly-supported organizations, it must not be controlled by disqualified persons (as described earlier) and it must meet an organizational test, a responsiveness test, an integral-part test, and an operational test.

This test requires that the organization, in its governing instrument:

1. Limit its purposes to supporting one or more publicly-supported organizations,

2. Designate the organizations operated, su­pervised, or controlled by, and

3. Not have express powers inconsistent with these purposes.

These tests apply to all supporting organiza­ tions.

In the case of an organization that is oper­ ated in connection with one or more publicly-supported organizations, however, the designation requirement under the organiza­tional test can be satisfied using either of the following two methods.

If an organization isorganized and operated to support one or more publicly-supported organizations and it is operted in connection with that type of organiza­tion or organizations, then, its articles of organization must designate the specified orga­nizations by name to satisfy the test. But a sup­porting organization that has one or more specified organizations designated by name in its articles will not fail the organizational test solely because its articles:

1. Permit a publicly-supported organization, that is designated by class or purpose rather than by name, to be substituted for the publicly-supported organization or or­ganizations designated by name in the arti­cles, but only if the substitution is conditioned upon the occurrence of an event that is beyond the control of the sup­ porting organization, such as loss of ex­ emption, substantial failure or abandonment of operations, or dissolution of the organization or organizations desig­nated in the articles,

2. Permit the supporting organization to oper­ate for the benefit of an organization that is not a publicly-supported organization, but only if the supporting organization is cur­rently operating for the benefit of a publicly-supported organization and the possibility of its operating for the benefit of other than a publicly-supported organiza­tion is remote, or

3. Permit the supporting organization to vary the amount of its support between different designated organizations, as long as it meets the requirements of the integral-part test (discussed later) with respect to at least one beneficiary organization.

If the beneficiary organization referred to in (2) is not a publicly-supported organization, the supporting organization will not meet the opera­tional test. Therefore, if a supporting organiza­tion substituted a beneficiary other than a publicly-supported organization and operated in support of that beneficiary, the supporting or­ganization would not be one described in sec­ tion 509(a){3).

If a historic and continuing re­lationship exists between the supporting organi­zation and the publicly-supported organizations, and because of this relationship, a substantial identity of interests has developed between the organizations, then the articles of organization will not have to designate the specified organi­ zation by name.

Responsiveness test. An organization will meet this test if it is responsive to the needs or demands of the publicly-supported organiza­tions. To meet this test, either of the following must be satisfied.

1. The publicly-supported organizations must elect, appoint, or maintain a close and con­tinuous working relationship with the of­ficers, directors, or trustees of the supporting organization. (Consequently, the officers, directors, or trustees of the publicly-supported organizations have a significant voice in the investment policies of the supporting organization, the timing of grants and the manner of making them, the selection of recipients, and generally the use of the income or assets of the supporting organization.}, or

2. The supporting organization is a charitable trust under state law, each specified publicly-supported organization is a named beneficiary under the trust's governing in­strument, and the beneficiary organization has the power to enforce the trust and compel an accounting understate law.

Integral-part test. The organization will meet this test if it maintains a significant involvement in the operations of one or more publicly-sup­ported organizations and these organizations are in turn dependent upon the supporting or­ ganization for the type of support that it provides. To meet this test, e/ tterof the following must be satisfied.

1. The activities engaged in for, or on behalf of, the publicly-supported organizations are activities to perform the functions of or to carry out the purposes of the organiza­tions, and, but for the involvement of the supporting organization, would normally be engaged in by the publicly-supported orga­nizations themselves, or

2. The supporting organization makes pay­ments of substantially all of its income to, or for the use of, publicly-supported organi­zations, and the amount of support re­ ceived by one or more of these publicly-supported organizations is enough to insure the attentiveness of these organi­zations to the operations of the supporting organization.

If item (2) is being relied on, a substantial amount of the total support of the supporting organization also must go to those publicly-sup­ported organizations that meet the attentiveness requirement with respect to the supporting or­ganization. Except as explained in the next par­agraph, the amount of support received by a publicly-supported organization must represent a large enough part of the organization's total support to insure such attentiveness. In applying this, if the supporting organization makes pay­ments to, or for the use of, a particular depart­ment or school of a university, hospital, or church, the total support of the department or school must be substituted for the total support of the beneficiary organization.

Even when the amount of support received by a publicly-supported beneficiary organization does not represent a large enough part of the beneficiary organization's total support, the amount of support received from a supporting organization may be large enough to meet the requirements of item (2) of the integral-part test if it can be demonstrated that, in order to avoid the interruption of a particular function or activ­ity, the beneficiary organization will be suffi­ciently attentive to the operations of the supporting organization. This may occur when either the supporting organization or the benefi­ciary organization earmarks the support re­ceived from the supporting organization for a particular program or activity, even if the pro­gram or activity is not the beneficiary organization's primary program or activity, as long as the program or activity is a substantial one.

All factors, including the number of beneficia­ ries, the length and nature of the relationship between the beneficiary and supporting organi­zation, and the purpose to which the funds are put, will be considered in determining whether the amount of support received by a publicly-supported beneficiary organization is large enough to insure the attentiveness of the organization to the operations of the supporting organization.

Normally, the attentiveness of a beneficiary organization is motivated by the amounts re­ceived from the supporting organization. Thus, the more substantial the amount involved, in terms of a percentage of the publicly-supported organization's total support, the greater the like­ lihood that the required degree of attentiveness will be present. However, in determining whether the amount received from the support­ing organization is large enough to insure the attentiveness of the beneficiary organization to the operations of the supporting organization (including attentiveness to the nature and yield of the supporting organization's investments), evidence of actual attentiveness by the benefi­ ciary organization is of almost equal importance.

Imposing this requirement is merely one of the factors in determining whether a supporting organization is complying with the attentiveness test. The absence of this requirement will not preclude an organization from classification as a supporting organization if it complies with the other factors.

However, when none of the beneficiary orga­ nizations are dependent upon the supporting organization for a large enough amount of their support, the requirements of item (2) of the integral-part test will not be satisfied, even though the beneficiary organizations have en­forceable rights against the supporting organi­zation understate law.

If an organization cannot meet the require­ments of item (2) of the integral-part test for its current tax year solely because the amount re­ceived by one or more of the beneficiaries from the supporting organization is no longer large enough, it can still qualify under the integral-part test if it can establish that it has met the require­ments of item (2) of the integral-part test for any 5-year period and that there has been an historic and continuing relationship of support between the organizations between the end of the 5-year period and the tax year in question.

The requirements for meet­ing the operational test for organizations oper­ ated, supervised, or controlled by publicly-supported organizations (discussed earlier, under Qualifying As Publicly Supported) have limited applicability to organizations oper­ ated in connection with one or more publicly-supported organizations. This is be­cause the operational requirements of the integral-part test, just discussed, generally are more specific than the general rules found for the operational test in the preceding category. However, a supporting organization can fail both the integral-part test and the operational test if it conducts activities of its own that do not consti­tute activities or programs that would, but for the supporting organization, have been conducted by any publicly-supported organization named in the supporting organization's governing in­strument. A similar result occurs for such activi­ties or programs that would not have been conducted by an organization with which the supporting organization has established an his­toric and continuing relationship.

An organization operated in conjunction with a social weifare organization, labor or agricul­tural organization, business league, chamber of commerce, or other organization described in section 501{c)(4), 501{c){5), or 501(c)(6), may qualify as a supporting organization under sec­tion 509{a)(3) and therefore not be classified as a private foundation if both the following condi­tions are met.

1. Adjusted net income, or

2. Minimum investment return.

Devoted directly to the active conduct of its exempt activity, to a functionally related business, or to a combination of the two,

2. Stock of a corporation that is controlled by the foundation (by ownership of at least 80% of the total voting power of all classes of stock entitled to vote and at least 80% of the total shares of all other classes of stock) and substantially all (at least 85%) the assets of which are devoted as pro­ vided above, or

3. Any combination of (1) and (2).

1. Substantially all (at least 85%) of its sup­port (other than gross investment income) is normally received from the general pub­lic and five or more unrelated exempt orga­ nizations,

2. Not more than 25% of its support (other than gross investment income) is normally received from any one exempt organiza­tion, and

3. Not more than 50% of its support is nor­mally received from gross investment in­ come.

This test is intended to apply to special-purpose foundations, such as learned societies and as­sociations of libraries.

for any private foundation for any tax year is 5% of the excess of the total fair market value of all assets of the foundation (other than those used directly in the active conduct of its exempt purpose) over the amount of indebtedness incurred to acquire those assets.

in determining whether the amount of quali­ fying distributions is at least two-thirds of the organization's minimum investment return, the organization is not required to trace the source of the expenditures to determine whether they were derived from investment income or from contributions.

This test is intended to apply to organizations such as research organizations that actively conduct charitable activities but whose personal services are so great in relationship to charitable assets that the cost of those services cannot be met out of small endowments.

1. Is an operating foundation, as described previously,

2. Has been publicly supported for at least 10 tax years or was an operating foundation on January 1, 1983, or for its last taxable year ending before January 1, 1983,

3. Has a governing body that, at all times during the tax year, is broadly representa­tive of the general public and consists of individuals no more than 25% of whom are disqualified individuals, and

4. Does not have any officer, at any time dur­ing the tax year, who is a disqualified indi­ vidual.

Use Form 5768, Elec­ tion/Revocation of Election By an Eligible Sec­ tion 501(c)(3) Organization To Make Expenditures To Influence Legislation, to make the election. The form must be signed and post­marked within the first tax year to which it ap­plies, if the form is used to revoke the election, it must be signed and postmarked before the first day of the tax year to which it applies.

Eligible section 501{c)(3) organizations that have made the election to be subject to the limits on lobbying expenditures must use Part VI - A of Schedule A (Form 990) to figure these limits.

1. Any attempt to influence any legislation through an effort to affect the opinions of the general public or any segment thereof (grass roots lobbying), and

2. Any attempt to influence any legislation through communication with any member or employee of a legislative body or with any government official or employee who may participate in the formulation of legis­lation (direct lobbying).

1. Making available the results of nonpartisan analysis, study, or research.

2. Examining and discussing broad social, economic, and similar problems.

3. Providing technical advice or assistance (where the advice would otherwise consti­tute the influencing of legislation) to a gov­ernmental body or to a committee or other subdivision thereof in response to a written request by that body or subdivision.

4. Appearing before, or communicating with, any legislative body about a possible deci­sion of that body that might affect the exis­tence of the organization, its powers and duties, its tax-exempt status, or the deduc­ tion of contributions to the organization.

5. Communicating with a government official or employee, other than:

a. A communication with a member or em­ployee of a legislative body (when the communication would otherwise consti­tute the influencing of legislation), or

b. A communication with the principal pur­pose of influencing legislation.

Also excluded are communications between an organization and its bona fide members about legislation or proposed legislation of direct in­terest to the organization and the members, unless these communications directly en­courage the members to attempt to influence legislation or directly encourage the members to urge nonmembers to attempt to influence legislation, as explained earlier.

If a public charitabie organization makes the election to be subject to the lobbying expenditures limits rules (instead of the substantial part of activities test), it will not lose its tax-exempt status under sec­tion 501(c)(3), unless it normally makes:

Lobbying expenditures that are more than 150% of the lobbying nontsxable amount for the organization for each tax year, or

Normally makes grass roots expendi­tures that are more than 150% of the grass roots nontaxable amount for the organization for each tax year.

See Tax on excess expenditures to influence legislation, later, in this section.

These are any expenditures that are made for the purpose of attempting to influence legislation, as discussed earlier under Attempting to influence legislation.

Grass roots expenditures. This term re­fers only to those lobbying expenditures that are made to influence legislation by attempting to affect the opinions of the general public or any segment thereof.

1. 20% of the exempt purpose expendi­tures if the exempt purpose expenditures are not over $500,000,

2. $100,000 plus 15% of the excess of the exempt purpose expenditures over $500,000 if the exempt purpose expendi­ tures are over $500,000 but not over $1,000,000,

3. $175,000 plus 10% of the excess of the exempt purpose expenditures over $1,000,000 if the exempt purpose expendi­ tures are over $1,000,000 but not over $1,500,000, or

4. $225,000 plus 5% of the excess of the exempt purpose expenditures over $1,500,000 if the exempt purpose expendi­tures are over $1,500,000.

1. Administrative expenses paid or incurred for the organization's exempt purposes, and

2. Amounts paid or incurred for the purpose of influencing legislation, whether or not the legislation promotes the organization's exempt purposes.

1. A separate fund-raising unit of the organi­ zation, or

2. One or more other organizations, if the amounts are paid or incurred primarily for fund-raising.

Once an organization elects to come under these pro­visions, the election will be in effect for all tax years that end after the date of the election and begin before the organization revokes this elec­ tion.

If two or more section 501{c){3) organizations are members of an affiliated group of organizations and at least one of these organizations has made the election regarding the treatment of certain lobbying expenditures, then the determi­nation as to whether excess lobbying expendi­tures have been made and the determination as to whether the expenditure limits, described ear­ lier, have been exceeded by more than 150% will be made as though the affiliated group is one organization.

If the group has excess lobbying expendi­tures, each organization for which the election is effective for the year will be treated as an organi­ zation that has excess lobbying expenditures in an amount that equals the organization's pro­portionate share of the group's excess lobbying expenditures. Further, if the expenditure limits, described in this section, are exceeded by more than 150%, each organization for which the election is effective for that year will lose its tax-exempt status under section 501(c)(3).

1. The governing instrument of one of the or­ganizations requires it to be bound by deci­sions of the other organization on legislative issues, or

2. The governing board of one of the organi­zations includes persons who:

a. Are specifically designated representa­tives of the other organization or are members of the governing board, of­ficers, or paid executive staff members of the other organization, and

b. Have enough voting power to cause or prevent action on legislative issues by the controlled organization by combin­ ing their votes.

If an election for a tax year is in effect for an organization and that organization exceeds the lobbying expenditures limits, an excise tax of 25% of the excess lobbying expen­ ditures for the tax year will be imposed. Excess lobbying expenditures for a tax year, in this case, means the greater of:

1. The amount by which the lobbying expen­ditures made by the organization during the tax year are more than the lobbying nontaxable amount for the organization for that tax year, or

2. The amount by which the grass roots ex­penditures made by the organization dur­ing the tax year are more than the grass roots nontaxable amount for the organiza­tion for that tax year.

Eligible organizations that have made the elec­ tion to be subject to the limits on lobbying expen­ ditures and that owe the tax on excess lobbying expenditures (as computed in Part VI - A of Schedule A (Form 990)) must file Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code, to report and pay the tax.

If your organization is not organized for profit and will be operated only to promote social wel­fare, you should file Form 1024 to apply for recognition of exemption from federal income tax under section 501(c)(4). Thediscussion that follows describes the information you must pro­vide when applying. For application procedures.

To qualify for exemption under section 501(c)(4), the organization's net earnings must be devoted only to charitable, educational, or recreational purposes. In addition, no part of the organization's net earnings may benefit any pri­vate shareholder or individual. If the organiza­tion provides an excess benefit to certain persons, an excise tax may be imposed. See Excise tax on excess benefit transactions under Public Charities for more informa­tion about this tax.

To establish that your organi­ zation is organized exclusively to promote social welfare, you should submit evidence with your application showing that your organization will operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).

An organization that restricts the use of its facilities to employees of selected corporations and their guests is primarily benefiting a private group rather than the community. It therefore does not qualify as a section 501 (c)(4) organiza­ tion. Similarly, an organization formed to repre­sent member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants in the com­ munity. However, an organization formed to pro­ mote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization.

An organiza­tion established by its members that has as its primary activity providing supplemental retire­ment benefits to its members or death benefits to their beneficiaries does not qualify as an ex­empt social welfare organization. It may qualify under another paragraph of section 501 (c) de­pending on all the facts.

However, a nonprofit association that is es­tablished, maintained, and funded by a local government to provide the only retirement bene­ fits to a class of employees may qualify as a social welfare organization under section 501(c)(4).

An organiza­tion established by its members that has as its primary activity providing supplemental retire­ment benefits to its members or death benefits to their beneficiaries does not qualify as an ex­empt social welfare organization. It may qualify under another paragraph of section 501 (c) de­pending on all the facts.

However, a nonprofit association that is es­tablished, maintained, and funded by a local government to provide the only retirement bene­ fits to a class of employees may qualify as a social welfare organization under section 501(c)(4).

The following information should be contained in the application form and accompanying state­ments of certain types of civic leagues or social welfare organizations.

If your organiza­tion wishes to obtain exemption as a volunteer fire company or similar organization, you should submit evidence that its members are actively engaged in fire fighting and similar disaster as­sistance, whether it actually owns the fire fight­ing equipment, and whether it provides any assistance for its members, such as death and medical benefits in case of injury to them.

If your organization does not have an inde­pendent social purpose, such as providing rec­reational facilities for members, it may be exempt under section 501(c)(3). In this event, your organization should file Form 1023.

A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. The term community generally refers to a geographical unit recognizable as a governmental subdivi­ sion, unit, or district thereof. Whether a particu­ lar association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Even ifan area represented by an association is not a commu­nity, the association can still qualify for exemp­tion if its activities benefit a community.

An organization operating an airport that is on land owned by a local government, which supervises the airport's operation, and that serves the general public in an area with no other airport,

* A community association that works to improve public services, housing and resi­dential parking, publishes a free commu­nity newspaper, sponsors a community sports league, holiday programs and meetings, and contracts with a private se­curity service to patrol the community,

* A community association devoted to preserving the community's traditions, ar­chitecture, and appearance by represent­ ing it before the local legislature and administrative agencies in zoning, traffic, and parking matters,

* An organization that tries to encourage in­ dustrial development and relieve unem­ ployment in an area by making loans to businesses so they will relocate to the area, and

» An organization that holds an annual festi­val of regional customs and traditions.

A labor organization is an association of workers who have combined to protect and promote the interests of the members by bargaining collec­ tively with their employers to secure better work­ing conditions.

To show that your organization has the pur­pose ofa labor organization, you should include in the articles of organization or accompanying statements (submitted with your exemption ap­plication) information establishing that the or­ganization is organized to better the conditions of workers, improve the grade of their products, and develop a higherdegree of efficiency in their respective occupations. In addition, no net earn­ ings of the organization may benefit any mem­ ber.

While a labor organization generally is composed of employ­ees or representatives of the employees (in the form of collective bargaining agents) and similar employee groups, evidence that an organization's membership consists mainly of workers does not in itself indicate an exempt purpose. You must show in your application that yourorganization has the purposes described in the preceding paragraph. These purposes may be accomplished by a single labor organization acting alone or by several organizations acting together through a separate organization.

Agricultural and horticultural organizations are connected with raising livestock, forestry, culti­vating land, raising and harvesting crops or aquatic resources, cultivating useful or orna­mental plants, and similar pursuits.

For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. The term harvesting, in this case, includes fishing and related pur­ suits.

Agricultural organizations may be quasi-pub­ lic in character and are often designed to en­courage the development of better agricultural and horticultural products through a system of awards, using income from entry fees, gate re­ceipts, and donations to meet the necessary expenses of upkeep and operation. When the activities are directed toward the improvement of marketing or other business conditions in one or more lines of business, rather than the im­provement of production techniques or the bet­terment of the conditions of persons engaged in agriculture, the organization must qualify for ex­ emption as a business league, board of trade, or other organization, as discussed next in the sec­ tion on 501(c)(6) organizations.

The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agricul­ture or horticulture, or improve the products.

The following list contains some examples of activities that show an agricultural or horticul­tural purpose.

1. Promoting various cooperative agricultural, horticultural, and civic activities among ru­ ral residents by a state and county farm and home bureau.

2. Exhibiting livestock, farm products, and other characteristic features of agriculture and horticulture.

3. Testing soil for members and nonmernbers of the farm bureau on a cost basis, the results of the tests and other recommenda­tions being furnished to the community members to educate them in soil treat­ ment.

4. Guarding the purity of a specific breed of livestock.

5. Encouraging improvements in the produc­tion offish on privately-owned fish farms.

6. Negotiating with processors for the price to be paid to members for their crops.

If your association wants to apply for recognition of exemption from federal income tax as a non­profit business league, chamber of commerce, real estate board, board of trade, or professional football league (whether or not administering a pension fund for football players), it should file Form 1024. For a discussion of the procedure to follow.

Your organization must indicate in its appli­cation form and attached statements that no part of its net earnings will benefit any private share­holder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried on for profit (even if the busi­ness is operated on a cooperative basis or pro- duces only sufficient income to be self-sustaining).

In addition, yourorganization must be prima­ rily engaged in activities or functions that are the basis for its exemption. It must be primarily sup­ ported by membership dues and other income from activities substantially related to its exempt purpose.

A business league, in general, is an associa­ tion of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of a kind ordinarily carried on for profit Trade associations and professional associa­tions are considered business leagues .

A board of trade often con­sists of persons engaged in similar lines of busi­ness. For example, a nonprofit organization formed to regulate the sale of a specified agricul­ tural commodity to assure equal treatment of producers, warehouse workers, and buyers is a board of trade.

Chambers of commerce and boards of trade usually promote the common economic inter­ests of all the commercial enterprises in a given trade community.

A common business interest of all members of the organi­zation must be established by the application documents.

Examples. Activities that would tend to il­lustrate a common business interest are: 1. Promotion of higher business standards and better business methods and encour­agement of uniformity and cooperation by a retail merchants association,

2. Education of the public in the use of credit,

3. Establishment of uniform casualty rates and compilation of statistical information by an insurance rating bureau operated by casualty insurance companies,

4. Establishment and maintenance of the in­tegrity of a local commercial market,

5. Operation of a trade publication primarily intended to benefit an entire industry, and

6. Encouragement of the use of goods and services of an entire industry (such as a lawyer referral service whose main pur­pose is to introduce individuals to the use of the legal profession in the hope that they will enter into lawyer-client relation­ships on a paying basis as a result).

A taxpayer cannot deduct the part of dues or other pay­ments to a business league, trade association, labor union, or similar organization that is for any of the following activities.

1. Influencing legislation.

2. Participating or intervening in a political campaign for, or against, any candidate for public office.

3. Trying to influence the general public, or part of the general public, with respect to elections, legislative matters, or referen- dums (also known as grassroots lobby­ ing).

4. Communicating directly with certain execu­tive branch officials to try to influence their official actions or positions.

See Dues Used for Lobbying or Political Activi­ ties under Required Disclosures .

Members may deduct dues (or assessments) to an organi­ zation that are for expenses of:

1. Appearing before, submitting statements to, or sending communications to mem­bers of a local council or similar governing body with respect to legislation or pro­posed legislation of direct interest to the member, or

2. Communicating information between the member and the organization with respect to local legislation or proposed legislation of direct interest to the organization or the member.

Legislation or proposed legislation is of direct interest to a taxpayer if it will, or may reasonably be expected to, affect the taxpayer's trade or business.

A tax-exempt trade association, labor union, or similar organization is considered to be engaging in grassroots lobying if it contacts prospective members or calls upon its own members to contact their employ­ees and customers for the purpose of urging such persons to communicate with their elected state or Congressional representatives to sup­port the promotion, defeat, or repeal of legisla­tion that is of direct interest to the organization. Any dues or assessments directly related to such activities are not deductible by the tax­payer, since the individuals being contacted, who are not members of the organization, are a segment of the general public.

If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax.

In applying for recognition of exemption, you should submit the information described in this section.

Typical organizations that should file for rec­ognition of exemption as social clubs include:

* College alumni associations that are not described in chapters under Alumni asso­ ciation,

* College fraternities or sororities operating chapter houses for students,

* Country clubs,

* Amateur hunting, fishing, tennis, swim­ming, and other sport clubs,

» Dinner clubs that provide a meeting place, library, and dining room for members,

* Hobby clubs,

* Garden clubs, and

* Variety clubs.

Your organiza­tion will not be recognized as tax exempt if its charter, bylaws, or other governing instrument, or any written policy statement provides for dis­crimination against any person on the basis of race, color, or religion.

However, a club that in good faith limits its membership to the members of a particular re­ligion to further the teachings or principles of that religion and not to exclude individuals of a partic­ ular race or color will not be considered as dis­criminating on the basis of religion. Also, the restriction on religious discrimination does not apply to a club that is an auxiliary of a fraternal beneficiary society (discussed later) if that soci­ety is described in section 501(c)(8) and exempt from tax under section 501 (a) and limits its membership to the members of a particular re­ ligion.

Fellowship need not be present between each member and every other member of a club if it is a material part in the life of the organiza­tion. A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group.

The term other nonprofitable purposes means other purposes similar to pleasure and recreation. For example, a club that, in addition to its social activities, has a plan for the payment of sick and death benefits is not operating exclu­sively for pleasure, recreation, and other non- profitable purposes.

The membership in a social club must be limited. To show that your organization has a purpose that would charac­terize it as a club, you should submit evidence with your application that there are limits on admission to membership consistent with the character of the club.

A social club that issues corporate mem­bership is dealing with the general public in the form of the corporation's employees. Corporate members of a club are not the kind of members contemplated by the law. Gross receipts from these members would be a factor in determining whether the club qualifies as a social club. See Gross receipts from nonmembership sources, later. Bona fide individual memberships paid for by a corporation would not have an effect on the gross receipts source.

The fact that a social club may have an associate (nonvoting) class of membership will not be, in and of itself, a cause for nonrecog­nition of exemption. However, if one member­ship class pays substantially lower dues and fees than another membership class, although both classes enjoy the same rights and privi­leges in using the club facilities, there may be an inurement of income to the benefited class, re­sulting in a denial of the club's exemption.

In general, your club should be supported solely by membership fees, dues, and assessments. However, if otherwise enti­tled to exemption, your club will not be disquali­fied because it raises revenue from members through the use of club facilities or in connection with club activities.

Donations to exempt social and recreation clubs are not de­ductible as charitable contributions on the donor's federal income tax return.

This section describes the information to be pro­vided upon application for recognition of exemp­tion by two types of fraternal societies: beneficiary and domestic. The major distinction is that fraternal beneficiary societies provide for the payment of life, sick, accident, or other bene­ fits to their members or their dependents, while domestic fraternal societies do not provide these benefits but rather devote their earnings to fra­ternal, religious, charitable, etc., purposes.

If your organization is controlled by a central organization, you should check with your con­trolling organization to determine whether your unit has been included in a group exemption letter or may be added. If so, your organization need not apply for individual recognition of ex­emption.

A fraternal beneficiary society, order, or associa­ tion should file an application for recognition of exemption from federal income tax on Form 1024. The application and accompanying state­ments should establish that the organization:

1. Is a fraternal organization,

2. Operates under the lodge system or for the exclusive benefit of the members of a fra­ternal organization itself operating under the lodge system, and

3. Provides for the payment of life, sick, acci­dent, or other benefits to the members of the society, order, or association or their dependents.

A domestic fraternal society, order, or associa­tion may file an application for recognition of exemption from federal income tax on Form 1024. The application and accompanying state­ments should establish that the organization:

1 . Is a domestic fraternal organization,

2. Operates under the lodge system,

3. Devotes its net earnings exclusively to re­ ligious, charitable, scientific, literary, edu­cational, and fraternal purposes, and

4. Does not provide for the payment of life, sick, accident, or other benefits to its mem­ bers.

The organization may arrange with insur­ance companies to provide optional insurance to its members without jeopardizing its exempt sta­ tus.

This section describes the information to be pro­vided upon application for recognition of exemp­tion by the following types of employees' associations:

1. A local association of employees whose membership is limited to employees of a designated person or persons in a particu­lar municipality, and whose income will be devoted exclusively to charitable, educa­ tional, or recreational purposes,

2. A voluntary employees' beneficiary as­ sociation (including federal employees' associations) organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated benefi­ ciaries, if no part of the net earnings of the association benefits any private share­holder or individual, and

3. A supplemental unemployment benefit trust whose primary purpose is providing for payment of supplemental unemploy­ ment benefits.

Both the application form to file and the infor­mation to provide are discussed later under the section that describes your employee associa­tion.

A local employees' association may apply for recognition of exemption by filing Form 1024. The organization must submit evidence that:

1. It is of a purely local character,

2. Its membership is limited to employees of a designated person or persons in a partic­ular locality, and

3. Its net earnings will be devoted exclusively to charitable, educational, or recreational purposes.

A local association of employees that has established a system of paying retirement or death benefits, or both, to its members will not qualify for exemption since the payment of these benefits is not considered as being for charita­ ble, educational, or recreational purposes. Simi­ larly, a local association of employees that is operated primarily as a cooperative buying serv­ice for its members in order to obtain discount prices on merchandise, services, and activities does not qualify for exemption.

An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024. The material sub­mitted with the application must show that your organization:

1. Is a voluntary association of employees,

2. Will provide for payment of life, sick, acci­dent, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose, and

3. Will not allow any of its earnings to benefit any private individual or shareholder ex­cept in the form of scheduled benefit pay­ ments.

An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS that it is applying for recognition of exempt sta­tus. The organization gives notice by filing Form 1024. If the notice is not given by 15 months after the end of the month in which the organiza­ tion was created, the organization will not be exempt for any period before notice is given. The EO area manager may grant an extension of time for filing the notice under the same pro­cedures as those described for section 501 (c)(3) organizations in chapters under Application for Recognition of Exemption.

Membership of a section 501{c)(9) organization must consist of individu­als who are employees and have an employment-related common bond. This com­mon bond may be a common employer {or affili­ated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. The membership of an association may in­clude some individuals who are not employees, provided they have an employment-related bond with the employee-members. For exam­ple, the owner of a business whose employees are members of the association may be a mem­ber. An association will be considered com­posed of employees if 90% of its total membership on one day of each quarter of its tax year consists of employees.

An organ­ ization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. However, if the organization is part of a plan that is a collective bargaining agreement that was the subject of good faith bargaining between employee organizations and employers, the plan need not meet these requirements for the organization to qualify as tax exempt.

A plan meets the nondiscrimination require­ments only if both of the following statements are true.

1. Each class of benefits under the plan is provided undera classification of employ­ees that is set forth in the plan and does not discriminate in favor of employees who are highly compensated individuals. 2. The benefits provided under each class of benefits do not discriminate in favor of highly compensated individuals,

A life insurance, disability, severance pay, or supplemental unemployment compensation benefit does not discriminate in favor of highly compensated individuals merely because the benefits available bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees covered by the plan.

For purposes of determining whether a plan meets the nondiscrimination requirements, the employer may elect to exclude all disability or severance payments payable to individuals who are in pay status as of January 1, 1985. This will not apply to any increase in such payment by any plan amendment adopted after June 22, 1984.

If a plan provides a benefit for which there is a nondiscrimination provision provided under Chapter 1 of the Internal Revenue Code as a condition of that benefit being excluded from gross income, these nondiscrimination require­ments do not apply. The benefit will be consid­ered nondiscriminatory only if it meets the nondiscrimination provision of the applicable Code section. For example, benefits provided under a medical reimbursement plan would meet the nondiscrimination requirements for an association, if the benefits meet the nondiscrimi­ nation requirements of Code section 105{h){3) and 105(h)(4).

Certain employees who are not covered by a plan may be excluded from consideration in applying these require­ments. These include employees:

1. Who have not completed 3 years of serv­ ice,

2. Who have not attained age 21,

3. Who are seasonal or less than half-time employees,

4. Who are not in the plan and who are in­cluded in a unit of employees covered by a collective bargaining agreement if the class of benefits involved was the subject of good faith bargaining, or

5. Who are nonresident aliens and who re­ceive no earned income from the employer that has United States source income.

A highly compensated individual is one who:

1. Owned 5 percent or more of the employer at any time during the current year or the preceding year,

2. Received more than $90,000 for 2002 (ad­justed for inflation) in compensation from the employer for the preceding year, and

3. Was among the top 20% of employees by compensation for the preceding year.

But the employer can choose not to have (3) apply.

The employer may choose to treat two or more plans as one plan for purposes of meeting the nondiscrimination re­quirements. Employees of controlled groups of corporations, trades or businesses under common control, or members of an affiliated service group, are treated as employees of a single employer. Leased employees are treated as employees of the recipient.

A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form 1024. The trust must be a valid, existing trust under local law and must be evidenced by an executed document. A conformed copy of the plan of which the trust is a part should be attached to the application.

If your organiza­ tion is a supplemental unemployment benefit trust and has received a denial of exemption because it engaged in a prohibited transaction, as defined by section 503(b), it may file a claim for exemption in any tax year following the tax year in which the notice of denial was issued. It must file the claim on Form 1024. The organiza­tion must include a written declaration that it will not knowingly again engage in a prohibited transaction. An authorized principal officer of your organization must make this declaration under the penalties of perjury.

If your organization has satisfied all require­ments as a supplemental unemployment benefit trust described in section 501(c)(17), it will be notified in writing that it has been recognized as exempt. However, the organization will be ex­ empt only for those tax years after the tax year in which the claim for exemption (Form 1024) is filed. Tax year in this case means the estab­lished annual accounting period of the organiza­tion or, if the organization has not established an annual accounting period, the calendar year. For more information about the requirements for reestablishing an exemption previously denied, contact the IRS.

Each of the following organizations may apply for recognition of exemption from federal income tax by filing Form 1024.

1. Benevolent life insurance associations of a purely local character and like organi­ zations.

2. Mutual ditch or irrigation companies and like organizations.

3. Mutual or cooperative telephone com­ panies and like organizations.

A like organization is an organization that per­forms a service comparable to that performed by any one of the above organizations.

The information to be provided upon applica­tion by each of these organizations is described in this section. For information as to the proce­dures to follow in applying for exemption,

These or