[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.170A-9]
[Page 79-113]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Sec. 1.170A-9 Definition of section 170(b)(1)(A) organization.
The term section 170(b)(1)(A) organization as used in the
regulations under section 170 means any organization described in
paragraphs (a) through (i) of this section, effective with respect to
taxable years beginning after December 31, 1969, except as otherwise
provided. Section 1.170-2(b) shall continue to be applicable with
respect to taxable years beginning prior to January 1, 1970. The term
one or more organizations described in section 170(b)(1)(A) (other than
in clauses (vii) and (viii)) as used in sections 507 and 509 of the Code
and the regulations thereunder means one or more organizations described
in paragraphs (a) through (e) of this section, except as modified by the
regulations under part II of subchapter F of chapter I or under chapter
42.
(a) Church or a convention or association of churches. An
organization is described in section 170(b)(1)(A)(i) if it is a church
or a convention or association of churches.
(b) Educational organization and organizations for the benefit of
certain State and municipal colleges and universities--(1) Educational
organization. An educational organization is described in section
170(b)(1)(A)(ii) if its primary function is the presentation of formal
instruction and it normally maintains a regular faculty and curriculum
and normally has a regularly enrolled body of pupils or students in
attendance at the place where its educational activities are regularly
carried on. The term includes institutions such as primary, secondary,
preparatory, or high schools, and colleges and universities. It includes
Federal, State, and other public-supported schools which 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 which
incidentally operates a museum or sponsors concerts is an educational
organization within the meaning of section 170(b)(1)(A)(ii). However,
the operation of a school by a museum does not necessarily qualify the
museum as an educational organization within the meaning of this
subparagraph.
(2) Organizations for the benefit of certain State and municipal
colleges and universities. (i) An organization is described in section
170(b)(1)(A)(iv) if it meets the support requirements of subdivision
(ii) of this subparagraph and is organized and operated exclusively to
receive, hold, invest, and administer property and to make expenditures
to or for the benefit of a college or university which is an
organization described in subdivision (iii) of this subparagraph. The
phrase ``expenditures to or for the benefit of a college or university''
includes expenditures made for any one or more of the normal functions
of colleges and universities such as the acquisition and maintenance of
real property comprising part of the campus area; the erection of, or
participation in the erection of, college or university buildings; the
acquisition and maintenance of equipment and furnishings used for, or in
conjunction with, normal functions of colleges and universities; or
expenditures for scholarships, libraries and student loans.
(ii) To qualify under section 170(b)(1)(A)(iv), the organization
receiving the contribution must normally receive a substantial part of
its support from the United States or any State or political subdivision
thereof or from direct or indirect contributions from the general
public, or from a combination
[[Page 80]]
of two or more of such sources. For such purposes, the term ``support''
does not include income received in the exercise or performance by the
organization of its charitable, educational, or other purpose or
function constituting the basis for its exemption under section 501(a).
An example of an indirect contribution from the public is the receipt by
the organization of its share of the proceeds of an annual collection
campaign of a community chest, community fund, or united fund. In
determining the amount of support received by such organization with
respect to a contribution of property which is subject to reduction
under section 170(e), the fair market value of the property shall be
taken into account.
(iii) The college or university (including a land grant college or
university) to be benefited must be an educational organization referred
to in section 170(b)(1)(A)(ii) and subparagraph (1) of this paragraph
which is an agency or instrumentality of a State or political
subdivision thereof, or which is owned or operated by a State or
political subdivision thereof or by an agency or instrumentality of one
or more States or political subdivisions.
(c) Hospitals and medical research organizations--(1) Hospitals. An
organization (other than one described in subparagraph (2) of this
paragraph) is described in section 170(b)(1)(a)(iii) if:
(i) It is a hospital, and
(ii) Its principal purpose or function is the providing of medical
or hospital care or medical education or medical research.
The term hospital includes (A) Federal hospitals and (B) State, county,
and municipal hospitals which are instrumentalities of governmental
units referred to in section 170(c)(1) and otherwise come within the
definition. A rehabilitation institution, outpatient clinic, or
community mental health or drug treatment center may qualify as a
``hospital'' within the meaning of subdivision (i) of this subparagraph
if its principal purpose or function is the providing of hospital or
medical care. For purposes of this subdivision, the term ``medical
care'' shall include the treatment of any physical or mental disability
or condition, whether on an inpatient or outpatient basis, provided the
cost of such treatment is deductible under section 213 by the person
treated. An organization, all the accommodations of which qualify as
being part of a ``skilled nursing facility'' within the meaning of 42
U.S.C. 1395x(j), may qualify as a ``hospital'' within the meaning of
subdivision (i) of this subparagraph if its principal purpose or
function is the providing of hospital or medical care. For taxable years
ending after June 28, 1968, the term ``hospital'' also includes
cooperative hospital service organizations which meet the requirements
of section 501(e) and Sec. 1.501(e)-1. The term ``hospital'' does not,
however, include convalescent homes or homes for children or the aged,
nor does the term include institutions whose principal purpose or
function is to train handicapped individuals to pursue some vocation. An
organization whose principal purpose or function is the providing of
medical education or medical research will not be considered a
``hospital'' within the meaning of subdivision (i) of this subparagraph,
unless it is also actively engaged in providing medical or hospital care
to patients on its premises or in its facilities, on an inpatient or
outpatient basis, as an integral part of its medical education or
medical research functions. See, however, subparagraph (2) of this
paragraph with respect to certain medical research organizations.
(2) Certain medical research organizations--(i) Introduction. A
medical research organization is described in section 170(b)(1)(A)(iii)
if the principal purpose or functions of such organization are medical
research and if it is directly engaged in the continuous active conduct
of medical research in conjunction with a hospital. In addition, for
purposes of the 50 percent limitation of section 170(b)(1)(A) with
respect to a contribution, during the calendar year in which the
contribution is made such organization must be committed to spend such
contribution for such research before January 1 of the fifth calendar
year which begins after the date such contribution is made. An
organization need not receive contributions deductible under section 170
to qualify as a medical research organization and such organization need
not be committed to spend amounts to which
[[Page 81]]
the limitation of section 170(b)(1)(A) does not apply within the 5-year
period referred to in this subdivision. However, the requirement of
continuous active conduct of medical research indicates that the type of
organization contemplated in this subparagraph is one which is primarily
engaged directly in the continuous active conduct of medical research,
as compared to an inactive medical research organization or an
organization primarily engaged in funding the programs of other medical
research organizations. As in the case of a hospital, since an
organization is ordinarily not described in section 170(b)(1)(A)(iii) as
a hospital unless it functions primarily as a hospital, similarly a
medical research organization is not so described unless it is primarily
engaged directly in the continuous active conduct of medical research in
conjunction with a hospital. Accordingly, the rules of this subparagraph
shall only apply with respect to such medical research organizations.
(ii) General rule. An organization (other than a hospital described
in subparagraph (1) of this paragraph) is described in section
170(b)(1)(A)(iii) only if within the meaning of this subparagraph:
(A) The principal purpose or functions of such organization are to
engage primarily in the conduct of medical research, and
(B) It is primarily engaged directly in the continuous active
conduct of medical research in conjunction with a hospital which is (1)
described in section 501(c)(3), (2) a federal hospital, or (3) an
instrumentality of a governmental unit referred to in section 170(c)(1).
However, in order for a contribution to such organization to qualify for
purposes of the 50 percent limitation of section 170(b)(1)(A), during
the calendar year in which such contribution is made or treated as made,
such organization must be committed (within the meaning of subdivision
(viii) of this subparagraph) to spend such contribution for such active
conduct of medical research before January 1 of the fifth calendar year
beginning after the date such contribution is made. For the meaning of
the term ``medical research'' see subdivision (iii) of this
subparagraph. For the meaning of the term ``principal purpose or
functions'' see subdivision (iv) of this subparagraph. For the meaning
of the term ``primarily engaged directly in the continuous active
conduct of medical research'' see subdivision (v) of this subparagraph.
For the meaning of the term ``medical research in conjunction with a
hospital'' see subdivision (vii) of this subparagraph.
(iii) Definition of medical research. Medical research means the
conduct of investigations, experiments, and studies to discover,
develop, or verify knowledge relating to the causes, diagnosis,
treatment, prevention, or control of physical or mental diseases and
impairments of man. To qualify as a medical research organization, the
organization must have or must have continuously available for its
regular use the appropriate equipment and professional personnel
necessary to carry out its principal function. Medical research
encompasses the associated disciplines spanning the biological, social
and behavioral sciences. Such disciplines include chemistry,
(biochemistry, physical chemistry, bioorganic chemistry, etc.),
behavioral sciences (psychiatry, physiological psychology,
neurophysiology, neurology, neurobiology, and social psychology, etc.),
biomedical engineering (applied biophysics, medical physics, and medical
electronics, e.g., developing pacemakers and other medically related
electrical equipment), virology, immunology, biophysics, cell biology,
molecular biology, pharmacology, toxicology, genetics, pathology,
physiology, microbiology, parasitology, endocrinology, bacteriology, and
epidemiology.
(iv) Principal purpose or functions. An organization must be
organized for the principal purpose of engaging primarily in the conduct
of medical research in order to be an organization meeting the
requirements of this subparagraph. An organization will normally be
considered to be so organized if it is expressly organized for the
purpose of conducting medical research and is actually engaged primarily
in the conduct of medical research. Other facts and circumstances,
however, may indicate that an organization does not
[[Page 82]]
meet the principal purpose requirement of this subdivision even where
its governing instrument so expressly provides. An organization that
otherwise meets all of the requirements of this subparagraph (including
this subdivision) to qualify as a medical research organization will not
fail to so qualify solely because its governing instrument does not
specifically state that its principal purpose is to conduct medical
research.
(v) Primarily engaged directly in the continuous active conduct of
medical research. (A) In order for an organization to be primarily
engaged directly in the continuous active conduct of medical research,
the organization must either devote a substantial part of its assets to,
or expend a significant percentage of its endowment for, such purposes,
or both. Whether an organization devotes a substantial part of its
assets to, or makes significant expenditures for, such continuous active
conduct depends upon the facts and circumstances existing in each
specific case. An organization will be treated as devoting a substantial
part of its assets to, or expending a significant percentage of its
endowment for, such purposes if it meets the appropriate test contained
in paragraph (c)(2)(v)(b) of this section. If an organization fails to
satisfy both of such tests, in evaluating the facts and circumstances,
the factor given most weight is the margin by which the organization
failed to meet such tests. Some of the other facts and circumstances to
be considered in making such a determination are:
(1) If the organization fails to satisfy the tests because it failed
to properly value its assets or endowment, then upon determination of
the improper valuation it devotes additional assets to, or makes
additional expenditures for, such purposes, so that it satisfies such
tests on an aggregate basis for the prior year in addition to such tests
for the current year.
(2) The organization acquires new assets or has a significant
increase in the value of its securities after it had developed a budget
in a prior year based on the assets then owned and the then current
values.
(3) The organization fails to make expenditures in any given year
because of the interrelated aspects of its budget and long-term planning
requirements, for example, where an organization prematurely terminates
an unsuccessful program and because of long-term planning requirements
it will not be able to establish a fully operational replacement program
immediately.
(4) The organization has as its objective to spend less than a
significant percentage in a particular year but make up the difference
in the subsequent few years, or to budget a greater percentage earlier
year and a lower percentage in in a later year.
(B) For purposes of this section, an organization which devotes more
than one half of its assets to the continuous active conduct of medical
research will be considered to be devoting a substantial part of its
assets to such conduct within the meaning of paragraph (c)(2)(v)(a) of
this section. An organization which expends funds equaling 3.5 percent
or more of the fair market value of its endowment for the continuous
active conduct of medical research will be considered to have expended a
significant percentage of its endowment for such purposes within the
meaning of paragraph (c)(2)(v)(a) of this section.
(C) Engaging directly in the continuous active conduct of medical
research does not include the disbursing of funds to other organizations
for the conduct of research by them or the extending of grants or
scholarships to others. Therefore, if an organization's primary purpose
is to disburse funds to other organizations for the conduct of research
by them or to extend grants or scholarships to others, it is not
primarily engaged directly in the continuous active conduct of medical
research.
(vi) Special rules. The following rules shall apply in determining
whether a substantial part of an organization's assets are devoted to,
or its endowment is expended for, the continuous active conduct of
medical research activities:
(A) An organization may satisfy the tests of paragraph (c)(2)(v)(b)
of this section by meeting such tests either for a computation period
consisting of the immediately preceding taxable year, or for the
computation period
[[Page 83]]
consisting of the immediately preceding four taxable years. In addition,
for taxable years beginning in 1970, 1971, 1972, 1973, and 1974, if an
organization meets such tests for the computation period consisting of
the first four taxable years beginning after December 31, 1969, an
organization will be treated as meeting such tests, not only for the
taxable year beginning in 1974, but also for the preceding four taxable
years. Thus, for example, if a calendar year organization failed to
satisfy such tests for a computation period consisting of 1969, 1970,
1971, or 1972, but on the basis of a computation period consisting of
the years 1970 through 1973, it expended funds equaling 3.5 percent or
more of the fair market value of its endowment for the continuous active
conduct of medical research, such organization will be considered to
have expended a significant percentage of its endowment for such
purposes for the taxable years 1970 through 1974. In applying such tests
for a four-year computation period, although the organization's
expenditures for the entire four-year period shall be aggregated, the
fair market value of its endowment for each year shall be summed, even
though, in the case of an asset held throughout the four-year period,
the fair market value of such an asset will be counted four times.
Similarly, the fair market value of an organization's assets for each
year of a four-year computation period shall be summed.
(B) Any property substantially all the use of which is
``substantially related'' (within the meaning of section 514(b)(1)(A))
to the exercise or performance of the organization's medical research
activities will not be treated as part of its endowment.
(C) The valuation of assets must be made with commonly accepted
methods of valuation. A method of valuation made in accordance with the
principles stated in the regulations under section 2031 constitutes an
acceptable method of valuation. Assets may be valued as of any day in
the organization's taxable year to which such valuation applies,
provided the organization follows a consistent practice of valuing such
asset as of such date in all taxable years. For purposes of paragraph
(c)(2)(v) of this section, an asset held by the organization for part of
a taxable year shall be taken into account by multiplying the fair
market value of such asset by a fraction, the numerator of which is the
number of days in such taxable year that the foundation held such asset
and the denominator of which is the number of days in such taxable year.
(vii) Medical research in conjunction with a hospital. The
organization need not be formally affiliated with a hospital to be
considered primarily engaged directly in the continuous active conduct
of medical research in conjunction with a hospital, but in any event
there must be a joint effort on the part of the research organization
and the hospital pursuant to an understanding that the two organizations
will maintain continuing close cooperation in the active conduct of
medical research. For example, the necessary joint effort will normally
be found to exist if the activities of the medical research organization
are carried on in space located within or adjacent to a hospital, the
organization is permitted to utilize the facilities (including
equipment, case studies, etc.) of the hospital on a continuing basis
directly in the active conduct of medical research, and there is
substantial evidence of the close cooperation of the members of the
staff of the research organization and members of the staff of the
particular hospital or hospitals. The active participation in medical
research by members of the staff of the particular hospital or hospitals
will be considered to be evidence of such close cooperation. Because
medical research may involve substantial investigation, experimentation
and study not immediately connected with hospital or medical care, the
requisite joint effort will also normally be found to exist if there is
an established relationship between the research organization and the
hospital which provides that the cooperation of appropriate personnel
and the use of facilities of the particular hospital or hospitals will
be required whenever it would aid such research.
(viii) Commitment to spend contributions. The organization's
commitment that the contribution will be spent within the prescribed
time only for the
[[Page 84]]
prescribed purposes must be legally enforceable. A promise in writing to
the donor in consideration of his making a contribution that such
contribution will be so spent within the prescribed time will constitute
a commitment. The expenditure of contributions received for plant,
facilities, or equipment, used solely for medical research purposes
(within the meaning of subdivision (ii) of this subparagraph), shall
ordinarily be considered to be an expenditure for medical research. If a
contribution is made in other than money, it shall be considered spent
for medical research if the funds from the proceeds of a disposition
thereof are spent by the organization within the five-year period for
medical research; or, if such property is of such a kind that it is used
on a continuing basis directly in connection with such research, it
shall be considered spent for medical research in the year in which it
is first so used. A medical research organization will be presumed to
have made the commitment required under this subdivision with respect to
any contribution if its governing instrument or by-laws require that
every contribution be spent for medical research before January 1 of the
fifth year which begins after the date such contribution is made.
(ix) Organizational period for new organizations. A newly created
organization, for its ``organizational'' period, shall be considered to
be primarily engaged directly in the continuous active conduct of
medical research in conjunction with a hospital within the meaning of
subdivisions (v) and (vii) of this subparagraph if during such period
the organization establishes to the satisfaction of the Commissioner
that it reasonably can be expected to be so engaged by the end of such
period. The information to be submitted shall include detailed plans
showing the proposed initial medical research program, architectural
drawings for the erection of buildings and facilities to be used for
medical research in accordance with such plans, plans to assemble a
professional staff and detailed projections showing the timetable for
the expected accomplishment of the foregoing. The ``organizational''
period shall be that period which is appropriate to implement the
proposed plans, giving effect to the proposed amounts involved and the
magnitude and complexity of the projected medical research program, but
in no event in excess of three years following organization.
(x) Examples. The application of this subparagraph may be
illustrated by the following examples:
Example 1. N, an organization referred to in section 170(c)(2), was
created to promote human knowledge within the field of medical research
and medical education. All of N's assets were contributed to it by A and
consist of a diversified portfolio of stocks and bonds. N's endowment
earns 3.5 percent annually, which N expends in the conduct of various
medical research programs in conjunction with Y hospital. N is located
adjacent to Y hospital, makes substantial use of Y's facilities and
there is close cooperation between the staffs of N and Y. N is directly
engaged in the continuous active conduct of medical research in
conjunction with a hospital, meets the principal purpose test described
in subdivision (iv) of this subparagraph, and is therefore an
organization described in section 170(b)(1)(A)(iii).
Example 2. O, an organization referred to in section 170(c)(2), was
created to promote human knowledge within the field of medical research
and medical education. All of O's assets consist of a diversified
portfolio of stocks and bonds. O's endowment earns 3.5 percent annually,
which O expends in the conduct of various medical research programs in
conjunction with certain hospitals. However, in 1974, O receives a
substantial bequest of additional stocks and bonds. O's budget for 1974
does not take into account the bequest and as a result O expends only
3.1 percent of its endowment in 1974. However, O establishes that it
will expend at least 3.5 percent of its endowment for the active conduct
of medical research for taxable years 1975 through 1978. O is therefore
directly engaged in the continuous active conduct of medical research in
conjunction with a hospital for taxable year 1975. Since O also meets
the principal purpose test described in subdivision (iv) of this
subparagraph, it is therefore an organization described in section
170(b)(1)(A)(iii) for taxable year 1975.
Example 3. M, an organization referred to in section 170(c)(2), was
created to promote human knowledge within the field of medical research
and medical education. M's activities consist of the conduct of medical
research programs in conjunction with various hospitals. Under such
programs, researchers
[[Page 85]]
employed by M engage in research at laboratories set aside for M within
the various hospitals. Substantially all of M's assets consists of 100
percent of the stock of X corporation, which has a fair market value of
approximately 100 million dollars. X pays M approximately 3.3 million
dollars in dividends annually, which M expends in the conduct of its
medical research programs. Since M expends only 3.3 percent of its
endowment, which does not constitute a significant percentage, in the
active conduct of medical research, M is not an organization described
in section 170(b)(1)(A)(iii) because M is not engaged in the continuous
active conduct of medical research.
(xi) Special rule for organizations with existing ruling. This
subdivision shall apply to an organization that prior to January 1,
1970, had received a ruling or determination letter which has not been
expressly revoked holding the organization to be a medical research
organization described in section 170(b)(1)(A)(iii) and with respect to
which the facts and circumstances on which the ruling was based have not
substantially changed. An organization to which this subdivision applies
shall be treated as an organization described in section
170(b)(1)(A)(iii) for a period not ending prior to 90 days after
February 13, 1976 (or where appropriate, for taxable years beginning
before such 90th day). In addition, with respect to a grantor or
contributor under sections 170, 507, 545(b)(2), 556(b)(2), 642(c), 4942,
4945, 2055, 2106(a)(2), and 2522, the status of an organization to which
this subdivision applies will not be affected until notice of change of
status under section 170(b)(1)(A)(iii) is made to the public (such as by
publication in the Internal Revenue Bulletin). The preceding sentence
shall not apply if the grantor or contributor had previously acquired
knowledge that the Internal Revenue Service had given notice to such
organization that it would be deleted from classification as a section
170(b)(1)(A)(iii) organization.
(d) Governmental unit. A governmental unit is described in section
170(b)(1)(A)(v) if it is referred to in section 170(c)(1).
(e) Definition of section 170(b)(1)(A)(vi) organization--(1) In
general. An organization is described in section 170 (b)(1)(A)(vi) if it
is:
(i) A corporation, trust, or community chest, fund, or foundation,
referred to in section 170(c)(2) (other than an organization
specifically described in paragraphs (a) through (d) of this section),
and
(ii) A ``publicly supported'' organization.
For purposes of this paragraph, an organization is publicly supported if
it normally receives a substantial part of its support from a
governmental unit referred to in section 170(c)(1) or from direct or
indirect contributions from the general public. An organization will be
treated as being ``public supported'' if it meets the requirements of
either subparagraph (2) or subparagraph (3) of this paragraph. Types of
organizations which, subject to the provisions of this paragraph,
generally qualify under section 170(b)(1)(A)(vi) as ``publicly
supported'' are publicly or governmentally supported museums of history,
art, or science, libraries, community centers to promote the arts,
organizations providing facilities for the support of an opera, symphony
orchestra, ballet, or repertory drama or for some other direct service
to the general public, and organizations such as the American Red Cross
or the United Givers Fund.
(2) Determination whether an organization is ``publicly supported'';
33\1/3\ percent-of-support test. An organization will be treated as a
``publicly supported'' organization if the total amount of support which
the organization ``normally'' (as defined in subparagraph (4) of this
paragraph) receives from governmental units referred to in section
170(c)(1), from contributions made directly or indirectly by the general
public, or from a combination of these sources, equals at least 33 1/3
percent of the total support ``normally'' received by the organization.
See subparagraphs (6), (7), and (8) of this paragraph for the definition
of ``support.'' The application of this test is illustrated by Example 1
of subparagraph (9) of this paragraph.
(3) Determination whether an organization is ``publicly supported'';
facts and circumstances test for organizations failing to meet 33 1/3
percent-of-support test. Even if an organization fails to meet the 33 1/
3 percent-of-support test described in subparagraph (2) of this
[[Page 86]]
paragraph, it will be treated as a ``publicly supported'' organization
if it normally receives a substantial part of its support from
governmental units, from direct or indirect contributions from the
general public, or from a combination of these sources, and meets the
other requirements of this subparagraph. In order to satisfy this
subparagraph, an organization must meet the requirements of subdivisions
(i) and (ii) of this subparagraph in order to establish, under all the
facts and circumstances, that it normally receives a substantial part of
its support from governmental units or from direct or indirect
contributions from the general public, and it must be in the nature of a
``publicly supported'' organization, taking into account the factors
described in subdivisions (iii) through (vii) of this subparagraph. The
requirements and factors referred to in the preceding sentence with
respect to a ``publicly supported'' organization (other than one
described in subparagraph (2) of this paragraph) are:
(i) Ten percent-of-support limitation. The percentage of support
``normally'' (as defined in subparagraph (4) of this paragraph) received
by an organization from governmental units, from contributions made
directly or indirectly by the general public, or from a combination of
these sources, must be ``substantial.'' For purposes of this
subparagraph, an organization will not be treated as ``normally''
receiving a ``substantial'' amount of governmental or public support
unless the total amount of governmental and public support ``normally''
received equals at least 10 percent of the total support ``normally''
received by such organization. See subparagraphs (6), (7), and (8) of
this paragraph for the definition of ``support.''
(ii) Attraction of public support. An organization must be so
organized and operated as to attract new and additional public or
governmental support on a continuous basis. An organization will be
considered to meet this requirement if it maintains a continuous and
bona fide program for solicitation of funds from the general public,
community, or membership group involved, or if it carries on activities
designed to attract support from governmental units or other
organizations described in section 170 (b)(1)(A)(i) through (vi). In
determining whether an organization maintains a continuous and bona fide
program for solicitation of funds from the general public or community,
consideration will be given to whether the scope of its fundraising
activities is reasonable in light of its charitable activities.
Consideration will also be given to the fact that an organization may,
in its early years of existence, limit the scope of its solicitation to
persons deemed most likely to provide seed money in an amount sufficient
to enable it to commence its charitable activities and expand its
solicitation program.
In addition to the requirements set forth in subdivisions (i) and (ii)
of this subparagraph which must be satisfied, all pertinent facts and
circumstances, including the following factors, will be taken into
consideration in determining whether an organization is ``publicly
supported'' within the meaning of subparagraph (1) of this paragraph.
However, an organization is not generally required to satisfy all of the
factors in subdivisions (iii) through (vii) of this subparagraph. 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 been in existence.
(iii) Percentage of financial support. The percentage of support
received by an organization from public or governmental sources will be
taken into consideration in determining whether an organization is
``publicly supported.'' The higher the percentage of support above the
10 percent requirement of subdivision (i) of this subparagraph from
public or governmental sources, the lesser will be the burden of
establishing the publicly supported nature of the organization through
other factors described in this subparagraph, while the lower the
percentage, the greater will be the burden. If the percentage of the
organization's support from public or governmental sources is low
because it receives a high percentage of its total support from
investment income on its endowment funds, such fact will be treated as
evidence of compliance with this subdivision if
[[Page 87]]
such endowment funds were originally contributed by a governmental unit
or by the general public. However, if such endowment funds were
originally contributed by a few individuals or members of their
families, such fact will increase the burden on the organization of
establishing compliance with the other factors described in this
subparagraph.
(iv) Sources of support. The fact that an organization meets the
requirement of subdivision (i) of this subparagraph through support from
governmental units or directly or indirectly from a representative
number of persons, rather than receiving almost all of its support from
the members of a single family, will be taken into consideration in
determining whether an organization is ``publicly supported.'' In
determining what is a ``representative number of persons,''
consideration will be given to the type of organization involved, the
length of time it has been in existence, and whether it limits its
activities to a particular community or region or to a special field
which can be expected to appeal to a limited number of persons.
(v) Representative governing body. The fact that an organization has
a governing body which represents the broad interests of the public,
rather than the personal or private interests of a limited number of
donors (or persons standing in a relationship to such donors which is
described in section 4946(a)(1)(C) through (G) ) will be taken into
account in determining whether an organization is ``publicly
supported.'' An organization will be treated as meeting this requirement
if it has a governing body (whether designated in the organization's
governing instrument or bylaws as a Board of Directors, Board of
Trustees, etc.) which is comprised of public officials acting in their
capacities as such; of individuals selected by public officials acting
in their capacities as such; of persons having special knowledge or
expertise in the particular field or discipline in which the
organization is operating; of community leaders, such as elected or
appointed officials, clergymen, educators, civic leaders, or other such
persons representing a broad cross-section of the views and interests of
the community; or, in the case of a membership organization, of
individuals elected pursuant to the organization's governing instrument
or bylaws by a broadly based membership.
(vi) Availability of public facilities or services; public
participation in programs or policies. (A) The fact that an organization
is of the type which generally provides facilities or services directly
for the benefit of the general public on a continuing basis (such as a
museum or library which holds open its building and facilities to the
public, a symphony orchestra which gives public performances, a
conservation organization which provides educational services to the
public through the distribution of educational materials, or an old age
home which provides domiciliary or nursing services for members of the
general public) will be considered evidence that such organization is
``publicly supported.''
(B) The fact that an organization is an educational or research
institution which regularly publishes scholarly studies that are widely
used by colleges and universities or by members of the general public
will also be considered evidence that such organization is ``publicly
supported.''
(C) Similarly, the following factors will also be considered
evidence that an organization is ``publicly supported:''
(1) The participation in, or sponsorship of, the programs of the
organization by members of the public having special knowledge or
expertise, public officials, or civic or community leaders;
(2) The maintenance of a definitive program by an organization to
accomplish its charitable work in the community, such as slum clearance
or developing employment opportunities; and
(3) The receipt of 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.
(vii) Additional factors pertinent to membership organizations. The
following are additional factors to be considered in determining whether
a membership organization is ``publicly supported'':
[[Page 88]]
(A) 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 or field of special interest (taking into account
the size of the area and the nature of the organization's activities);
(B) 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; and
(C) 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 associations.
See Examples 2 through 5 contained in subparagraph (9) of this paragraph
for illustrations of this subparagraph.
(4) Definition of ``normally''; general rule--(i) Normally; one-
third support test. For purposes of subparagraph (2) of this paragraph,
an organization will be considered as ``normally'' meeting the 33 1/3
percent-of-support test for its current taxable year and the taxable
year immediately succeeding its current year, if, for the 4 taxable
years immediately preceding the current taxable year, the organization
meets the 33 1/3 percent-of-support test described in subparagraph (2)
of this paragraph on an aggregate basis.
(ii) Normally; facts and circumstances test. For purposes of
subparagraph (3) of this paragraph, an organization will be considered
as ``normally'' meeting the requirements of subparagraph (3) of this
paragraph for its current taxable year and the taxable year immediately
succeeding its current year, if, for the 4 taxable years immediately
preceding the current taxable year, the organization meets the
requirements of subparagraph (3) (i) and (ii) of this paragraph on an
aggregate basis and satisfies a sufficient combination of the factors
set forth in subparagraph (3) (iii) through (vii) of this paragraph. In
the case of subparagraph (3) (iii) and (iv) of this paragraph, facts
pertinent to years preceding 4 taxable years immediately preceding the
current taxable year may also be taken into consideration. The
combination of factors set forth in subparagraph (3) (iii) through (vii)
of this paragraph which an organization ``normally'' must meet does not
have to be the same for each 4-year period so long as there exists a
sufficient combination of factors to show compliance with subparagraph
(3) of this paragraph.
(iii) Special rule. The fact that an organization has ``normally''
met the requirements of subparagraph (2) of this paragraph for a current
taxable year, but is unable ``normally'' to meet such requirements for a
succeeding taxable year, will not in itself prevent such organization
from meeting the requirements of subparagraph (3) of this paragraph for
such succeeding taxable year.
(iv) Illustration. The application of subdivisions (i), (ii), and
(iii) of this subparagraph may be illustrated by the following example:
Example X, an organization described in section 170(c)(2), meets the
33 1/3 percent-of-support test described in subparagraph (2) of this
paragraph in taxable year 1975 on the basis of support received during
taxable years 1971, 1972, 1973, and 1974. It therefore ``normally''
meets the requirements of subparagraph (2) of this paragraph for 1975
and 1976, the taxable year immediately succeeding 1975 (the current
taxable year). For the taxable year 1976, X is unable to meet the 33 1/3
percent-of-support test described in subparagraph (2) of this paragraph
on the basis of support received during taxable years 1972, 1973, 1974,
and 1975. If X can meet the requirements of subparagraph (3) of this
paragraph on the basis of taxable years 1972, 1973, 1974, and 1975, X
will meet the requirements of subparagraph (3) of this paragraph for
1977 (the taxable year immediately succeeding 1976, the current taxable
year) under subdivision (ii) of this subparagraph. However, if on the
basis of both the taxable years 1972 through 1975 and 1973 through 1976,
X, fails to meet the requirements of both subparagraphs (2) and (3) of
this paragraph, X will not be described in section 170(b)(1)(A)(vi) for
1977. However, X will not be disqualified as a section 170(b)(1)(A)(vi)
organization for taxable year 1976, because it ``normally'' met the
requirements of subparagraph (2) of this paragraph on the basis of the
taxable years 1971 through 1974, unless the provisions of subdivision
(v) of this subparagraph become applicable.
[[Page 89]]
(v) Exception for material changes in sources of support--(A) In
general. If for the current taxable year there are substantial and
material changes in an organization's sources of support other than
changes arising from unusual grants excluded under subparagraph (6)(ii)
of this paragraph, then in applying subparagraph (2) or (3) of this
paragraph, neither the 4-year computation period applicable to such year
as an immediately succeeding taxable year or as a current taxable year
shall apply, and in lieu of such computation periods there shall be
applied a computation period consisting of the taxable year of
substantial and material changes and the 4 taxable years immediately
preceding such year. Thus, for example, if there are substantial and
material changes in an organization's sources of support for taxable
year 1976, then even though such organization meets the requirements of
subparagraph (2) or (3) of this paragraph based on a computation period
of taxable years 1971-74 or 1972-75, such an organization will not meet
the requirements of section 170(b)(1)(A)(vi) unless it meets the
requirements of subparagraph (2) or (3) of this paragraph for a
computation period consisting of the taxable years 1972-76. See Example
3 in Sec. 1.509(a)-3(c)(6) for an illustration of a similar rule. An
example of a substantial and material change is the receipt of an
unusually large contribution or bequest which does not qualify as an
unusual grant under subparagraph (6)(ii) of this paragraph. See
subparagraph (6)(iv)(b) of this paragraph as to the procedure for
obtaining a ruling whether an unusually large grant may be excluded as
an unusual grant.
(B) Status of grantors and contributors. If as a result of (a) of
this subdivision, an organization is not able to meet the requirements
of either the 33 1/3 percent-of-support test described in subparagraph
(2) of this paragraph, or the facts and circumstances test described in
subparagraph (3) of this paragraph for its current taxable year, its
status (with respect to a grantor or contributor under sections 170,
507, 545(b)(2), 556(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2), and
2522) will not be affected until notice of change of status under
section 170(b)(1)(A)(vi) is made to the public (such as by publication
in the Internal Revenue Bulletin). The preceding sentence shall not
apply, however, if the grantor or contributor was responsible for, or
was aware of, the substantial and material change referred to in (a) of
this subdivision, or acquired knowledge that the Internal Revenue
Service had given notice to such organization that it would be deleted
from classification as a section 170(b)(1)(A)(vi) organization.
(C) Reliance by grantors and contributors. A grantor or contributor,
other than one of the organization's founders, creators, or foundation
managers (within the meaning of section 4946(b)) will not be considered
to be responsible for, or aware of, the substantial and material change
referred to in (a) of this subdivision, if such grantor or contributor
has made such grant or contribution in reliance upon a written statement
by the grantee organization that such grant or contribution will not
result in the loss of such organization's classification as a publicly
supported organization as described in section 170(b)(1)(A)(vi). Such
statement must be signed by a responsible officer of the grantee
organization and must set forth sufficient information, including a
summary of the pertinent financial data for the 4 preceding years, to
assure a reasonably prudent man that his grant or contribution will not
result in the loss of the grantee organization's classification as a
publicly supported organization as described in section
170(b)(1)(A)(vi). If a reasonable doubt exists as to the effect of such
grant or contribution, or if the grantor or contributor is one of the
organizations' founders, creators, or foundation managers, the procedure
set forth in subparagraph (6)(iv)(b) of this paragraph may be followed
by the grantee organization for the protection of the grantor or
contributor.
(vi) Special rule for new organizations. If an organization has been
in existence for at least 1 taxable year consisting of at least 8
months, but for fewer than 5 taxable years, the number of years for
which the organization has been in existence immediately preceding each
current taxable year being tested will be substituted for the 4-year
period described in subdivision (i) or (ii) of this
[[Page 90]]
subparagraph to determine whether the organization ``normally'' meets
the requirements of subparagraph (2) or (3) of this paragraph. However,
if subdivision (v)(a) of this subparagraph applies, then the period
consisting of the number of years for which the organization has been in
existence (up to and including the current year) will be substituted for
the 4-year period described in subdivision (i) or (ii) of this
subparagraph. An organization which has been in existence for at least 1
taxable year, consisting of 8 or more months, may be issued a ruling or
determination letter if it ``normally'' meets the requirements of
subparagraph (2) or (3) of this paragraph for the number of years
described in this subdivision. Such an organization may apply for a
ruling or determination letter under the provisions of this
subparagraph, rather than under the provisions of subparagraph (5) of
this paragraph. The issuance of a ruling or determination letter will be
discretionary with the Commissioner. See subparagraph (5)(v) of this
paragraph as to the initial determination of the status of a newly
created organization. This subdivision shall not apply to those
organizations receiving an extended advance ruling under subparagraph
(5)(iv) of this paragraph.
(vii) Special rule for organizations with existing ruling. This
subdivision shall apply to an organization that prior to January 1,
1970, had received a ruling or determination letter which has not been
expressly revoked holding the organization to be a publicly supported
organization described in section 170(b)(1)(A)(vi) and with respect to
which the facts and circumstances on which the ruling was based have not
substantially changed. An organization to which this subdivision applies
shall be treated as an or ganization described in section
170(b)(1)(A)(vi) for a period not ending prior to 90 days after December
29, 1972. In addition, with respect to a grantor or contributor under
sections 170, 507, 545(b)(2), 556(b)(2), 642(c), 4942, 4945, 2055,
2106(a)(2), and 2522, the status of an organization to which this
subdivision applies will not be affected until notice of change of
status under section 170(b)(1)(A)(vi) is made to the public (such as by
publication in the Internal Revenue Bulletin). The preceding sentence
shall not apply if the grantor or contributor had previously acquired
knowledge that the Internal Revenue Service had given notice to such
organization that it would be deleted from classification as a section
170(b)(1)(A)(vi) organization.
(viii) Termination of status. For the transitional rules applicable
to an organization that is unable to meet the requirements of this
paragraph for its first taxable year beginning after December 31, 1969
(as extended by Sec. 1.507-2(j)) and wishes to terminate its private
foundation status, see Sec. 1.507-2(c) (2) and (3).
(ix) Status of ruling. The provisions of this subparagraph do not
require an organization to file a new application with the Internal
Revenue Service every 2 years in order to maintain or reaffirm its
status as a ``publicly supported'' organization described in section
170(b)(1)(A)(vi).
(5) Advance rulings to newly created organizations--(i) In general.
A ruling or determination letter that an organization is described in
section 170 (b)(1)(A)(vi) will not be issued to a newly created
organization prior to the close of its first taxable year consisting of
at least 8 months. However, such 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 2 taxable years (or its
first 3 taxable years, if its first taxable year consists of less than 8
months). For purposes of this section, such 2- or 3-year period,
whichever is applicable, shall be referred to as the advance ruling
period. Such an advance ruling or determination letter may be issued if
the organization can reasonably be expected to meet the requirements of
subparagraph (2) or (3) of this paragraph during the advance ruling
period. The issuance of a ruling or determination letter will be
discretionary with the Commissioner.
(ii) Basic consideration. In determining whether an organization can
reasonably be expected (within the meaning of subdivision (i) of this
subparagraph) to meet the requirements of subparagraph (2) or (3) of
this paragraph for its advance ruling period or
[[Page 91]]
extended advance ruling period as provided in subdivision (iv) of this
subparagraph, if applicable, the basic consideration is whether its
organizational structure, proposed programs or activities, and intended
method of operation are such as to attract the type of broadly based
support from the general public, public charities, and governmental
units which is necessary to meet such tests. The information to be
considered for this purpose shall consist of all pertinent facts and
circumstances relating to the requirements set forth in subparagraph (3)
of this paragraph.
(iii) Status of newly created organizations--(A) Advance ruling.
This subdivision shall apply to a newly created organization which has
received an advance ruling or determination letter under subdivision (i)
of this subparagraph, or an extended advance ruling or determination
letter under subdivision (iv) of this subparagraph, that it will be
treated as a section 170(b)(1)(A)(vi) organization for its advance or
extended advance ruling period. So long as such an organization's ruling
or determination letter has not been terminated by the Commissioner
before the expiration of the advance or extended advance ruling period,
then whether or not such organization has satisfied the requirements of
subparagraph (2) or (3) of this paragraph during such advance or
extended advance ruling period, such an organization will be treated as
an organization described in section 170(b)(1)(A)(vi) in accordance with
(b) and (c) of this subdivision, both for purposes of the organization
and any grantor or contributor to such organization.
(B) Reliance period. Except as provided in (a) and (c) of this
subdivision, an organization described in (a) of this subdivision will
be treated as an organization described in section 170(b)(1)(A)(vi) for
all purposes other than sections 507(d) and 4940 for the period
beginning with its inception and ending 90 days after its advance or
extended advance ruling period. Such period will be extended until a
final determination is made of such an organization's status only if the
organization submits, within the 90-day period, information needed to
determine whether it meets the requirements of subparagraph (2) or (3)
of this paragraph for its advance or extended advance ruling period
(even if such organization fails to meet the requirements of such
subparagraph (2) or (3) ). However, since this subparagraph does not
apply to the tax imposed by section 4940, if it is subsequently
determined that the organization was a private foundation from its
inception, then the tax imposed by section 4940 shall be due without
regard to the advance or extended advance ruling or determination
letter. Consequently, if any amount of tax under section 4940 in such a
case is not paid on or before the last date prescribed for payment, the
organization is liable for interest in accordance with section 6601.
However, since any failure to pay such tax during the period referred to
in this subparagraph is due to reasonable cause, the penalty under
section 6651 with respect to the tax imposed by section 4940 shall not
apply.
(C) Grantors or contributors. If a ruling or determination letter is
terminated by the Commissioner prior to the expiration of the period
described in (b) of this subdivision, for purposes of sections 170, 507,
545(b)(2), 556(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2), and 2522,
the status of grants or contributions with respect to grantors or
contributors to such organizations will not be affected until notice of
change of status of such organization is made to the public (such as by
publication of the Internal Revenue Bulletin). The preceding sentence
shall not apply however, 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 under section 170(b)(1)(A)(vi) or
acquired knowledge that the Internal Revenue Service had given notice to
such organization that it would be deleted from such classification.
Prior to the making of any grant or contribution which allegedly will
not result in the grantee's loss of classification under section
170(b)(1)(A)(vi), a potential grantee organization may request a ruling
whether such grant or contribution may be made without such loss of
classification. A request for such ruling may be filed by the grantee
organization with the district director. The issuance of
[[Page 92]]
such ruling will be at the sole discretion of the Commissioner. The
organization must submit all information necessary to make a
determination on the factors referred to in subparagraph (6)(iii) of
this paragraph. If a favorable ruling is issued, such ruling may be
relied upon by the grantor or contributor of the particular contribution
in question for purposes of sections 170, 507, 545(b)(2), 556(b)(2),
642(c), 4942, 4945, 2055, 2106(a)(2), and 2522 and by the grantee
organization for purposes of subparagraph (6)(ii) of this paragraph.
(iv) Extension of advance ruling period. (A) The advance ruling
period described in subdivision (i) of this subparagraph shall be
extended for a period of 3 taxable years after the close of the
unextended advance ruling period if the organization so requests, but
only if such organization's request accompanies its request for an
advance ruling and is filed with a consent under section 6501(c)(4) to
the effect that the period of limitation upon assessment under section
4940 for any taxable year within the extended advance ruling period
shall not expire prior to 1 year after the date of the expiration of the
time prescribed by law for the assessment of a deficiency for the last
taxable year within the extended advance ruling period. An
organization's extended advance ruling period is 5 taxable years if its
first taxable year consists of at least 8 months, or is 6 years if its
first taxable year is less than 8 months.
(B) Notwithstanding (a) of this subdivision, an organization which
has received or applied for an advance ruling prior to January 29, 1973,
may file its request for the 3-year extension within 90 days from such
date, but only if it files the consents required in this section.
(C) See subdivision (v) of this subparagraph for the effect upon the
initial determination of status of an organization which receives a
ruling for an extended advance ruling period.
(v) Initial determination of status. (A) The initial determination
of status of a newly created organization is the first determination
(other than by issuance of an advance ruling or determination letter
under subdivision (i) of this subparagraph or an extended advance ruling
or determination letter under subdivision (iv) of this subparagraph)
that the organization will be considered as ``normally'' meeting the
requirements of subparagraph (2) or (3) of this paragraph for a period
beginning with its first taxable year.
(B) In the case of a new organization whose first taxable year is at
least 8 months, except as provided for in subdivision (v)(d) of this
subparagraph, the initial determination of status shall be based on a
computation period of either the first taxable year or the first and
second taxable years.
(C) In the case of a new organization whose first taxable year is
less than 8 taxable months, except as provided for in subdivision (v)(d)
of this subparagraph, the initial determination of status shall be based
on a computation period of either the first and second taxable years or
the first, second, and third taxable years.
(D) In the case of an organization which has received a ruling or
determination letter for an extended advance ruling period under
subdivision (iv) of this subparagraph, the initial determination of
status shall be based on a computation period of all of the taxable
years in the extended advance ruling period. However, where the ruling
or determination letter for an extended advance ruling period under
subdivision (iv) of this subparagraph is terminated by the Commissioner
prior to the expiration of the relevant period described in subdivision
(iii)(b) of this subparagraph, the initial determination of status shall
be based on a computation period of the period provided in (b) or (c) of
this subdivision or, if greater, the number of years to which the
advance ruling applies.
(E) An initial determination that an organization will be considered
as ``normally'' meeting the requirements of subparagraph (2) or (3) of
this paragraph shall be effective for each taxable year in the
computation period plus (except as provided by subparagraph (4)(v)(a) of
this paragraph, relating to material changes in sources of support) the
2 taxable years immediately succeeding the computation period.
Therefore, in the case of an organization referred to in (b) of this
subdivision to which subparagraph
[[Page 93]]
(4)(v)(a) of this paragraph does not apply, with respect to its first,
second, and third taxable years, such an organization shall be described
in section 170(b)(1)(A)(vi) if it meets the requirements of subparagraph
(2) or (3) of this paragraph for either its first taxable year or for
its first and second taxable years on an aggregate basis. In addition,
if it meets the requirements of subparagraph (2) or (3) of this
paragraph for its first and second taxable years, it shall be described
in section 170(b)(1)(A)(vi) for its fourth taxable year. Once an
organization is considered as ``normally'' meeting the requirements of
subparagraph (2) or (3) of this paragraph for a period specified under
this subdivision, subparagraph (4) (i), (ii), (v), or (vi) of this
paragraph shall apply.
(F) The provisions of this subdivision may be illustrated by the
following examples:
Example 1. X, a calendar year organization described in section
501(c)(3), is created in February 1972. The support received from the
public in 1972 by X will satisfy the one-third support test described in
subparagraph (4)(i) of this paragraph over its first taxable year, 1972.
X may therefore get an initial determination that it meets the
requirements of subparagraph (2) of this paragraph for its first taxable
year beginning in February 1972 and ending on December 31, 1972. This
determination will be effective for taxable years 1972, 1973, and 1974.
Example 2. Assume the same facts as in Example 1 except that X also
receives a substantial contribution from one individual in 1972 which is
not excluded from the denominator of the one-third support fraction
described in subparagraph (4)(i) of this paragraph by reason of the
unusual grant provision of subparagraph (6)(ii) of this paragraph.
Because of this substantial contribution, X fails to satisfy the one-
third support test over its first taxable year, 1972. X also fails to
satisfy the ``facts and circumstances'' test described in subparagraph
(4)(ii) of this paragraph for its first taxable year, 1972. However, the
support received from the public over X's first and second taxable years
in the aggregate will satisfy the one-third support test. X may
therefore get an initial determination that it meets the requirements of
subparagraph (2) of this paragraph for its first and second taxable
years in the aggregate beginning in February 1972 and ending on December
31, 1973. This determination will be effective for taxable years 1972,
1973, 1974, and 1975.
Example 3. Y, a calendar year organization described in section
501(c)(3), is created in July 1972. Y requests and receives an extended
advance ruling period of 5 full taxable years plus its initial short
taxable year of 6 months under subparagraph (5)(iv) of this paragraph.
The extended advance ruling period begins in July 1972 and ends on
December 31, 1977. The support received from the public over Y's first
through sixth taxable years in the aggregate will satisfy the one-third
support test described in subparagraph (4)(i) of this paragraph.
Therefore, Y in 1978 may get an initial determination that it meets the
requirements of subparagraph (2) of this paragraph in the aggregate over
all the taxable years in its extended advance ruling period beginning in
July 1972 and ending on December 31, 1977. This determination will be
effective for taxable years 1972 through 1979.
Example 4. Assume the same facts as in Example 3 except that the
ruling for the extended advance ruling period is terminated
prospectively at the end of 1975, so that Y may not rely upon such
ruling for 1976 or any succeeding year. The support received from the
public over Y's first through fourth taxable years (1972 through 1975)
will not satisfy either the one-third support test described in
subparagraph (4)(i) of this paragraph, or the ``facts and
circumstances'' test described in subparagraph (4)(ii) of this
paragraph. Because the ruling was terminated the computation period for
Y's initial determination of status is the period 1972 through 1975.
Since Y has not met the requirements of either subparagraph (2) or (3)
of this paragraph for such computation period, Y is not described in
section 170(b)(1)(A)(vi) for purposes of its initial determination of
status. If Y is not described in section 170(b)(1)(A) (i) through (v) or
section 509(a) (2), (3), or (4), then Y is a private foundation. As of
1976, Y shall be treated as a private foundation for all purposes
(except as provided in subdivision (iii)(c) of this subparagraph with
respect to grantors and contributors), and as of July 1972 for purposes
of the tax imposed by section 4940 and for purposes of section 507(d)
(relating to aggregate tax benefit).
(vi) Failure to obtain advance ruling. (A) Unless a newly created
organization has obtained an advance ruling or determination letter
under subdivision (i) of this subparagraph, or an extended advance
ruling or determination letter under subdivision (iv) of this
subparagraph, that it will be treated as a section 170(b)(1)(A)(vi)
organization for its advance or extended advance ruling period, it
cannot rely upon the possibility it will meet the requirements of
subparagraph (2) or (3) of this paragraph
[[Page 94]]
for a taxable year which begins before the close of either applicable
computation period provided for in subdivision (v) (b) or (c) of this
subparagraph. Therefore, such an organization, in order to avoid the
risk of subsequently being determined to be a private foundation because
of failure to qualify under section 170(b)(1)(A)(vi) and therefore under
section 509(a)(1), may comply with the rules applicable to private
foundations and may pay, for example, the tax imposed by section 4940.
In that event, if the organization subsequently meets the requirements
of subparagraph (2) or (3) of this paragraph for either applicable
computation period, it shall be treated as a section 170(b)(1)(A)(vi)
organization from its inception and, therefore, any tax imposed under
chapter 42 shall be refunded and section 509(b) shall not apply.
(B) If a newly created organization fails to obtain an advance
ruling or determination letter under subdivision (i) of this
subparagraph, or an extended advance ruling or determination letter
under subdivision (iv) of this subparagraph, and fails to meet the
requirements of subparagraph (2) or (3) of this paragraph for the first
applicable computation period provided for in subdivision (v) (b) or (c)
of this subparagraph, see section 6651 for penalty for failure to file
return and pay tax.
(6) Definition of support; meaning of general public--(i) In
general. In determining whether the 33 1/3 percent-of-support test
described in subparagraph (2) of this paragraph or the 10 percent-of-
support limitation described in subparagraph (3)(i) of this paragraph is
``normally'' met, contributions by an individual, trust; or corporation
shall be taken into account as ``support'' from direct or indirect
contributions from the general public only to the extent that the total
amount of the contributions by any such individual, trust, or
corporation during the period described in subparagraph (4) (i), (ii),
(v), or (vi) or (5)(v) of this paragraph does not exceed 2 percent of
the organization's total support for such period, except as provided in
subdivision (ii) of this subparagraph. Therefore, any contribution by
one individual will be included in full in the denominator of the
fraction determining the 33 1/3 percent-of-support or the 10 percent-of-
support limitation, but will only be includible in the numerator of such
fraction to the extent that such amount does not exceed 2 percent of the
denominator. In applying the 2 percent limitation, all contributions
made by a donor and by any person or persons standing in a relationship
to the donor which is described in section 4946(a)(1) (C) through (G)
and the regulations thereunder shall be treated as made by one person.
The 2 percent limitation shall not apply to support received from
governmental units referred to in section 170(c)(1) or to contributions
from organizations described in section 170(b)(1)(A)(vi), except as
provided in subdivision (v) of this subparagraph. For purposes of
subparagraphs (2), (3)(i) and (7)(ii)(b) of this paragraph, the term
``indirect contributions from the general public'' includes
contributions received by the organization from organizations (such as
section 170(b)(1)(A)(vi) organizations) which normally receive a
substantial part of their support from direct contributions from the
general public, except as provided in subdivision (v) of this
subparagraph. See the examples in subparagraph (9) of this paragraph for
the application of this subdivision. For purposes of this paragraph (e),
the term contributions includes qualified sponsorship payments (as
defined in Sec. 1.513-4) in the form of money or property (but not
services).
(ii) Exclusion of unusual grants. For purposes of applying the 2
percent limitation described in subdivision (i) of this subparagraph to
determine whether the 33 1/3 percent-of-support test in subparagraph (2)
of this paragraph or the 10 percent-of-support limitation in
subparagraph (3)(i) of this paragraph is satisfied, one or more
contributions may be excluded from both the numerator and the
denominator of the applicable percent-of-support fraction if such
contributions meet the requirements of subdivision (iii) of this
subparagraph. The exclusion provided by this subdivision is generally
intended to apply to substantial contributions or bequests from
disinterested parties which contributions or bequests:
[[Page 95]]
(A) Are attracted by reason of the publicly supported nature of the
organization;
(B) Are unusual or unexpected with respect to the amount thereof;
and
(C) Would, by reason of their size, adversely affect the status of
the organization as normally being publicly supported for the applicable
period described in subparagraph (4) or (5) of this paragraph.
In the case of a grant (as defined in Sec. 1.509(a)-3(g) ) which meets
the requirements of this subdivision, if the terms of the granting
instrument (whether executed before or after 1969) require that the
funds be paid to the recipient organization over a period of years, the
amount received by the organization each year pursuant to the terms of
such grant may be excluded for such year. However, no item of gross
investment income may be excluded under this subparagraph. The
provisions of this subparagraph shall apply to exclude unusual grants
made during any of the applicable periods described in subparagraph (4),
(5), or (6) of this paragraph. See subdivision (iv) of this subparagraph
as to reliance by a grantee organization upon an unusual grant ruling
under this subparagraph.
(iii) Determining factors. In determining whether a particular
contribution may be excluded under subdivision (ii) of this subparagraph
all pertinent facts and circumstances will be taken into consideration.
No single factor will necessarily be determinative. For some of the
factors similar to the factors to be considered, see Sec. 1.509(a)-
3(c)(4).
(iv) Grantors and contributors. (A) As to the status of grants and
contributions which result in substantial and material changes in the
organization (as described in subparagraph (4)(v)(a) of this paragraph)
and which fail to meet the requirements for exclusion under subdivision
(ii) of this subparagraph, see the rules prescribed in subparagraph
(4)(v) (b) and (c) of this paragraph.
(B) Prior to the making of any grant or contribution which will
allegedly meet the requirements for exclusion under subdivision (ii) of
this subparagraph, a potential grantee organization may request a ruling
whether such grant or contribution may be so excluded. Requests for such
ruling may be filed by the grantee organization with the district
director. The issuance of such ruling will be at the sole discretion of
the Commissioner. The organization must submit all information necessary
to make a determination on the factors referred to in subdivision (iii)
of this subparagraph. If a favorable ruling is issued, such ruling may
be relied upon by the grantor or contributor of the particular
contribution in question for purposes of sections 170, 507, 545(b)(2),
556(b)(2), 642(c), 4942, 4945, 2055, 2106(a)(2), and 2522 and by the
grantee organization for purposes of subdivision (ii) of this
subparagraph.
(v) Grants from public charities. Pursuant to subdivision (i) of
this subparagraph, contributions received from a governmental unit or
from a section 170(b)(1)(A)(vi) organization are not subject to the 2
percent limitation described in that subdivision unless such
contributions represent amounts which have been expressly or impliedly
earmarked by a donor to such governmental unit or section
170(b)(1)(A)(vi) organization as being for, or for the benefit of, the
particular organization claiming section 170 (b)(1)(A)(vi) status. See
Sec. 1.509(a)-3 (j)(3) for examples illustrating the rules of this
subdivision.
(7) Definition of support; special rules and meaning of terms--(i)
Definition of support. For purposes of this paragraph, the term support
shall be as defined in section 509(d) (without regard to section
509(d)(2)). The term ``support'' does not include:
(A) Any amounts received from the exercise or performance by an
organization of its charitable, educational, or other purpose or
function constituting the basis for its exemption under section 501(a).
In general, such amounts include amounts received from any activity the
conduct of which is substantially related to the furtherance of such
purpose or function (other than through the production of income), or
(B) Contributions of services for which a deduction is not
allowable.
For purposes of the 33 1/3 percent-of-support test in subparagraph (2)
of this paragraph and the 10 percent-of-support limitation in
subparagraph (3)(i)
[[Page 96]]
of this paragraph, all amounts received which are described in (a) or
(b) of this division are to be excluded from both the numerator and the
denominator of the fractions determining compliance with such tests,
except as provided in subdivision (ii) of this subparagraph.
(ii) Organizations dependent primarily on gross receipts from
related activities. Notwithstanding the provisions of subdivision (i) of
this subparagraph, an organization will not be treated as satisfying the
33 1/3 percent-of-support test in subparagraph (2) of this paragraph or
the 10 percent-of-support limitation in subparagraph (3)(i) of this
paragraph if it receives:
(A) Almost all of its support (as defined in section 509(d) ) from
gross receipts from related activities; and
(B) An insignificant amount of its support from governmental units
(without regard to amounts referred to in subdivision (i)(a) of this
subparagraph) and contributions made directly or indirectly by the
general public.
For example X, an organization described in section 501(c)(3), is
controlled by A, its president. X received $500,000 during the 4 taxable
years immediately preceding its current taxable year under a contract
with the Department of Transportation, pursuant to which X has engaged
in research to improve a particular vehicle used primarily by the
Federal Government. During this same period, the only other support
received by X consisted of $5,000 in small contributions primarily from
X's employees and business associates. The $500,000 amount constitutes
support under section 509(d)(2) and 509(d)(2)(a) of this subdivision.
Under these circumstances, X meets the conditions of (a) and (b) of this
subdivision and will not be treated as meeting the requirements of
either subparagraph (2) or subparagraph (3) of this paragraph. As to the
rules applicable to organizations which fail to qualify under section
170(b)(1)(A)(vi) because of the provisions of this subdivision, see
section 509(a)(2) and the regulations thereunder. For the distinction
between gross receipts (as referred to in section 509(d)(2)) and gross
investment income (as referred to in section 509(d)(4)), see Sec.
1.509(a)-3(m).
(iii) Membership fees. For purposes of this subparagraph, the term
``support'' shall include ``membership fees'' within the meaning of
Sec. 1.509(a)-3(h) (that is, if the basic purpose for making a payment
is to provide support for the organization rather than to purchase
admissions, merchandise, services, or the use of facilities).
(8) Support from a governmental unit. (i) For purposes of
subparagraphs (2) and (3)(i) of this paragraph, the term ``support from
a governmental unit'' includes any amounts received from a governmental
unit, including donations or contributions and amounts received in
connection with a contract entered into with a governmental unit for the
performance of services or in connection with a Government research
grant. However, such amounts will not constitute ``support from a
governmental unit'' for such purposes if they constitute amounts
received from the exercise or performance of the organization's exempt
functions as provided in subparagraph (7)(i)(a) of this paragraph.
(ii) For purposes of subdivision (i) of this subparagraph, any
amount paid by a governmental unit to an organization is not to be
treated as received from the exercise or performance of its charitable,
educational, or other purpose or function constituting the basis for its
exemption under section 501(a) (within the meaning of subparagraph
(7)(i)(a) of this paragraph) 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 such service or facility is paid for by
the public), rather than to serve the direct and immediate needs of the
payor. For example:
(A) Amounts paid for the maintenance of library facilities which are
open to the public.
(B) Amounts paid under Government programs to nursing homes or homes
for the aged in order to provide health care or domiciliary services to
residents of such facilities, and
(C) Amounts paid to child placement or child guidance organizations
under Government programs for services rendered to children in the
community,
[[Page 97]]
are considered payments the purpose of which is primarily 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 such that the amount would be
treated as a ``grant'' within the meaning of Sec. 1.509(a)-3(g) will
generally constitute ``support from a governmental unit'' described in
this subdivision, rather than an amount described in subparagraph
(7)(i)(a) of this paragraph.
(9) Examples. The application of subparagraphs (1) through (8) of
this paragraph may be illustrated by the following examples:
Example 1. (a) M is an organization referred to in section
170(c)(2). For the years 1970 through 1973 (the applicable period with
respect to the taxable year 1974 under subparagraph (4) of this
paragraph), M received support (as defined in subparagraphs (6) through
(8) of this paragraph) of $600,000 from the following sources:
Investment income.......................................... $300,000
City Y (a governmental unit referred to in section 40,000
170(c)(1))................................................
United Fund (an organization referred to in section 40,000
170(b)(1)(A)(vi)..........................................
Contributions.............................................. 220,000
----------
Total support............................................. 600,000
(b) With respect to the taxable year 1974, M ``normally'' received
in excess of 33 1/3 percent of its support from a governmental unit
referred to in section 170(c)(1) and from direct and indirect
contributions from the general public (as defined in subparagraph (6) of
this paragraph) computed as follows:
33\1/3\ percent of total support........................... $200,000
==========
Support from a governmental unit referred to in section 40,000
170(c)(1).................................................
Indirect contributions from the general public (United 40,000
Fund).....................................................
Contributions by various donors (no one having made 50,000
contributions which total in excess of $12,000--2 percent
of total support).........................................
Six contributions (each in excess of $12,000--2 percent 72,000
total support) 6x$12,000..................................
----------
202,000
(c) Since the amount of X's support from governmental units referred
to in section 170(c)(1) and from direct and indirect contributions from
the general public with respect to the taxable year 1974 ``normally''
exceeds 33 1/3 percent of M's total support for the applicable period
(1970-73), X meets the 33 1/3 percent-of-support test under subparagraph
(2) of this paragraph and is therefore treated as satisfying the
requirements for classification as a ``publicly supported'' organization
under subparagraph (2) of this paragraph for the taxable years 1974 and
1975 (there being no substantial and material changes in the
organization's character, purposes, methods of operation, or sources of
support in these years).
Example 2. N is an organization referred to in section 170(c)(2). It
was created to maintain public gardens containing botanical specimens
and displaying statuary and other art objects. The facilities, works of
art, and a large endowment were all contributed by a single contributor.
The members of the governing body of the organization are unrelated to
its creator. The gardens are open to the public without charge and
attract a substantial number of visitors each year. For the 4 taxable
years immediately preceding the current taxable year, 95 percent of the
organization's total support was received from investment income from
its original endowment. N also maintains a membership society which is
supported by members of the general public who wish to contribute to the
upkeep of the gardens by paying a small annual membership fee. Over the
4-year period in question, these fees from the general public
constituted the remaining 5 percent of the organization's total support
for such period. Under these circumstances, N does not meet the 33 1/3
percent-of-support test under subparagraph (2) of this paragraph for its
current taxable year. Furthermore, since only 5 percent of its total
support is, with respect to the current taxable year, normally received
from the general public, N does not satisfy the 10 percent-of-support
limitation described in subparagraph (3)(i) of this paragraph and cannot
therefore be classified as ``publicly supported'' under subparagraph (3)
of this paragraph. For its current taxable year, N therefore, is not an
organization described in section 170(b)(1)(A)(vi). Since N has failed
to satisfy the 10 percent-of-support limitation under subparagraph
(3)(i) of this paragraph, none of the other requirements or factors set
forth in subparagraph (3) (iii) through (vii) of this paragraph can be
considered in determining whether N qualifies as a ``publicly
supported'' organization.
Example 3. (a) O, an art museum, is an organization referred to in
section 170(c)(2). In 1930, O 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 which
originally consisted almost entirely of members of the founding family.
However, since 1945, members of the founding family or persons standing
in a relationship to the members of such family described in section
4946(a)(1)(C) through (G) have annually constituted less than one-
[[Page 98]]
fifth 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 people of Y City in the activities
carried on by the organization rather than the personal or private
interests of the founding family. O solicits contributions from the
general public and for each of its 4 most recent taxable years has
received total contributions (in small sums of less than $100, none of
which exceeds 2 percent of O's total support for such period) in excess
of $10,000. These contributions from the general public (as defined in
subparagraph (6) of this paragraph) represent 25 percent of the
organization's total support for such 4-year period. For this same
period, investment income from several large endowment funds has
constituted 75 percent of its total support. O expends 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 in order to carry out its activities on a normal and continuing
basis and to acquire new works of art. O has, for the entire period of
its existence, been open to the public and more than 300,000 people
(from Y City and elsewhere) have visited the museum in each of its four
most recent taxable years.
(b) Under these circumstances, O does not meet the 33 1/3 percent-
of-support test under subparagraph (2) of this paragraph for its current
year since it has received only 25 percent of its total support for the
applicable 4-year period from the general public. However, under the
facts set forth above, O has met the 10 percent-of-support limitation
under subparagraph (3)(i), as well as the requirements of subparagraph
(3)(ii), of this paragraph. Under all of the facts set forth in this
example, O is considered as meeting the requirements of subparagraph (3)
of this paragraph on the basis of satisfying subparagraph (3) (i) and
(ii) of this paragraph and the factors set forth in subparagraph (3)
(iii), (iv), (v), and (vi) of this paragraph, and is therefore
classified as a ``publicly supported organization'' under subparagraph
(1) of this paragraph for its current taxable year and the immediately
succeeding taxable year (there being no substantial and material changes
in the organization's character, purposes, methods of operation, or
sources of support in these years).
Example 4. (a) In 1960, the P Philharmonic Orchestra was organized
in Z City through the combined efforts of 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. P is an
organization referred to in section 170(c)(2). 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
admission charge is made for each of these performances. In addition,
several performances are staged annually without charge. During its 4
most recent taxable years, P has received separate contributions of
$200,000 each from A and B (not members of a single family) and support
of $120,000 from the Z Community Chest, a public federated fundraising
organization operating in Z City. P depends on these funds in order 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 fundraising
campaign in an attempt to expand its activities for the coming years. P
is governed by a Board of Directors comprised of five individuals. A
faculty member of a local college, the president of a local music
society, the head of a local banking institution, 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.
(b) With respect to P's current taxable year, P's sources of support
are computed on the basis of the 4 immediately preceding years, as
follows:
Contributions.............................................. $520,000
Receipts from performances................................. 100,000
----------
Total support............................................ 620,000
Less:
Receipts from performances (excluded under subparagraph 100,000
(7)(i)(a) of this paragraph)..............................
----------
Total support for purposes of subparagraphs (2) and 520,000
(3)(i) of this paragraph................................
(c) For purposes of subparagraphs (2) and (3)(i) of this paragraph,
P's support is computed as follows:
Z Community Chest (indirect support from the general $120,000
public)...................................................
Two contributions (each in excess of $10,400--2 percent of 20,800
total support) 2x$10,400..................................
----------
Total.................................................... 140,800
(d) P's support from the general public, directly and indirectly,
does not meet the 33 1/3 percent-of-support test under subparagraph (2)
of this paragraph ($140,800/$520,000=27 percent of total support).
However, since P receives 27 percent of its total support from the
general public, it meets the 10 percent-of-support limitation under
subparagraph (3)(i) of this paragraph. P also meets the requirements of
subparagraph (3)(ii) of this paragraph. As a result of satisfying these
requirements and the factors set forth in subparagraph (3) (iii), (iv),
(v), and (vi) of this paragraph, P is considered as meeting the
requirements of subparagraph (3) of this paragraph and is therefore
considered to be a ``publicly supported'' organization under
subparagraph (1) of this paragraph.
(e) If, instead of the above facts, P were a newly created
organization, P could obtain a
[[Page 99]]
ruling pursuant to subparagraph (5) of this paragraph 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, such fact would not, in and of itself, disqualify P from
receiving a ruling under subparagraph (5) of this paragraph.
Example 5. (a) Q is an organization referred to in section
170(c)(2). It is a philanthropic organization founded in 1965 by A for
the purpose of making annual contributions to worthy charities. A
created Q as a charitable trust by the transfer of $500,000 worth of
appreciated securities to Q.
Pursuant to the trust agreement, A and two other members of his
family are the sole trustees and are vested with the right to appoint
successor trustees. In each of its four most recent taxable years, Q
received $15,000 in investment income from its original endowment. Each
year Q makes a solicitation for funds by operating a charity ball at A's
residence. Guests are invited and requested to make contributions of
$100 per couple. During the 4-year period involved, $15,000 was received
from the proceeds of these events. A and his family have also made
contributions to Q of $25,000 over the course of the organization's 4
most recent taxable years. Q makes disbursements each year of
substantially all of its net income to the public charities chosen by
the trustees.
(b) With respect to Q's current taxable year, Q's sources of support
are computed on the basis of the 4 immediately preceding years as
follows:
Investment income.......................................... $60,000
Contributions.............................................. 40,000
----------
Total support............................................ 100,000
(c) For purposes of subparagraphs (2) and (3)(i) of this paragraph,
Q's support is computed as follows:
Contributions from the general public...................... $15,000
One contribution (in excess of $2,000--2 percent of total 2,000
support) 1x$2,000.........................................
----------
Total.................................................... 17,000
(d) Q's support from the general public does not meet the 33 1/3
percent-of-support test under subparagraph (2) of this paragraph
($17,000/$100,000=17 percent of total support). Thus, Q's classification
as a ``publicly supported'' organization depends on whether it meets the
requirements of subparagraph (3) of this paragraph. Even though it
satisfies the 10 percent-of-support limitation under subparagraph (3)(i)
of this paragraph, its method of solicitation makes it questionable
whether Q satisfies the requirements of subparagraph (3)(ii) of this
paragraph. Because of its method of operating, Q also has a greater
burden of establishing its publicly supported nature under subparagraph
(3)(iii) of this paragraph. Based upon the foregoing and upon Q's
failure to receive favorable consideration under the factors set forth
in subparagraph (3) (iv), (v), and (vi) of this paragraph, Q does not
satisfy the requirements of subparagraph (3) of this paragraph as a
``publicly supported'' organization.
(e) If, instead of the above facts, Q were a newly created
organization, Q would not be able to receive a ruling pursuant to
subparagraph (5) of this paragraph. Its purposes, organizational
structure, and method of operation would be insufficient to establish
that Q could reasonably be expected to meet the requirements of
subparagraph (2) or (3) of this paragraph for its first 2 or its first 5
taxable years.
(10) Community trusts; introduction. Community trusts have often
been established to attract large contributions of a capital or
endowment nature for the benefit of a particular community or area, and
often such contributions have come initially from a small number of
donors. While the community trust generally has a governing body
comprised of representatives of the particular community or area, its
contributions are often received and maintained in the form of separate
trusts or funds, which are subject to varying degrees of control by the
governing body. To qualify as a ``publicly supported'' organization, a
community trust must meet the 33 1/3 percent-of-support test of
paragraph (e)(2) of this section, or, if it cannot meet that test, 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 of paragraph (e)(3) of this section. Such facts
and circumstances test includes a requirement of attraction of public
support in paragraph (e)(3)(ii) of this section which, as applied to
community trusts will generally satisfied, 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 which call attention
to the community trust as a potential recipient of gifts and berquests
made for the benefit of the community or area served. A community trust
is not required to engage in periodic, community-wide, fund-raising
campaigns directed toward attracting a large number of small
contributions in
[[Page 100]]
a manner similiar to campaigns conducted by a community chest or united
fund. Paragraph (e) (12) and (13) of this section provide a transitional
ruling period for certain community trusts in existence before November
11, 1976 that had irregular public support, so that they can meet the
requirements of paragraph (e) (2) or (3) of this section based on the 4-
year computation period described in paragraph (e)(4) of this section.
Paragraph (e)(11) of this section provides rules for determining the
extent to which separate trusts or funds may be treated as component
parts of a community trust, fund or foundation (herein collectively
referred to as a ``community trust'', and sometimes referred to as an
``organization'') for purposes of meeting the requirements of this
paragraph for classification as a ``publicly supported'' organization.
Paragraph (e)(14) of this section contains rules for trusts or funds
which are prevented from qualifying as component parts of a community
trust by paragraph (e)(11) of this section.
(11) Community trusts; requirements for treatment as a single
entity--(i) General rule. For purposes of sections 170, 501, 507, 508,
509, and Chapter 42, any organization that meets the requirements
contained in paragraph (e)(11) (iii) through (iv) of this section will
be treated as a single entity, rather than as an aggregation of separate
funds, and except as otherwise provided, all funds associated with such
organization (whether a trust, not-for-profit corporation,
unincorporated association, or a combination thereof) which meet the
requirements of paragraph (e)(11)(ii) of this section will be treated as
component parts of such organization.
(ii) Component part of a community trust. In order to be treated as
a component part of a community trust referred to in paragraph (e)(11)
of this section (rather than as a separate trust or not-for-profit
corporation or association) a trust or fund:
(A) Must be created by a gift, bequest, legacy, devise, or other
transfer to a community trust which is treated as a single entity under
paragraph (e)(11) of this section; and
(B) May not be directly or indirectly subjected by the transferor to
any material restriction or condition (within the meaning of Sec.
1.507-2(a)(8) with respect to the transferred assets.
For purposes of paragraph (e)(11)(ii)(B) of this section, if the
transferor is not a private foundation, the provisions of Sec. 1.507-
2(a)(8) shall be applied to the trust or fund as if the transferor were
a private foundation established and funded by the person establishing
the trust or fund and such foundation transferred all its assets to the
trust or fund. Any transfer made to a fund or trust which is treated as
a component part of a community trust under paragraph (e)(11)(ii) of
this section will be treated as a transfer made ``to'' a ``publicly
supported'' community trust for purposes of section 170(b)(1)(A) and
507(b)(1)(A) if such community trust meets the requirements of section
170(b)(10(A)(vi) as a ``publicly supported'' organization at the time of
the transfer, except as provided in Sec. 1.170A-9(e)(4)(v)(b) or Sec.
1.508-1(b) (4) and (6) (relating, generally, to reliance by grantors and
contributors). See, also, paragraph (e)(14) (ii) and (iii) of this
section for special provisions relating to split-interest trusts and
certain private foundations described in section 170(b)(1)(E)(iii).
(iii) Name. The organization must be commonly known as a community
trust, fund, foundation or other similar name conveying the concept of a
capital or endoment fund to support charitable activities (within the
meaning of section 170(c)(1) or (2)(B)) in the community or area it
serves.
(iv) Common instrument. All funds of the organization must be
subject to a common governing instrument or a master trust or agency
agreement (herein referred to as the ``governing instrument''), which
may be embodied in a single document or several documents containing
common language. Language in an instrument of transfer to the community
trust making a fund subject to the community trust's governing
instrument or master trust or agency agreement will satisfy the
requirements of paragraph (e)(11)(iv) of this section. In addition, if a
community trust adopts a new governing instrument (or creates a
corporation) to
[[Page 101]]
put into effect new provisions (applying to future transfers to the
community trust), the adoption of such new governing instrument (or
creation of a corporation with a governing instrument) which contains
common language with the existing governing instrument shall not
preclude the community trust from meeting the requirements of such
paragraph (e)(11)(iv).
(v) Common governing body. (A) The organization must have a common
governing body or distribution committee (herein referred to as the
``governing body'') which either directs or, in the case of a fund
designated for specified beneficiaries, monitors the distribution of all
of the funds exclusively for charitable purposes (within the meaning of
section 170(c) (1) or (2)(B)).
For purposes of this (v) a fund is designated for specified
beneficiaries only if no person is left with the discretion to direct
the distribution of the fund.
(B) Powers of modification and removal. Except as provided in
paragraph (e)(11)(v)(C) of this section, the governing body must have
the power in the governing instrument, the instrument of transfer, the
resolutions or by-laws of the governing body, a written agreement, or
otherwise--
(1) To modify any restriction or condition on the distribution of
funds for any specified charitable purposes or to 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), such restriction or
condition becomes, in effect, unnecessary, incapable of fulfillment, or
inconsistent with the charitable needs of the community or area served;
(2) To replace any participating trustee, custodian, or agent for
breach of fiduciary duty under State law; and
(3) To replace any participating trustee, custodian, or agent for
failure to produce a reasonable (as determined by the governing body)
return of net income (within the meaning of paragraph (e)(11)(v)(F) of
this section) over a reasonable period of time (as determined by the
governing body).
The fact that the exercise of any such power in paragraph (e)(11)(v)(B)
(1), (2) or (3) of this section is reviewable by an appropriate State
authority will not preclude the community trust from meeting the
requirements of paragraph (e)(11)(v)(B) of this section.
(C) Transitional rule. (1) Notwithstanding paragraph (e)(11)(v)(B)
of this section, if a community trust meets the requirements of
paragraph (e)(11)(v)(C)(2) of this section, then in the case of any
instrument of transfer which is executed before July 19, 1977 and is not
revoked or amended thereafter (with respect to any dispositive provision
affecting the transfer to the community trust), and in the case of any
instrument of transfer which is irrevocable on January 19, 1982, the
governing body must have the power to cause proceedings to be instituted
(by request to the appropriate State authority):
(i) To modify any restriction or condition on the distribution of
funds for any specified charitable purposes or to specified
organizations if in the judgment of the governing body such restriction
or condition becomes, in effect, unnecessary, incapable of fulfillment,
or inconsistent with the charitable needs of the community or area
served; and (ii) To remove any participating trustee, custodian, or
agent for breach of fiduciary duty under State law.
The necessity for the governing body to obtain the approval of a
participating trustee to exercise such a power shall be treated as not
preventing the governing body from having such power, unless (and until)
such approval has been (or is) requested by the governing body and has
been (or is) denied.
(2) Paragraph (e)(11)(v)(C)(1) of this section shall not apply
unless the community trust meets the requirements of paragraph
(e)(11)(v)(B) of this section, with respect to funds other than those
under instruments of transfer described in the first sentence of such
paragraph (e)(11)(v)(C)(1), by January 19, 1978, or such later date as
the Commissioner may provide for such community trust, and unless the
community trust does not, once it so complies, thereafter solicit for
funds that will not qualify under the requirements of such paragraph
(e)(11)(v)(B).
(D) Inconsistent State law. (E T='03'1) For purposes of
paragraph (e)(11)(v)(B)
[[Page 102]]
(1), (2), or (3 or (C)(1) (i) or (ii) or (E) of this section, if a power
described in such a provision is inconsistent with State law even if
such power were expressly granted to the governing body by the governing
instrument and were accepted without limitation under an instrument of
transfer, then the community trust will be treated as meeting the
requirements of such a provision if it meets such requirements to the
fullest extent possible consistent with State law (if such power is or
had been so expressly granted).
(2) For example, if, under the conditions of paragraph
(e)(11)(v)(D)(1) of this section, the power to modify is inconsistent
with State law, but the power to institute proceedings to modify if so
expressly granted, would be consistent with State law, the community
trust will be treated as meeting such requirements to the fullest extent
possible if the governing body has the power (in the governing
instrument or otherwise) to institute proceedings to modify a condition
or restriction. On the other hand, if in such a case the community trust
has only the power to cause proceedings to be instituted to modify a
condition or restriction, it will not be treated as meeting such
requirements to the fullest extent possible.
(3) In addition, if, for example, under the conditions of paragraph
(e)(11)(v)(D)(1) of this section, the power to modify and the power to
institute proceedings to modify a condition or restriction is
inconsistent with State law, but the power to cause such proceedings to
be instituted would be consistent with State law, if it were expressly
granted in the governing instrument and if the approval of the State
Attorney General were obtained, then the community trust will be treated
as meeting such requirements to the fullest extent possible if it has
the power (in the governing instrument or otherwise) to cause such
proceedings to be instituted, even if such proceedings can be instituted
only with the approval of the State Attorney General.
(E) Exercise of powers. The governing body shall (by resolution or
otherwise) commit itself to exercise the powers described in paragraph
(e)(11)(v) (B), (C) and (D) of this section in the best interests of the
community trust. The governing body will be considered not to be so
committed where it has grounds to exercise such a power and fails to
exercise it by taking appropriate action. Such appropriate action may
include, for example, consulting with the appropriate State authority
prior to taking action to replace a participating trustee.
(F) Reasonable return. In addition to the requirements of paragraph
(e)(11)(v) (B), (C), (D) or (E) of this section, the governing body
shall (by resolution or otherwise) commit itself to obtain information
and take other appropriate steps with the view to seeing that each
participating trustee, custodian, or agent, with respect to each
restricted (within the meaning of paragraph (e)(13)(x) of this section)
trust or fund that is, and with respect to the aggregate of the
unrestricted trusts or funds that are, a component part of the community
trust, administers such trust or fund in accordance with the terms of
its governing instrument and accepted standards of fiduciary conduct to
produce a reasonable return of net income (or appreciation where not
inconsistent with the community trust's need for current income), with
due regard to safety of principal, in furtherance of the exempt purposes
of the community trust (except for assets held for the active conduct of
the community trust's exempt activities). In the case of a low return of
net income (and, where appropriate, appreciation), the Internal Revenue
Service will examine carefully whether the governing body has, in fact,
committed itself to take the appropriate steps.
(vi) Common reports. The organization must prepare periodic
financial reports treating all of the funds which are held by the
community trust, either directly or in component parts, as funds of the
organization.
(vii) Transitional rule. If the governing instrument of a community
trust (or an instrument of transfer) is inconsistent with the
requirements of paragraph (e)(11) (iv) or (v) of this section but with
respect to gifts or bequests acquired before January 1, 1982, the
community trust changes its governing instrument (or instrument of
[[Page 103]]
transfer) by the later of November 11, 1977, or one year after the gift
or bequest is acquired, in order to conform such instruments to such
provisions, then such an instrument shall be treated as consistent with
paragraph (e)(11) (iv) or (v) of this section for taxable years
beginning after December 31, 1969. In addition, if prior to the later of
such dates, the organization has instituted court proceedings in order
to conform such an instrument, then it may apply (prior to the later of
such dates) for an extension of the period to conform such instrument to
such provisions. Such application shall be made to the Commissioner of
Internal Revenue, Attention: E:EO, Washington, DC 20224. The
Commissioner, at the Commissioner's discretion, may grant such an
extension, if in the Commissioner's opinion such a change will conform
the instrument to such provisions and will be made within a reasonable
time.
(12) Community trusts qualifying for 5-year transitional ruling
period--(i) In general. Paragraph (e) (12) and (13) of this section
contain transitional rules for certain community trusts in existence
before November 11, 1976 which are unable to meet the requirements of
paragraph (e) (2) or (3) of this section based upon a 4-year computation
period under paragraph (e)(4) of this section. A community trust that
satisfies the requirements of paragraph (e)(12)(ii) of this section will
be eligible for a transitional ruling or determination letter that it
will be treated as a section 170(b)(1)(A)(vi) organization for a 5-year
transitional ruling period (referred to in this section as
``transitional ruling or determination letter''). These transitional
rules apply to:
(A) A community trust which has been in existence less than 9
taxable years before November 11, 1976; and
(B) Other community trusts that for each taxable year beginning
after December 31, 1969, and before January 1, 1978, qualify as
``publicly supported'' under paragraph (e) (2) or (3) of this section
based upon a computation period of either:
(1) 10 taxable years, or
(2) The number of taxable years (but not more than 20 nor less than
10) preceding such taxable year that the organization was in existence.
For special rules in applying the requirements of paragraph (e) (2) or
(3) of this section based upon such computation periods, see paragraph
(e)(12)(v) of this section. For purposes of paragraph (e)(12) of this
section the initial taxable year of the 5-year transitional ruling
period (hereinafter referred to as the ``transitional ruling period'')
shall be the organization's taxable year beginning in 1977, and (unless
terminated earlier) the last year of the transitional ruling period is
the organization's taxable year which begins in 1981.
(ii) Transitional 5-year ruling. (A) If a community trust meets the
requirements of paragraph (e) (11), (12) and (13) of this section and
can reasonably be expected to meet the requirements of paragraph (e) (2)
or (3) of this section:
(1) For each of its taxable years (if such a year begins after its
tenth taxable year) beginning in 1978, 1979, 1980 and 1981 based upon a
10-year computation period, and
(2) For its taxable year beginning in 1982 based upon a 4-year
computation period under paragraph (e)(4) of this section;
it may, at the discretion of the Commissioner, receive a transitional
ruling or determination letter for the transitional ruling period.
(B)(1) However, if for the taxable year beginning in 1977, a
community trust can meet the requirements of paragraph (e)(12)(i)(B) of
this section only by using the computation period of its existence
described in paragraph (e)(12)(i)(B)(2) of this section, then the
community trust may meet the requirements of paragraph (e)(12)(ii)(A)(1)
of this section if it is reasonably expected to meet the requirements of
paragraph (e) (2) or (3) of this section for each of its taxable years
beginning in 1978, 1979, 1980 and 1981 based upon a computation period
consisting of the number of taxable years (but not more than 20 nor less
than 10) preceding such taxable year that the organization was in
existence.
(2) In the case of a community trust that will not have been in
existence more than ten taxable years as of its taxable year beginning
in 1981, a transitional ruling or determination letter for the
transitional ruling period will
[[Page 104]]
not be granted unless the community trust can reasonably be expected to
meet the requirements of paragraph (e) (2) or (3) of this section for
its taxable year beginning in 1982 based upon a 4-year computation
period under paragraph (e)(4) of this section and also a computation
period consisting of the taxable years the organization has been in
existence (other than the organization's taxable year beginning in
1982).
(C) A community trust that is eligible for a transitional ruling or
determination letter must apply with the district director for such
ruling or determination letter within one year after November 11, 1976.
A transitional ruling or determination letter will be granted only if
the requesting organization files with its request for such ruling or
determination letter a consent letter under section 6501(c)(4) to the
effect that the period of limitation upon assessment under section 4940
for all taxable years beginning before January 1, 1982 during the
transitional ruling period shall not expire prior to 1 year after the
date of the expiration of the time prescribed by law for the assessment
of a deficiency for its taxable year beginning in 1981. The provisions
of paragraph (e)(5)(iii) of this section (relating to reliance upon
ruling) shall apply with respect to a community trust which receives a
transitional ruling or determination letter and with respect to its
grantors and contributors, expect that the transitional ruling period
described in paragraph (e)(12)(ii) of this section shall be substituted
for the advance ruling period described in paragraph (e)(5) (i) or (iv)
of this section.
(D) A community trust does not have to meet the requirements of
paragraph (e)(13) of this section for taxable years beginning prior to
the date of its application for a transitional ruling or determination
letter or for any taxable year beginning after the expiration or
termination of its transitional ruling or determination letter. In
applying paragraph (e)(13) of this section to organizations applying for
a transitional ruling or determination letter, paragraph (e)(13) (x) and
(xii) of this section (relating to unrestricted gifts and excess
holdings, respectively) shall be applied without regard to assets
acquired prior to November 11, 1976. In addition, if within 1 year from
acquiring any asset, the community trust removes any restriction
inconsistent with paragraph (e)(13) of this section, such asset shall be
treated as if it were not subject to such restriction as of the time it
was acquired. Since under paragraph (e)(12)(ii)(D) of this section, a
community trust does not have to meet the requirements of paragraph
(e)(13) of this section for taxable years beginning prior to the date of
its application for the transitional ruling or determination letter,
then if the community trust makes such application in its taxable year
beginning 1977 and it terminates such ruling or determination letter in
such year as well, such a community trust does not have to meet such
requirements for any taxable year.
(E) After the transitional ruling or determination letter of an
organization has expired or been terminated under paragraph (e)(12)(iii)
of this section, the organization must qualify as a ``publicly
supported'' organization pursuant to the rules set forth in paragraph
(e) (1) through (11) of this section. Thus, since the transitional
ruling period of a community trust expires with its taxable year
beginning in 1981, for its taxable year beginning in 1982 and
thereafter, the community trust must meet the requirements of paragraph
(e) (2) or (3) of this section based upon the 4-year computation period
under paragraph (e)(4) of this section.
(iii) Termination of transitional ruling. (A) The transitional
ruling or determination letter issued under this paragraph is subject to
termination under paragraph (e)(12)(iii) (B) or (D) of this section
without a request from the organization. In addition, such a ruling or
determination letter is subject to termination under paragraph
(e)(12)(iii)(E) of this section at the request of the organization. A
transitional ruling or determination letter is subject to termination
for any taxable year beginning after December 31, 1976, and before
January 1, 1982, under paragraph (e)(12)(iii) (B), (D) or (E) of this
section.
[[Page 105]]
(B) The transitional ruling or determination letter issued under
this paragraph shall be terminated for any taxable year (if such a year
begins after its tenth taxable year) beginning in 1978, 1979, 1980 or
1981 for which a community trust receiving such a ruling or
determination letter fails to meet the requirements of paragraph (e) (2)
or (3) of this section for a 10-year computation period, except as
provided in paragraph (e)(12)(iii)(C) of this section.
(C) In applying paragraph (e)(12)(iii)(B) of this section to a
community trust described in paragraph (e)(12)(ii)(B)(1) of this
section, a computation period consisting of the number of taxable years
(but not more than 20 nor less than 10) preceding such taxable year that
the organization has been in existence shall be substituted for the 10-
year computation period until the first taxable year beginning in 1978,
1979, 1980 or 1981 that the community trust can meet the requirements of
paragraph (e) (2) or (3) of this section based upon a 10-year
computation period.
(D) The Commissioner may, at the discretion of the Commissioner,
terminate the transitional ruling or determation letter of any community
trust for any taxable year beginning prior to January 1, 1982, for which
the organization fails to meet the requirements of paragraph (e) (11),
(12) or (13) of this section as provided in paragraph (e)(12)(ii) of
this section.
(E) A community trust may request an immediate termination of the
community trust's transitional ruling or determination letter in order
that, for the current taxable year, it may be determined if such
community trust meets the requirements of paragraph (e) (2) or (3) of
this section based upon a 4-year computation period under paragraph
(e)(4) of this section. Such a request shall be granted and the
transitional ruling or determination letter terminated only if the
community trust meets such requirements, and in the case of an
organization that has been in existence less than 11 taxable years at
the time of such request, the organization also meets the requirements
of paragraph (e) (2) or (3) of this section for the computation period
consisting of the taxable years that the organization has been in
existence.
(iv) Initial determination of status. (A) The initial determination
of status of a community trust is the first determination (other than by
issuance of an advance ruling or determination letter under paragraph
(e)(5) or a transitional ruling or determination letter under paragraph
(e)(12)(ii) of this section) that the community trust will be considered
as ``normally'' meeting the requirements of paragraph (e) (2) or (3) of
this section for a period beginning with its first taxable year.
(B)(1) In the case of a community trust described in paragraph
(e)(12)(i)(B) of this section, the initial determination of status shall
be made for the community trust's taxable year beginning in 1977 if such
community trust has met the requirements of paragraph (e) (2) or (3) of
this section for its taxable year beginning in 1977, based upon a 10-
year computation period.
(2) In the case of any other community trust described in paragraph
(e)(12)(i)(B) of this section (but not described in paragraph
(e)(12)(iv) (B)(1) of this section), the initial determination of status
shall be made for its first taxable year beginning after December 31,
1976 and before January 1, 1982, for which it meets the requirements of
paragraph (e) (2) or (3) of this section based upon a 10-year
computation period (if the community trust has received a transitional
ruling or determination letter that has not been terminated before such
taxable year).
(C) In the case of a community trust described in paragraph
(e)(12)(i)(A) of this section (relating to an organization in existence
less than 9 taxable years) that reaches its 11th taxable year before its
taxable year beginning in 1982, its initial determination of status a
10-year computation period (if it has received a transitional ruling or
determination letter that has not been terminated before such taxable
year).
(D) If a community trust has not received an initial determination
of status shall be for its 11th taxable year based upon prior to the
expiration or termination of its transitional ruling period, the initial
determination of status shall be made:
[[Page 106]]
(1) In the case of an expiration, for the taxable year beginning in
1982, or
(2) In the case of a termination, for the last taxable year of the
terminated transitional period.
Based upon a 4-year computation period under paragraph (e)(4) of this
section. In the case of an organization that has been in existence less
than 11 taxable years at such time, the initial determination of status
shall also be based upon a computation period consisting of the taxable
years it has been in existence. For example, if the initial
determination of status (for an organization that has been in existence
for at least 11 taxable years) is made for its taxable year beginning in
1982, then, except as provided in paragraph (e)(4)(v) of this section
(relating to exception for material changes of support), such
determination shall be based upon a 4-year computation period ending
with the taxable year beginning in 1980 or 1981 (treating the taxable
year beginning in 1982, as the subsequent year or current year,
respectively).
On the other hand, if, for example, the transitional ruling or
determination letter is terminated in the taxable year beginning in
1980, then, except as provided in such paragraph (e)(4)(v), the initial
determination of status shall be made for the taxable year beginning in
1980 based upon the 4-year computation period ending with the taxable
year beginning in 1978 or 1979.
(v) Special rules--(A) Consequences of organization failing to meet
requirements at end of transitional period. If upon the expiration (or
termination) of the transitional period an organization with a
transitional ruling or determination letter fails to meet the
requirements of paragraph (e) (2) or (3) of this section based upon the
4-year computation period of paragraph (e)(4) of this section, it shall
not be treated as an organization described in section 170(b)(1)(A)(vi)
for its taxable year beginning in 1982 (or for the last taxable year of
its terminated transitional period, as the case may be). If, by reason
of failing to qualify as an organization described in section
170(b)(1)(A)(vi), such organization becomes a private foundation, then
the organization will be a private foundation for its taxable year
beginning in 1982 (or the last taxable year of its terminated
transitional period, as the case may be) and all subsequent taxable
years, unless and until it terminates its status under section 507. In
addition, such an organization is a private foundation for all taxable
years beginning prior to its taxable year beginning in 1982 (or for the
last taxable year of the terminated transition period, as the case may
be), except:
(1) That if the organization had received an initial determination
of status that it met the requirements of paragraph (e) (2) or (3) of
this section, then the organization will be treated as ``publicly
supported'' for the taxable years to which the initial determination of
status is effective, as well as for all taxable years beginning after
the last of such years and before January 1, 1982, for which the
organization consecutively meets the requirements of paragraph (e) (2)
or (3) of this section based upon a 10-year computation period,
(2) That in the case of an organization that has reached its tenth
taxable year of existence before January 1, 1970, if the organization
has not received an initial determination of status prior to its taxable
year beginning in 1982, then the organization will be treated as
``publicly supported'' for each taxable year beginning before January 1,
1977, that the organization, beginning with the taxable year beginning
in 1970, consecutively met the requirements of paragraph (e) (2) or (3)
of this section based upon a 10-year computation period, or
(3) That in the case of an organization whose 11th taxable year of
its existence began after December 31, 1970 and before January 1, 1977,
if the organization has not received an initial determination of status
prior to its taxable year beginning in 1982, but the organization for
its 11th taxable year of existence met the requirements of paragraph (e)
(2) or (3) of this section based upon a 10-year computation period, then
the organization will be treated as ``publicly supported'' for the first
12 taxable years of its existence. In addition, such an organization
will be so treated for its 13th taxable year and each subsequent taxable
year (if
[[Page 107]]
such a year begins before January 1, 1977) that the organization,
beginning with its 12th taxable year, consecutively met the requirements
of paragraph (e) (2) or (3) of this section based upon a 10-year
computation period.
(4) To the extent provided in paragraph (e)(4)(vii) of this section
(relating to special rule for organization with existing rulings), Sec.
1.508-1(b) (relating to notice that an organization is not a private
foundation) or Sec. 1.509(a)-7 (relating to reliance by grantors and
contributors to section 509(a) (1), (2), and (3) organizations).
(B) Computation period. In applying the requirements of paragraph
(e) (2) or (3) of this section to a 10-year or other computation period
under paragraph (e) (12) or (13) of this section, such 10-year or other
computation period shall be substituted for the 4-year computation
period of paragraph (e)(4) of this section. Thus, for example, an
organization will (except as provided in paragraph (e)(4)(v) of this
section relating to exemption for material changes in sources of
support) meet the ``publicly supported'' test of this paragraph for the
taxable year beginning in 1977 based upon a 10-year computation period,
if it met the requirements of paragraph (e) (2) or (3) of this section
for a computation period consisting of either the taxable years
beginning in the years 1966 through 1975 or the years 1967 through 1976,
since under paragraph (e)(4) of this section, meeting the requirements
for a computation period is effective for the current taxable year and
the immediately succeeding taxable year. However, in substituting a 10-
year or other computation period for the 4-year computation period of
paragraph (e)(4) of this section, the rules of such paragraph (e) (4)
and (6) apply, including the 2-percent limitation under paragraph
(e)(6)(i) of this section and the exclusion for unusual grants under
paragraph (e)(6)(ii) of this section. In applying such provisions, the
fact that the computation period is other than a 4-year computation
period shall be taken into account, so that, for example, the 2-percent
limitation shall be applied, in the case of a 10-year computation
period, with reference to 2 percent of the organization's total support
for the 10-year computation period rather than a 4-year computation
period.
In addition, in substituting a 10-year or other computation period for
purposes of paragraph (e)(3) of this section, all of the facts and
circumstances referred to in such paragraph (e)(3) shall be considered
with respect to such period, viewing such period as a whole. See, also,
paragraph (e)(10) of this section with respect to the organization being
organized and operated to attract public support.
(C) First taxable year of less than 8 months. In the case of an
organization whose first taxable year consisted of less than 8 months,
in order to coordinate the rules of paragraph (e)(12) of this section
with the rules of paragraph (e)(5) of this section, in applying the
rules of paragraph (e)(12) of this section, such an organization shall
be treated as organized at the beginning of its succeeding taxable year,
so that such succeeding taxable year shall be treated as its first
taxable year of existence. However, the support received for the period
preceding such succeeding taxable year shall be taken into account with
the support received in such succeeding taxable year.
(13) Community trusts; requirements for 5-year transitional ruling
period--(i) In general. In order for a community trust to be eligible
for a transitional ruling or determination letter for the transitional
ruling period under paragraph (e)(12) of this section, it must establish
that it is organized, and will be operated, in such manner that it can
reasonably be expected to meet the requirements of paragraph (e)(13) of
this section, and can reasonably be expected to meet the requirements of
paragraph (e) (2) or (3) of this section, for each taxable year during
and immediately following the transitional ruling period, as provided in
paragraph (e)(12)(ii) of this section. In determining whether an
organization can reasonably be expected to meet the requirements of
paragraph (e) (2) or (3) of this section for each such taxable year, the
basic consideration is whether its organizational structure, proposed
programs or activities, and intended method of operation are such as to
attract the type of broadly based support from the general public,
public charities,
[[Page 108]]
and governmental units which is necessary to meet such tests. The
information to be considered for this purpose shall consist of all
pertinent facts and circumstances relating to the requirements set forth
in paragraph (e)(3) of this section. For purposes of meeting the
requirements of paragraph (e)(13) of this section, a community trust
may, prior to its application for a transitional ruling or determination
letter under paragraph (e)(12)(i)(C) of this section, adopt a resolution
stating that, as a matter of policy, it will attempt to meet the
conditions set forth in paragraph (e)(13) of this section during the
transitional ruling period. A community trust will not be treated as
failing to satisfy the requirements of paragraph (e)(13) of this section
merely because the governing body, or any of its trustees, agents, or
custodians, fails to meet one or more of the requirements contained in
paragraph (e)(13) (ii) through (xiii) of this section by reason of
isolated and nonrepetitive acts. However, any continuing pattern on the
part of the governing body, or its trustees, agents or custodians,
indicating a continued and repetitive failure to comply with a policy of
meeting such requirements will result in termination of the transitional
ruling or determination letter under paragraph (e)(12)(iii)(D) of this
section.
(ii) Area. The community trust is organized and operated exclusively
to carry out charitable purposes (within the meeting of section 170(c)
(1) or (2)(B)) primarily within a broad geographical area which it
serves, such as a municipality, county, metropolitan area, State or
region.
(iii) General composition of governing body. The governing body must
represent the board interests of the public rather than the personal or
private interests of a limited number of donors. An organization will be
treated as meeting this requirement if it has a governing body comprised
of public officials acting in their capacities as such; individuals
selected by public officials acting in their capacities as such; persons
having special knowledge or expertise in a particular field or
discipline in which the community trust operates; community leaders,
such as elected or appointed officials, clergymen, educators, civic
leaders; or other such persons representing a broad cross-section of the
views and interests of the area served.
(iv) Rules for governing body. With respect to terms of office
beginning after the date of the application of the community trust for a
transitional ruling or determination letter:
(A) Its governing body is comprised of members who may serve a
period of not more than ten consecutive years;
(B) Upon completion of a period of service (beginning before or
after such date) no person may serve within a period consisting of the
lesser of 5 years or the number of consecutive years the member has
immediately completed serving;
(C) Persons who would be described in section 4946(a)(1) (A) or (C)
through (G) if the community trust were a private foundation do not
constitute more than one-third of its governing body; and
(D) Representatives of banks or trust companies which serve as
trustees, investment managers, custodians, or agents, plus persons
described in paragraph (e)(13)(iv)(C) of this section, do not constitute
a majority of the governing body.
No term of office beginning on or before the date of such application
may continue for more than 10 years from such date.
(v) Fiduciary responsibility. Fiduciary responsibility with respect
to the funds of the community trust is imposed, either by the master
trust or agency agreement or by State law, on either its governing body
or its trustee banks or trust companies or both.
(vi) Ultimate control of assets. Neither its governing body, nor any
of its trustees, investment managers, custodians or agents may be
subjected by any donor to the community trust to any material condition
or restriction within the meaning of Sec. 1.507-2(a)(8) which would
prevent it from exercising ultimate control over its assets.
(vii) Administration. Administration and investment of all gifts and
bequests are accomplished through:
(A) A governing body which directly holds, administers or invests
such gifts and bequests exclusively for charitable purposes;
[[Page 109]]
(B) Banks or trust companies (acting or appointed as trustees),
investment managers, custodians or agents of the community trust or one
or more components thereof; or
(C) A combination of such persons.
(viii) Annual distributions. It makes annual distributions for
purposes described in section 170(c) (1) or (2)(B), including
administrative expenses and amounts paid to acquire an asset used (or
held for use) directly in carrying out one or more of such purposes, in
an amount not less than its adjusted net income (as defined in section
4942(f)). For purposes of paragraph (e)(13)(viii) of this section, the
term ``distributions'' shall include amounts set aside for a specific
project, but only if prior to making the set-aside the organization has,
pursuant to a request for a ruling, established to the satisfaction of
the Commissioner that:
(A) The amount will be paid for the specific project within 5 years;
and
(B) The project is one which can be better accomplished by such set-
aside than by immediate distribution of funds.
All annual distributions required to be made pursuant to paragraph
(e)(13)(viii) of this section, except for set-asides, must be made no
later than the close of the organization's first taxable year after the
taxable year for which the adjusted net income is computed. Thus, in the
case of a calendar year community trust which has received a
transitional ruling or determination letter upon an application made in
1977, it must make distributions under paragraph (e)(13)(vii) of this
section for 1978, 1979, 1980 and 1981 based upon its adjusted net income
for 1977, 1978, 1979 and 1980, respectively, unless its transitional
ruling or determination letter is terminated. If such a community
trust's transitional ruling or determination letter is terminated in
1979, it must make distributions under paragraph (e)(13)(viii) of this
section only for 1978 based upon its adjusted net income for 1977. On
the other hand, if such ruling or letter is terminated in 1977 or 1978,
no distribution under paragraph (e)(13)(viii) of this section need be
made.
(ix) Net income. The community trust's funds must, on an aggregate
basis, be invested to produce an annual adjusted net income (as defined
in section 4942(f)) of not less than two-thirds of what would be its
minimum investment return (within the meaning of section 4942(e)) if
such organization were a private foundation.
(x) Unrestricted gifts. At least one-half of the total income which
the community trust derives from the investment of gifts and bequests
received must be unrestricted (within the meaning of this (x)) with
respect to its availability for distribution by the governing body. For
purposes of this (x), any income which has been designated by the donor
of the gift or bequest to which such income is attributable as being
available only for the use or benefit of a broad charitable purpose,
such as the encouragement of higher education or the promotion of better
health care in the community, will be treated as unrestricted. However,
any income which has been designated for the use or benefit of a named
charitable organization or agency or for the use or benefit of a
particular class of charitable organizations or agencies, the members of
which are readily ascertainable and are less than five in number, will
be treated as restricted.
(xi) Self-dealing. The community trust may not engage in any act
with any person (other than a foundation manager acting only in such
capacity) which would constitute self-dealing within the meaning of
section 4941 if such community trust were a private foundation.
(xii) Excess holdings. The community trust must dispose of any
holdings which would constitute excess business holdings (within the
meaning of section 4943--applied on a component-by-component basis as if
each component were a private foundation, except that components will be
combined for purposes of this paragraph if such components would have
been described in section 4946(a)(1)(H)(ii)).
(xiii) Expenditure responsibility. The community trust must exercise
expenditure responsibility (within the meaning of section 4945(h))
through either its governing body, trustees, investment managers,
custodians, or agents with respect to any grant which would otherwise
constitute a taxable
[[Page 110]]
expenditure under section 4945(d)(4) if the community trust were a
private foundation, except that it need not make the reports required of
private foundations by section 4945(h)(3).
(14) Community trusts; treatment of trusts and not-for-profit
corporations and associations not included as components. (i) For
purposes of sections 170, 501, 507, 508, 509 and Chapter 42, any trust
or not-for-profit corporation or association which is alleged to be a
component part of a community trust, but which fails to meet the
requirements of paragraph (e)(11)(ii) of this section, shall not be
treated as a component part of a community trust and, if a trust, shall
be treated as a separate trust and be subject to the provisions of
section 501 or section 4947(a) (1) or (2), as the case may be. If such
organization is a not-for-profit corporation or association, it will be
treated as a separate entity, and, if it is described in section
501(c)(3), it will be treated as a private foundation unless it is
described in section 509(a) (1), (2), (3), or (4). Any transfer made in
connection with the creation of such separate trust or not-for-profit
organization, or to such entity, will not be treated as being made
``to'' the community trust or one of its components for purposes of
sections 170(b)(1)(A) and 507(b)(1)(A) even though a deduction with
respect to such transfer is allowable under Sec. 1,170-1(e), Sec.
20.2055-2(b), or Sec. 25.2522(a)-2(b), unless such treatment is
permitted under Sec. 1.170A-9(e)(4)(v)(b) or Sec. 1.508-1(b)(4). In
the case of a fund which is ultimately treated as not being a component
part of a community trust pursuant to paragraph (e)(14) of this section,
if the Forms 990 filed annually by the community trust included
financial information with respect to such fund and treated such fund in
the same manner as other component parts thereof, such returns filed by
the community trust prior to the taxable year in which the Commissioner
notifies such fund that it will not be treated as a component part will
be treated as its separate return for purpose of Subchapter A of Chapter
61 of Subtitle F, and the first such return filed by the community trust
will be treated as the notification required of the separate entity for
purposes of section 508(a).
(ii) If a transfer is made in trust to a community trust to make
income or other payments for a period of a life or lives in being or a
term of years to any individual or for any noncharitable purpose,
followed by payments to or for the use of the community trust (such as
in the case of a charitable remainder annuity trust or a charitable
remainder unitrust described in section 664 or a pooled income fund
described in section 642(c)(5)), such trust will be treated as a
component part of the community trust upon the termination of all
intervening noncharitable interests and rights to the actual possession
or enjoyment of the property if such trust satisfies the requirements of
paragraph (e)(11) of this section at such time. Until such time, the
trust will be treated as a separate trust. If a transfer is made in
trust to a community trust to make income or other payments to or for
the use of the community trust, followed by payments to any individual
or for any noncharitable purpose, such trust will be treated as a
separate trust rather than as a component part of the community trust.
See section 4947(a)(2) and the regulations thereunder for the treatment
of such split-interest trusts. The provisions of this (ii) only provide
rules for determining when a charitable remainder trust or pooled income
fund may be treated as a component part of a community trust and are not
intended to preclude a community trust from maintaining a charitable
remainder trust or pooled income fund. Thus, for purposes of grantors
and contributors, a pooled income fund of a ``publicly supported''
community trust shall be treated no differently than a pooled income
fund of any other ``publicly supported'' organization.
(iii) An organization described in section 170(b)(1)(E)(iii) will
not ordinarily satisfy the requirements of paragraph (e)(11)(ii) of this
section because of the unqualified right of the donor to designate the
recipients of the income and principal of the trust. Such organization
will therefore ordinarily be treated as other than a component part of a
community trust under paragraph (e)(14)(i) of this section. However, see
section 170(b)(1)(E)(iii) and the regulations thereunder with respect to
the
[[Page 111]]
treatment of contributions to such organizations.
(f) Private operating foundation. An organization is described in
section 170(b)(1) (A)(vii) and (E)(i) if it is a private ``operating
foundation'' as defined in section 4942(j)(3) and the regulations
thereunder.
(g) Private nonoperating foundation distributing amount equal to all
contributions received--(1) In general. (i) An organization is described
in section 170(b)(1) (A)(vii) and (E)(ii) if it is a private foundation
which, not later than the 15th day of the third month after the close of
its taxable year in which any contributions are received, distributes an
amount equal in value to 100 percent of all contributions received in
such year. Such distributions must be qualifying distributions (as
defined in section 4942(g) without regard to paragraph (3) thereof)
which are treated, after the application of section 4942(g)(3), as
distributions out of corpus in accordance with section 4942(h).
Qualifying distributions, as defined in section 4942(g) without regard
to paragraph (3) thereof, cannot be made to (i) an organization
controlled directly or indirectly by the foundation or by one or more
disqualified persons (as defined in section 4946) with respect to the
foundation or (ii) a private foundation which is not an operating
foundation (as defined in section 4942(j)(3)). The phrase ``after the
application of section 4942(g)(3)'' means that every contribution
described in section 4942(g)(3) received by a private foundation
described in this subparagraph in a particular taxable year must be
distributed (within the meaning of section 4942(g)(3)(A)) by such
foundation not later than the 15th day of the third month after the
close of such taxable year in order for any other distribution by such
foundation to be counted toward the 100-percent requirement described in
this subparagraph.
(ii) In order for an organization to meet the distribution
requirements of subdivision (i) of this subparagraph, it must, not later
than the 15th day of the third month after the close of its taxable year
in which any contributions are received, distribute (within the meaning
of subdivision (i) of this subparagraph) an amount equal in value to 100
percent of all contributions received in such year and have no remaining
undistributed income for such year.
(iii) The provisions of this subparagraph may be illustrated by the
following examples:
Example 1. X is a private foundation on a calendar year basis. As of
January 1, 1971, X had no undistributed income for 1970. X's
distributable amount for 1971 was $600,000. In July 1971, A, an
individual, contributed $500,000 (fair market value determined at the
time of the contribution) of appreciated property to X (which, if sold,
would give rise to long-term capital gain). X did not receive any other
contribution in either 1970 or 1971. During 1971, X made qualifying
distributions of $700,000 which were treated as made out of the
undistributed income for 1971 and $100,000 out of corpus. X will meet
the requirements of section 170(b)(1)(E)(ii) for 1971 if it makes
additional qualifying distributions of $400,000 out of corpus by March
15, 1972.
Example 2. Assume the facts as stated in Example 1, except that as
of January 1, 1971, X had $100,000 of undistributed income for 1970.
Under these circumstances, the $700,000 distributed by X in 1971 would
be treated as made out of the undistributed income for 1970 and 1971. X
would therefore have to make additional qualifying distributions of
$500,000 out of corpus between January 1, 1972, and March 15, 1972, in
order to meet the requirements of section 170(b)(1)(E)(ii) for 1971.
(2) Special rules. In applying subparagraph (1) of this paragraph:
(i) For purposes of section 170(b)(1)(A)(vii), an organization
described in section 170(b)(1)(E)(ii) must distribute all contributions
received in any year, whether of cash or property. However, solely for
purposes of section 170(e)(1)(B)(ii), an organization described in
section 170(b)(1)(E)(ii) is required to distribute all contributions of
property only received in any year. Contributions for purposes of this
paragraph do not include bequests, legacies, devises, or transfers
within the meaning of section 2055 or 2106(a)(2) with respect to which a
deduction was not allowed under section 170.
(ii) Any distributions made by a private foundation pursuant to
subparagraph (1) of this paragraph with respect to a particular taxable
year shall be
[[Page 112]]
treated as made first out of contributions of property and then out of
contributions of cash received by such foundation in such year.
(iii) A private foundation is not required to trace specific
contributions of property, or amounts into which such contributions are
converted, to specific distributions.
(iv) For purposes of satisfying the requirements of section
170(b)(1)(D)(ii), except as provided to the contrary in this subdivision
(iv), the fair market value of contributed property, determined on the
date of contribution, is required to be used for purposes of determining
whether an amount equal in value to 100 percent of the contribution
received has been distributed. However, reasonable selling expenses, if
any, incurred by the foundation in the sale of the contributed property
may be deducted from the fair market value of the contributed property
on the date of contribution, and distribution of the balance of the fair
market value will satisfy the 100 percent distribution requirement. If a
private foundation receives a contribution of property and, within 30
days thereafter, either sells the property or makes an in kind
distribution of the property to a public charity, then at the choice of
the private foundation the gross amount received on the sale (less
reasonable selling expenses incurred) or the fair market value of the
contributed property at the date of its distribution to the public
charity, and not the fair market value of the contributed property on
the sale of contribution (less reasonable selling expenses, if any), is
considered to be the amount of the fair market value of the contributed
property for purposes of the requirements of section 170(b)(1)(D)(ii).
(v) A private foundation may satisfy the requirements of
subparagraph (1) of this paragraph for a particular taxable year by
electing (pursuant to section 4942(h)(2) and the regulations thereunder)
to treat a portion or all of one or more distributions, made not later
than the 15th day of the third month after the close of such year, as
made out of corpus.
(3) Transitional rules--(i) Taxable years beginning before January
1, 1970, and ending after December 31, 1969. In order for an
organization to meet the distribution requirements of subparagraph
(1)(i) of this paragraph for a taxable year which begins before January
1, 1970, and ends after December 31, 1969, it must, not later than the
15th day of the third month after the close of such taxable year,
distribute (within the meaning of subparagraph (1)(i) of this paragraph)
an amount equal in value to 100 percent of all contributions (other than
contributions described in section 4942(g)(3)) which were received
between January 1, 1970, and the last day of such taxable year. Because
the organization is not subject to the provisions of section 4942 for
such year, the organization need not satisfy subparagraph (1)(ii) of
this paragraph or the phrase ``after the application of section
4942(g)(3)'' for such year.
(ii) Extension of period. For purposes of section 170(b)(1)(A)(vii)
and 170(e)(1)(B)(ii), in the case of a taxable year ending in either
1970, 1971 or 1972, the period referred to in section 170(b)(1)(E)(ii)
for making distributions shall not expire before April 2, 1973.
(4) Adequate records required. A taxpayer claiming a deduction under
section 170 for a charitable contribution to a foundation described in
subparagraph (1) of this paragraph must obtain adequate records or other
sufficient evidence from such foundation showing that the foundation
made the required qualifying distributions within the time prescribed.
Such records or other evidence must be attached to the taxpayer's return
for the taxable year for which the charitable contribution deduction is
claimed. If necessary, an amended income tax return or claim for refund
may be filed in accordance with Sec. 301.6402-2 and Sec. 301.6402-3 of
this chapter (procedure and administration regulations).
(h) Private foundation maintaining a common fund--(1) Designation by
substantial contributors. An organization is described in section
170(b)(1) (A)(vii) and (E)(iii) if it is a private foundation all of the
contributions to which are pooled in a common fund and which would be
described in section 509(a)(3) but for the right of any donor who is a
substantial contributor or his spouse to designate annually the
recipients,
[[Page 113]]
from among public charities, of the income attributable to the donor's
contribution to the fund and to direct (by deed or by will) the payment,
to public charities, of the corpus in the common fund attributable to
the donor's contribution. For purposes of this paragraph, the private
foundation is to be treated as meeting the requirements of section
509(a)(3) (A) and (B) even though donors to the foundation, or their
spouses, retain the right to, and in fact do, designate public charities
to receive income or corpus from the fund.
(2) Distribution requirements. To qualify under subparagraph (1) of
this paragraph, the private foundation described therein must be
required by its governing instrument to distribute, and it must in fact
distribute (including administrative expenses):
(i) All of the adjusted net income (as defined in section 4942(f))
of the common fund to one or more public charities not later than the
15th day of the third month after the close of the taxable year in which
such income is realized by the fund, and
(ii) All the corpus attributable to any donor's contribution to the
fund to one or more public charities not later than 1 year after the
donor's death or after the death of the donor's surviving spouse if such
surviving spouse has the right to designate the recipients of such
corpus.
(3) Failure to designate. A private foundation will not fail to
qualify under this paragraph merely because a substantial contributor or
his spouse fails to exercise his right to designate the recipients of
income or corpus of the fund, provided that the income and corpus
attributable to his contribution are distributed as required by
subparagraph (2) of this paragraph.
(4) Definitions. For purposes of this paragraph:
(i) The term substantial contributor is as defined in section
507(d)(2) and the regulations thereunder.
(ii) The term public charity means an organization described in
section 170(b)(1)(A) (i) through (vi). If an organization is described
in section 170(b)(1)(A) (i) through (vi), and is also described in
section 170(b)(1)(A)(viii), it shall be treated as a public charity for
purposes of this paragraph.
(iii) The term income attributable to means the income earned by the
fund which is properly allocable to the contributed amount by any
reasonable and consistently applied method. See, for example, Sec.
1.642(c)-5(c).
(iv) The term corpus attributable to means the portion of the corpus
of the fund attributable to the contributed amount. Such portion may be
determined by any reasonable and consistently applied method.
(v) The term donor means any individual who makes a contribution
(whether of cash or property) to the private foundation, whether or not
such individual is a substantial contributor.
(i) Section 509(a) (2) or (3) organization. An organization is
described in section 170(b)(1)(A)(viii) if it is described in section
509(a) (2) or (3) and the regulations thereunder.
[T.D. 7242, 38 FR 12, Jan. 3, 1973; 38 FR 3598, Feb. 8, 1973, as amended
by T.D. 7406, 41 FR 7096, Feb. 17, 1976; T.D. 7440, 41 FR 50650, Nov.
17, 1976; T.D. 7456, 42 FR 4436, Jan. 25, 1977; T.D. 7679, 45 FR 13452,
Feb. 29, 1980; T.D. 8100, 51 FR 31614, Sept. 4, 1986; T.D. 8991, 67 FR
20437, Apr. 25, 2002]