In order to understand how the IRS determines eligibility for tax exemptions under Section 501(c)(3), it is necessary to understand where the standards that the IRS applies come from. Section 501(c)(3) itself is part of a federal statute, Section 501 of Title 26 of the United States Code, and states that the following organizations are exempt from income taxation:
Corporations ... organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation ..., and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. [FN1]
The eight purposes set forth in the statute define the range of tax-exempt organizations recognized under Section 501(c)(3):
- religious
- charitable
- scientific
- public safety testing
- literary
- educational
- amateur sports
- prevention of cruelty to children and animals [FN2]
However, Section 501(c)(3) is just the starting point; these eight purposes have specific legal definitions, and the IRS is not free to interpret them as it sees fit. Instead, there is a complex body of law and guidance on the topic developed over the course of more than fifty years, including the following:
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SOURCE OF AUTHORITY |
DESCRIPTION |
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Rulings by U.S. Federal Courts |
Judges in the United States federal court system can be called upon to interpret Section 501(c)(3) and applicable regulations in the course of reviewing IRS decisions on applications for tax exemption under the statute. These rulings are normally binding on the IRS. |
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Rulings by the U.S. Tax Court
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The United States Tax Court is a special court created by Congress pursuant to Article I of the U.S. Constitution to hear certain cases relating to tax issues. The decisions of the Tax Court can be appealed to the United States Courts of Appeals in the normal federal court system. |
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Treasury Regulations |
First promulgated in 1960 and amended thereafter, Treasury Regulations are “issued by the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to address issues that arise with respect to existing Internal Revenue Code sections.” [FN3] |
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IRS Revenue Rulings |
“A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts.” [FN4] |
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IRS Revenue Procedures |
“A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge.” [FN5] |
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Legal advice provided by IRS attorneys: |
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General Counsel Memoranda |
General Counsel Memoranda are non-precedential "legal memorandums from the Office of Chief Counsel to the Internal Revenue Service prepared in response to a formal request for legal advice[.] They are primarily prepared ... in connection with the review of ... proposed determinations ... of the Service. ... The body of the GCM contains a lengthy legal analysis of the substantive issues, and the recommendations and opinions of the Office of Chief Counsel.” [FN6] |
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Technical Advice Memoranda
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“A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. … Technical Advice Memoranda are issued … [to] provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued.” [FN7] TAMs may also be issued by the Tax Exempt and Government Entities Division of the IRS. |
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Chief Counsel Advice
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“Chief Counsel Advice” is general term for non-precedential materials issued by the office of the IRS’s Chief Counsel containing legal opinions and advice to IRS personnel facing specific issues. |
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Other IRS decisions: |
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Private Letter Rulings
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“A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. … A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on as precedent by other taxpayers or IRS personnel.” [FN8] |
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Non Docketed Service Advice Reviews |
Non Docketed Service Advice Reviews constitute non-precedential determinations on tax issues directed to taxpayers in letter form. |
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Miscellaneous materials |
In addition to the materials listed above, the IRS publishes a wide array of other documents, including the Internal Revenue Manual (the IRS’s internal operations guide), press releases, notices, announcements, checksheets, and other informational materials. |
The IRS makes a large amount of the above material available on its website pursuant to the Freedom of Information Act, in its Electronic Reading Room.
As noted above, some of these materials (in particular certain past IRS decisions and internal advisory memoranda) are considered "non-precedential." This means that these materials may not be relied upon by the public as a basis to argue that the IRS should grant an exemption, and may not be relied upon by the IRS as a basis for granting or rejecting an exemption. Therefore, applicants should not cite these materials to the IRS as a basis for requesting Section 501(c)(3) status. Nevertheless, these materials are informative with respect to how the IRS will apply those rules and decisions that are binding on the agency.
The other sections of this Guide discuss the standards applied by the IRS to journalism organizations claiming a tax exemption, and the pitfalls faced by organizations in the IRS review process. The standards applied by the IRS are grouped into two general tests, both of which will be applied: the "Organizational Test" and the "Operational Test."
1 26 U.S.C. § 501(c)(3) (2006). Title 26 of the U.S. Code is interchangeably known as the Internal Revenue Code, and is the main body of statutory law governing federal taxation in the United States.
2 Note that Section 501(c)(3) does not itself state that exempt organizations can receive tax deductible contributions. Rather, Section 170(c)(2) of the Internal Revenue Code provides that contributions made to seven out of the eight kinds of 501(c)(3) organizations (all except "testing for public safety") are deductible.
3 http://www.irs.gov/irs/article/0,,id=101102,00.html (last updated May 20, 2011).
4 http://www.irs.gov/irs/article/0,,id=101102,00.html (last updated May 20, 2011).
5 http://www.irs.gov/irs/article/0,,id=101102,00.html (last updated May 20, 2011).
6 Taxation With Representation Fund v. IRS, 646 F.2d 666, 669 (D.C. Cir. 1981).
7 http://www.irs.gov/irs/article/0,,id=101102,00.html (last updated May 20, 2011).
8 http://www.irs.gov/irs/article/0,,id=101102,00.html (last updated May 20, 2011).
