The Tax Law of Charitable Giving. Bruce R. Hopkins

common interest or purpose.⁴³⁴

Concerning the governing board factor, the organization's non–private foundation status will be enhanced when it has a governing body that represents the interests of the public, rather than the personal or private interests of a limited number of donors. As noted, one of the important elements of this facts and circumstances test is the availability of public facilities or services. Examples of entities meeting this requirement are a museum that holds its building open to the public, a symphony orchestra that gives public performances, a conservation organization that provides educational services to the public through the distribution of educational materials, and a home for the elderly that provides domiciliary or nursing services for members of the general public.⁴³⁵

Community Foundations. A community foundation (or community trust) may qualify as a donative-type public charitable organization if it attracts, receives, and depends on financial support from the general public on a regular, recurring basis. Community foundations are designed primarily to attract large contributions of a capital or endowment nature from a small number of donors. They are generally identified with a particular community or area and are controlled by a representative group of persons from that community or area. Individual donors relinquish control over the investment and distribution of their contributions and the income derived from the contributions, although donors may designate the purposes for which the assets are to be used, subject to change by the governing body of the community foundation.⁴³⁶

Publicly Supported Service Provider Entities. An organization is not a private foundation if it is a charitable organization that is broadly, publicly supported and thus is responsive to the general public, rather than to the private interests of a limited number of donors or other persons.⁴³⁷

For a charitable organization to achieve non–private foundation status under these rules, it must normally receive more than one-third of its support from any combination of (1) gifts, grants, contributions, or membership fees⁴³⁸ and (2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in activities related to its tax-exempt function,⁴³⁹ as long as the support in either category is from permitted sources. Permitted sources are governmental units,⁴⁴⁰ the charitable institutions,⁴⁴¹ donative-type public charitable organizations,⁴⁴² and persons other than disqualified persons⁴⁴³ with respect to the organization. Thus, an organization seeking to qualify under this one-third support test for service-provider publicly supported organizations must construct a support fraction, with the amount of support received from these two categories of sources constituting the numerator of the support fraction and the total amount of support received by the organization being the denominator of the support fraction.⁴⁴⁴ The organization may exclude from both the numerator and denominator of the support fraction an amount equal to one or more unusual grants.⁴⁴⁵

There is no limitation on the amount of support that may be taken into account in determining the numerator of the support fraction under these rules concerning gifts, grants, contributions, and membership fees, except that this support must, as noted, come from permitted sources. In computing the amount of support received from gross receipts that is allowable toward the one-third requirement, gross receipts from related activities received from any person or from any bureau or similar agency of a governmental unit are includible in any tax year to the extent that the receipts do not exceed the greater of $5,000 or 1 percent of the organization's support for the year.⁴⁴⁶

The term support⁴⁴⁷ (in addition to the two categories of public support referenced previously) means (1) net income from unrelated business activities, (2) gross investment income,⁴⁴⁸ (3) tax revenues levied for the benefit of the organization and either paid to or expended on behalf of the organization, and (4) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit to the organization without charge. The term does not include any gain from the disposition of property that would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any federal, state, or local tax or any similar benefit.⁴⁴⁹ These six items of support are combined to constitute the denominator of the support fraction.

To avoid private foundation classification under these rules, an organization also must normally receive not more than one-third of its support from the sum of (1) gross investment income,⁴⁵⁰ including interest, dividends, payments with respect to securities loans, rents, and royalties, and (2) any excess of the amount of unrelated business taxable income over the amount of the tax on that income.⁴⁵¹ To qualify under this test, an organization must construct a gross investment income fraction, with the amount of gross investment income received constituting the numerator of the fraction and the total amount of support received being the denominator of the fraction.⁴⁵²

These support and investment income tests are computed on the basis of the nature of the organization's normal sources of support. An organization is considered as normally receiving one-third of its support from permitted sources and not more than one-third of its support from gross investment income for its current tax year and immediately succeeding tax year if, for its most recent five tax years, including its current tax year, the aggregate amount of support received over the five-year period from permitted sources is more than one-third of its total support and the aggregate amount of support over the five-year period from gross investment income is not more than one-third of its total support.⁴⁵³

Supporting Organizations. Another category of charitable organization that is not a private foundation is the supporting organization.⁴⁵⁴ Organizations that are deemed not to be private foundations because they are supporting organizations are those organizations that are not themselves one of the public institutions⁴⁵⁵ or publicly supported organizations,⁴⁵⁶ but are sufficiently related to organizations that are public or publicly supported entities so that the requisite degree of public control and involvement is considered present.⁴⁵⁷

      A qualified supporting organization must satisfy an organizational test, an operational test, a relationship test, and a disqualified person noncontrol test.

A supporting organization must be organized, and at all times thereafter operated,