The Tax Law of Charitable Giving. Bruce R. Hopkins

trust created for the benefit of an aged clergyman and his spouse was held to be a private trust that did not involve exempt activities, irrespective of the fact that the two beneficiaries served were needy.³⁶⁶

       A trust the purpose of which was to pay a certain sum to all individuals enrolled in a certain school on a certain date was held to be a private entity.³⁶⁷

       A bequest to a trust for scholarships at two universities, where the only potential recipients were individuals with the same surname as the decedent (about 600 families), was held not to be a charitable bequest.³⁶⁸

By contrast, a charitable organization established to award scholarships solely to members of a national fraternity or sorority was ruled to be exempt as an educational organization.³⁶⁹ Basically, when a class of individuals is involved as beneficiaries, the sufficiency of the class for purposes of ascertaining whether charitable activities are being engaged in is a matter of degree to be assessed on a case-by-case basis.³⁷⁰ Traditional charitable classes include the impoverished, students, the elderly, and the disabled³⁷¹; sometimes, the IRS looks to see whether a “broad public interest” is being served.³⁷² There are, of course, limitations within the bounds of reason on the IRS's reach in applying this doctrine. As one court observed: “To our knowledge, no charity has ever succeeded in benefiting every member of the community. If to fail to so benefit everyone renders an organization noncharitable, then dire times must lie ahead for this nation's charities.”³⁷³

§ 2.4 PUBLIC CHARITIES AND PRIVATE FOUNDATIONS

      The federal income tax deduction, or the extent of this deduction, for a contribution of money or property to a charitable organization often depends on the tax classification of the donee organization. From the perspective of the tax law, not all charitable organizations are the same. In general, the federal tax law categorizes charitable organizations that are eligible donees for purposes of the charitable deduction as being one of the following types:

       Public charitable organizations

       Private charitable organizations (private foundations)

       A hybrid of the two

       Other eligible donees³⁷⁴

The terms public and private, as used in this context, often generate confusion. The term public is not used in the sense of a governmental entity (as in a public school), nor is the term private used in the sense of business activity (as in private enterprise) or the counterpart of a governmental entity (such as a private school). Neither term has anything to do with the nature of a charitable organization's board of directors or trustees (as in a public board, rather than a private one). These terms, as used in the charitable giving and tax-exempt organizations settings, relate to how the charitable organization is financially supported.

Charitable organizations are presumed to be private foundations.³⁷⁵ This presumption is rebuttable (if the facts so warrant) by showing that the organization qualifies as one of the types of public charitable organizations or as one of the hybrid charitable organizations. Since there is no tax law advantage to being a private foundation, most charitable organizations strive to rebut this presumption, principally to avoid the private foundation rules,³⁷⁶ to facilitate maximum charitable contribution deductions, and to escape the burdensome federal reporting obligations of private foundations.³⁷⁷

(a) Public Charitable Organizations

      Public charitable organizations are the most favored of the categories of charitable organizations for charitable giving purposes. There are essentially four categories of public charitable organizations:

      1 Institutions

      2 Publicly supported organizations that are donative entities

      3 Publicly supported organizations that are service provider entities

      4 Supporting organizations

      Institutions. Some entities in the category of public charitable organizations are classified as institutions because they satisfy the requirements of at least one category of public institution. These entities are not private foundations—not because of how they are funded, but because of the nature of their operations.

Churches. A church is a public charitable organization and thus is not a private foundation.³⁷⁸

The IRS has formulated a test that it uses to ascertain whether an organization qualifies as a church. The IRS's position is that, to be a church for tax purposes, an organization must satisfy at least some of the following criteria: a distinct legal existence, a recognized creed and form of worship, a definite and distinct ecclesiastical government, a formal code of doctrine and discipline, a distinct religious history, a membership not associated with any other church or denomination, a complete organization of ordained ministers ministering to their congregations and selected after completing prescribed courses of study, a literature of its own, established places of worship, regular congregations, regular religious services, schools for religious instruction of the young, and schools for the preparation of its ministers.³⁷⁹ Courts have generally adhered to these criteria.³⁸⁰

Nonetheless, the law on this point has changed considerably in recent years. The IRS has begun ruling that, to be a church, a religious organization must have a place of worship, a congregation, and regular services.³⁸¹ The IRS's position was significantly augmented when a federal court ruled that a “minimum” requirement for church status for a religious entity is satisfaction of an associational test.³⁸²

Thus, to avoid private foundation status as a church, the organization must be more than an organization that generally engages in religious activities.³⁸³

Conventions and Associations of Churches. A convention or association of churches is a public charitable organization and thus is not a private foundation.³⁸⁴

The IRS recognizes that the phrase convention or association of churches has a historical meaning generally referring to a cooperative undertaking by churches of the same denomination.³⁸⁵ A tax-exempt organization, the membership of which is comprised of churches of different denominations, also qualifies as an association of churches.³⁸⁶

Integrated