When you form a group with a charitable purpose, you apply for 501(c)(3)
status; if granted, your organization is exempt from tax, and it can
attract tax-deductible gifts.  However, the IRS will assume that your
organization is a private foundation, as defined by 509(a), unless you
can prove otherwise.  In other words, your organization will be covered
by both 501(c)(3) and 509(a).  If you can prove that 509(a) doesn't
cover you, your organization will be deemed a public charity.

The advantage to proving that 509(a) doesn't apply is that donors will
be able to make larger gifts without coming up against deductibility
limits.  In general, we say that gifts are tax-deductible, but actually
there are limits on how much of your income you can deduct in any one
year.  Gifts to private foundations allow donors to deduct a smaller
percentage of their income than gifts to public charities.

The difference between a private foundation and a public charity -- and
remember, both are 501(c)(3) -- is that a public charity can demonstrate
that it receives the bulk of its funds from a variety of sources,
whereas a private foundation receives most of its funding from limited
private sources or a single source.  So, for example, if your
institution gets 95% of its funds from its endowment, it's a private
foundation; but if it has a mix of earned income, gifts, public funding,
and endowment, you can bet that it "escapes" 509(a) classification.

With respect to lobbying, public charities are allowed to express their
opinion because they are operating in the public interest, and so we
assume that what they have to say will be an important to the public
debate.  So they are allowed to lobby with the understanding that they
can't devote much effort to it.  Private foundations, on the other hand,
are under a ban.

Clear as mud, no doubt.

Andy Finch
AAM Government Affairs
[log in to unmask]

> -----Original Message-----
> From: Tara Davey [SMTP:[log in to unmask]]
> Sent: Thursday, June 11, 1998 11:12 AM
> To:   [log in to unmask]
> Subject:      501(c)(3) foundation
>
> Does anyone know what the impact on fundraising is of being classified
> by the IRS both 501(c)(3) AND a private foundation under 509(a) as
> opposed to being classified as just a 501(c)(3)?