501(c)(3) Public Charities: Meeting the Public Support Financial Requirement

Nonprofit entities that have been granted tax exempt status under Section 501(c)(3) of the Internal Revenue Code (the “Code”) must remain in compliance with the requirements of the Code. This is particularly true with exempt entities that have been granted “public charity” status (the “Organization”). The IRS allows some flexibility in satisfying the Code requirements, but it is important to review and keep the following guidelines in mind as the Organization plans activities, including and especially fundraising activities, throughout the year. This article explains the public support requirement to which the Organization must adhere on a five-year aggregate basis.

1. Meeting Public Support Requirement for Federal Tax Purposes

A 501(c)(3) public charity must be “publicly supported,” which means the Organization must satisfy one of the following two tests. For future ease of reference, the information below is summarized on the two-page chart entitled “Public Support Test for Public Charities,” which can be found by clicking here:

1. One-Third Support Test: (Qualifying support/total support > 1/3) The Organization will qualify as publicly supported if it normally receives at least one-third of its total support from qualified sources (“Qualifying Support”): (1) governmental units, (2) public support, either direct or indirect (e.g. via United Way), or (3) a combination of these sources (known as the “One-Third Support Test”). In this context, “normally” means, for the current tax year and the four tax years immediately preceding, the Organization meets the One-Third Support Test on an aggregate basis.
2. Facts and Circumstances Test: If the Organization fails the One-Third Support Test, it may still be treated as publicly supported if it can normally satisfy the following criteria (the “Facts and Circumstances Test”):
   1. Qualifying support/total support > 1/10;
   2. Attraction of public support (ongoing efforts to attract new and additional public or governmental support on a continuing basis; may reasonably limit scope in light of the Organization’s charitable activities); and
   3. Five public support factors:
      1. Percent of financial support (sliding scale from 1/10 to 1/3; the more public financial support, the less weight required from the following four factors);
      2. Sources of support (sliding scale from few to many individuals; contributions should come from a representative number of persons rather than be concentrated in certain families or among those of the same socioeconomic background);
      3. Representative governing body (sliding scale; better to have a broad cross section of views, interests and educational or professional backgrounds than private interest of a limited number of donors);
      4. Availability of public facilities/services (facilities and services should be available to the public on a continuing basis (e.g. a museum or library open to the public)); and
      5. Additional factors for organizations with membership: (1) dues-paying member solicitation designed to enroll a substantial number of persons in the community or in a particular profession or field of special interest; (2) membership dues set at a level so that membership is available to a broad cross section of the public; and (3) activities of the Organization are likely to appeal to people with broad common interest or purpose (e.g. educational activities for alumni, music for symphony societies or civic affairs for parent-teacher associations). This factor does not apply to organizations without membership.
3. As with the One-Third Support Test, “normally” means, for the current tax year and the four tax years immediately preceding, the Organization meets the ten-percent-of-support and the attraction of public support on an aggregate basis and satisfies a sufficient combination of the five public support factors above, which weight among the factors may vary from year-to-year.

The Organization should frequently refer to the public support guidelines above and consult with a qualified attorney and a qualified tax advisor, especially where the Organization seeks to attract large donations (in comparison to the Organization’s annual budget). In a future blog post, I will address how to calculate support for the 1/3 and 1/10 support calculations.