specified requirements.1

Service performed by employees of an organi tion 501 (c) (3) is not subject to the unemploym 3306 (c) (8)) or the social security tax (sec. 31 ever, pursuant to section 3121 (k) (1), a section 5 may elect FICA coverage for its employees.

Tax deductions under section 170

Section 170 of the Code generally allows inc charitable contributions, as defined in section 170 (c), the term "charitable contribution" ger

1

1 Code sec. 501(c)(3) has its origin in sec. 32 of the provided for the exemption from income tax of "corpor ciations organized and conducted solely for charitable purposes" (Tariff Act of 1894, ch. 349, sec. 32, 28 Stat. provision was included in every subsequent revenue a (1939 Code, sec. 101 (6)); Revenue Act of 1938, ch. 28 Revenue Act of 1936, ch. 690, § 101 (6), 49 Stat. 1674; 277, § 103(6), 48 Stat. 700; Revenue Act of 1932, ch. 2 Revenue Act of 1928, ch. 852, § 103(6), 45 Stat. 813; R § 231(6), 44 Stat. 40; Revenue Act of 1924, ch. 234, § 2 nue Act of 1921, ch. 136, § 231(6), 42 Stat. 253; Rev § 231 (6), 40 Stat. 1076; Revenue Act of 1916, ch. 463, Tariff of 1913, ch. 16, § 11 (G) (a), 38 Stat. 172; Tariff 113).

The statutory provision for exemption of certain org 501(c)(3)) has been amended eight times since 1913 was amended in 1913 to provide a reference to "scien 1913, ch. 16, § II (G) (a), 38 Stat. 172); in 1918, to add "prevention of cruelty to children or animals" (Rev § 231 (6), 40 Stat. 1076); in 1921, to add a reference to " nue Act of 1921, ch. 136, § 231(6), 42 Stat. 253); in the ence to purposes of "testing for public safety" (1954 C in 1976, to add a reference to certain "amateur spor (Tax Reform Act of 1976, sec. 1313, 90 Stat. 1730). Ap activities to influence legislation was added in 1934 ( 277, § 101 (6), 48 Stat. 700), and amended in 1976 (Tax 1307 (d) (1) (A), 90 Stat. 1727), and a prohibition agai paign activities was added in the 1954 Code (1954 Cod

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tribution or gift to, or for the use of, an organization that is and operated exclusively for the same purposes as enumerat tion 501 (c) (3).2 Thus, a private school that is exempt from t section 501 (c) (3) generally is entitled to receive contribut are deductible by the donors. Bequests and gifts to organiza scribed in section 501 (c) (3) also are deductible under the es gift tax provisions (secs. 2055, 2522).

Recognition of tax-exempt status

Prior to enactment of the Tax Reform Act of 1969, an orga which met the requirements of section 501 (c) (3) was tax whether or not it applied to the IRS for a determination lette nizing its exempt status. However, pursuant to the 1969 Act ganization organized after October 9, 1969, generally is not as exempt under section 501 (c) (3) unless it applies for reco of its exempt status. This requirement does not apply to church their integrated auxiliaries), to conventions or associati churches, to organizations (other than private foundations) annual gross receipts normally are not more than $5,000, and to other organizations which the Treasury may exempt by reg (sec. 508).

An organization seeking recognition of exempt status under 501 is required to file an application with the District Direc Internal Revenue for the district where the principal place of b or principal office of the organization is located. A ruling or deter tion letter will be issued to an organization by the Internal Re Service if the organization's application and supporting docu establish that it meets the particular requirements of the section which exemption is claimed. Exempt status will be recogniz advance of an organization's operations if proposed operations described in sufficient detail to permit a conclusion that the orga tion will meet the particular requirements of the section under exemption is claimed. In order to qualify for exemption, the orga tion is required to describe fully the activities in which it expe engage, including the standards, criteria, procedures, or other n adopted or planned for carrying out the activities; the anticip source of receipts; and the nature of contemplated expenditures. der certain circumstances, the IRS may require submission of a re of actual operations before an exemption determination may be iss

Code section 7428, added by the Tax Reform Act of 1976, prov that the U.S. Tax Court, the U.S. Court of Claims, or the U.S. Dis Court for the District of Columbia has jurisdiction in the case of actual controversy involving an IRS determination (or failure to n a determination) as to the initial qualification, or continuing quali tion, of an organization as tax exempt under section 501 (c) (3), an a qualified charitable donee under section 170 (c). Under certain cumstances, contributions (not to exceed $1,000 per individual organization) made after an adverse determination by the IRS during the period of litigation over tax-exempt status may be ded

2

However, a contribution to a tax-exempt organization that is organized operated for the purpose of testing for public safety is not included in the tion 170 (c) definition of charitable contributions.

to organizations (other than private foundation receipts normally are not more than $5,000, to gious activities of any religious order, and t which the Treasury may exempt by regulations.

Section 7605 (a) imposes certain restrictions of a church (or convention or association of chu generally precludes the IRS from examining such an organization for any purpose other than the organization qualifies for tax exemption as a or association of churches).

Restriction on exemptions for social clubs

In 1976, Congress added a provision to secti denies tax exemption to an organization descri (7) if its charter, bylaws, or other governing written policy statement) contains a provision crimination against any person on the basis of (sec. 501 (i)). The purpose of enacting section rule the portion of the decision in McGlotten v. 448 (D.D.C. 1972), which held that social clubs tax notwithstanding racially discriminatory

8 These organizations are clubs organized for pleasu nonprofitable purposes, substantially all of the activiti purposes and no part of the net earnings of which inure shareholders. Services performed for these organizati FICA tax or FUTA tax, and contributions to these ductible as charitable contributions. Furthermore, thes on income other than from members (sec. 512(a) (3)).

'In the McGlotten case, the three-judge U.S. District Columbia distinguished social clubs (exempt under sect ternal organizations (exempt under section 501(c)(8) the section 501(c)(7) exemption, which is limited to me does not operate as a grant of Federal funds. The Court determined that in a situation where individuals have vide recreational facilities on a mutual basis, it would I to impose a tax on the organization as a separate entity. that there was no other act of Government involvemen by section 501(c)(7) organizations. Accordingly, the section 501 (c) (7) exemption did not violate the U.S. Co the prohibition of the 1964 Civil Rights Act against Fe to racially discriminatory programs or activities.

However, the Court further concluded that the exem nizations under section 501(c) (8) stood on a different 501 (c) (7) exemption. The Court considered the most c

The Court held that such segregation would be if the physical facilities and other tangible fact and black schools were equal.

B. IRS Policies Prior to 1

In 1965, the IRS suspended issuance of exen vate schools in order to consider the effect of ra tax-exempt status. This suspension was effectu through a supplement to the Internal Revenue M on November 5, 1965.

In 1967, the IRS announced that it had resun exempt status of private schools.1 This resumpti "an extensive review of judicial and legislative civil rights area" to determine the effect of those qualification of private schools for tax exemption the IRS stated that tax exemption would be school (and contributions to the school would if the school was operated on a segregated basis with the State or political subdivision was such a unconstitutional or a violation of Federal law. school did not have such a degree of involvem subdivision as had been determined by the cour action for constitutional purposes, then tax available.

Also, in 1967, the IRS issued a revenue rulin 1967-2 C.B. 113) dealing with an organization tional facilities which were restricted to less munity on the basis of race. That ruling provid tion was not exempt from tax and that contri deductible. The ruling stated that "sections 170 of the Code, to the extent that they provide de 1IRS News Release, August 2, 1967.

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