Every section 501(c)(3) organization is classified as either a private foundation or a public charity. Private foundations and public charities are distinguishable primarily by the level of public involvement in their activities.
Public charities generally receive a greater portion of their financial support from the general public or governmental units, and have greater interaction with the public. A private foundation, on the other hand, is typically controlled by members of a family or by a small group of individuals, and derives much of its support from a small number of sources and from investment income. Because they are less open to public scrutiny, private foundations are subject to various operating restrictions and to excise taxes for failure to comply with those restrictions.
Under the tax law, a section 501(c)(3) organization is presumed to be a private foundation unless it requests, and qualifies for, a ruling or determination as a public charity. Organizations that qualify for public charity status include churches, schools, hospitals, medical research organizations, "publicly-supported" organizations (i.e., organizations that receive a specified portion of their total support from public sources), and certain supporting organizations.
A section 501(c)(3) organization may be classified as a public charity (rather than as a private foundation) on the basis that it is publicly supported. An organization is considered publicly supported if:
It normally receives a substantial part of its support (other than income from its exempt functions) from a governmental unit or from contributions from the general public; or,
It normally receives more than one-third of its support from gifts, grants, contributions, or gross receipts from activities related to its exempt purposes, but only including such gross receipts from any one person, or bureau or similar agency of a governmental unit, that are not more than the greater of $5,000 or 1% of the foundation's support for the tax year), and does not normally receive more than a third of its support from gross investment income plus any excess of unrelated business taxable income over the tax on unrelated business income.
A substantial part of the foundation's support, for purposes of (1) above, generally is a third of its total support, figured on a combined basis for the 4 tax years immediately preceding the tax year in question. However, if the foundation does not meet this one-third support test, it may still qualify as deriving a substantial part of its support from governmental units and from the general public if it:
Normally receives at least 10% of its support from these sources,
Satisfies the attraction of public support requirement by being organized and operated to attract new and additional public or governmental support on a continuous basis, and
Satisfies some or all of 5 public support factors.
Generally, an organization computes its support over a four-year period. A new organization, however, may request on its application an advance ruling that it will be treated as a publicly-supported organization for its first five taxable years. At the end of the five-year advance ruling period, the organization must submit information to the IRS to establish that it met one of the public support tests for its advance ruling period. If the organization fails to provide such information, it will be reclassified as a private foundation.
An organization that wishes to continue to be treated as a public charity after the end of its advance ruling period should submit Form 8734, Support Schedule for Advance Ruling Period, within ninety days after the end of the advance ruling period. Failure to submit Form 8734 results in your organization automatically being reclassified as a private foundation required to file Form 990PF.
[Source: Internal Revenue Service, U.S. Dept. Of Treasury (IRS), http://www.irs.gov/]
