Instructions for Form 1023 |
2006 Tax Year |
Instructions for Form 1023 - Introductory Material
This is archived information that pertains only to the 2006 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
The user fee for the initial application for recognition of exemption under IRC Section 501(c)(3) has been increased. Part
XI of Form 1023 has been
revised to reflect the new fee. See Rev. Proc. 2006-8, 2006-1 I.R.B. 245 for more information about user fees that may be
applicable to tax-exempt
organizations.
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You can order Publication 1796, IRS Tax Products CD, and obtain:
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Bonus: Historical Tax Products DVD — Ships with the final release.
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Internal Revenue Bulletins.
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Toll-free and email technical support.
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The CD is released twice during the year.
o The first release will ship the beginning of January 2007. |
o The final release will ship the beginning of March 2007. |
Purchase the CD from National Technical Information Service at
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You can order forms and publications by calling 1-800-TAX-FORM (1-800-829-3676). You can also get most forms and publications at your
local IRS office.
Overview of Section 501(c)(3) Organizations
Who Is Eligible for Section 501(c)(3) Status?
Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary,
or educational
purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children
or animals are eligible to
file Form 1023 to obtain recognition of exemption from federal income tax under section 501(c)(3) of the Internal Revenue
Code.
Form 1023 not necessary.
The following types of organizations may be considered tax exempt under section 501(c)(3) even if they do not file
Form 1023.
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Churches, including synagogues, temples, and mosques.
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Integrated auxiliaries of churches and conventions or associations of churches.
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Any organization that has gross receipts in each taxable year of normally not more than $5,000.
Even though the above organizations are not required to file Form 1023 to be tax exempt, these organizations may choose
to file Form 1023 in order
to receive a determination letter that recognizes their section 501(c)(3) status and specifies whether contributions to them
are tax deductible.
Qualification of a Section 501(c)(3) Organization
There are two key requirements for an organization to be exempt from federal income tax under section 501(c)(3). A 501(c)(3)
organization must be
organized and operated exclusively for one or more exempt purposes.
Organized.
An organization must be organized as a corporation (including a limited liability company), trust, or unincorporated
association. The organizing
document (articles of incorporation if you are a corporation, articles of organization if you are a limited liability company,
articles of association
or constitution if you are an association, or trust agreement or declaration of trust if you are a trust) must limit the organization's
purpose(s) and
permanently dedicate its assets to exempt purposes.
Operated.
An organization must be operated to further one or more of the exempt purposes stated in its organizing document.
Certain other activities are
prohibited or restricted, including, but not limited to, the following activities. A 501(c)(3) organization must:
a. Absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office.
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b. Absolutely ensure that its assets and earnings do not unjustly enrich board members, officers, key management employees,
or
other insiders.
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c. Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially.
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d. Not operate for the primary purpose of conducting a trade or business that is not related to its exempt
purpose(s).
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e. Not engage in activities that are illegal or violate fundamental public policy.
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f. Restrict its legislative activities.
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Legislative activity.
An organization does not qualify for section 501(c)(3) status if a substantial part of its activities is attempting
to influence legislation.
Form 5768.
Most public charities are eligible to elect to make expenditures to influence legislation by filing Form 5768, Election/Revocation
of Election by
an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation. By filing Form 5768, an eligible
organization's legislative
activities will be measured solely by an expenditure limit rather than by the “ no substantial amount” limit. For additional information on the
expenditure limit or the no substantial amount limit, see Publication 557, Tax-Exempt Status for Your Organization.
For this purpose, “ legislation”
includes action by Congress, a state legislature, a local council, or a similar governing body, with respect to
acts, bills, resolutions or similar items (such as legislative confirmation of appointive offices). Legislation also includes
action by the public in
a referendum, ballot initiative, constitutional amendment, or similar procedure. Legislation generally does not include actions
by executive,
judicial, or administrative bodies.
Organizations may involve themselves in issues of public policy without being engaged in legislative activity. For
example, organizations may
conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues. Similarly,
an organization may
appear before a governmental body to offer testimony about a decision that may affect the organization's existence.
A private foundation is not allowed to influence legislation.
Political campaign intervention.
All 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating or intervening in
any political campaign on behalf
of (or in opposition to) any candidate for elective public office. Non-partisan voter education activities (including public
forums and voter
education guides) are permitted. Similarly, non-partisan activities to encourage people to participate in the electoral process,
such as voter
registration and get-out-the-vote drives, are not prohibited political campaign activity. However, voter education or registration
activities that (a)
favor one candidate over another, (b) oppose a candidate in some manner, or (c) favor a group of candidates, are prohibited.
Public Charities and Private Foundations
Every organization that qualifies for tax-exempt status under section 501(c)(3) is further classified as either a public charity
or a private
foundation. For some organizations, the primary distinction between a public charity and a private foundation is an organization's
source of financial
support.
A public charity has a broad base of support, while a private foundation receives its support from a small number of donors.
This classification is
important because different tax rules apply to the operations of each entity.
Deductibility of contributions to a private foundation is more limited than contributions to a public charity. See Publication
526, Charitable
Contributions, for more information on the deductibility of contributions. In addition, private foundations are subject to
excise taxes that are not
imposed on public charities.
Public charities.
The following 501(c)(3) organizations are classified as public charities.
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Churches.
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Schools.
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Hospitals, medical research organizations, and cooperative hospital service organizations.
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Organizations that receive substantial support from grants, governmental units, and/or contributions from the general public.
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Organizations that normally receive more than one-third of their support from contributions, membership fees, and gross receipts
from
activities related to their exempt functions, and not more than one-third of their support from gross investment income and
net unrelated business
income.
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Organizations that support other public charities.
If an organization requests public charity classification based on receiving substantial public support, it must continue
to seek significant and
diversified public support contributions in later years. A new organization that cannot show it will receive enough public
support may request an
advance ruling of its status. After 5 years, it must file
Form 8734, Support Schedule for Advance Ruling Period, showing its sources of support during the advance ruling
period. If the organization does not meet the public support requirements during the 5-year advance ruling period, it could
be reclassified as a
private foundation.
Private foundation.
A 501(c)(3) organization that cannot meet one of the specific exceptions to be classified as a public charity is a
private foundation.
Classification as a private foundation has nothing to do with the name of the organization. There are many organizations that
include the word
foundation in their names that are not private foundations for tax purposes.
Private operating foundations.
A private foundation that lacks general public support but actively conducts exempt programs (as opposed to making
grants to other organizations to
conduct exempt activities) may be treated as a private operating foundation. Private operating foundations are subject to
more favorable rules than
other private foundations in terms of charitable contribution deductions and attracting grants from private foundations. In
order to be classified as
a private operating foundation, an organization must meet certain support tests.
State Registration Requirements
Tax exemption under section 501(c)(3) is a matter of federal law. After receiving federal tax exemption, you may also be required
to register with
one or more states to solicit for contributions or to obtain exemption from state taxes. The National Association of State
Charity Officials (NASCO)
maintains a website that provides informational links to the various states for these purposes. It can be accessed at
www.nasconet.org.
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