On March 17, 2023, the IRS Exempt Organizations and Government Entities Division published two Technical Guides: (1) TG 1 Instrumentalities of the United States, Government Corporations, and Federal Credit Unions; and (2) TG 3-3 Exempt Purpose, Charitable IRC 501(c)(3).
Given its substance and magnitude, TG 3-3 will be addressed first here.
TG 3-3 Exempt Purpose, Charitable IRC 501(c)(3)
TG 3-3, a 59-page gem, provides guidance on, basically, the meaning of exempt purposes described in section 501(c)(3) of Title 26 of the Internal Revenue Code ("Code"). In this regard, section 501 of the Code affords exemption from federal income tax to (among other organizations)
Corporations, and any community chest, fund, or foundation, 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 (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
See 26 U.S.C. § 501(c)(3).
TG 3-3 describes the IRS's position on and understanding of core and common tax-exempt terms such as "charitable," "needy," "low-income families," "very low-income families," "charitable class," and "charitable group." TG 3-3 addresses the organizational and operational tests prescribed by section 501(c)(3). TG 3-3 provides guidance on common programmatic areas within the tax-exempt space, such as assistance to the elderly, the sick, and handicapped.
TG 3-3 also addresses Treasury Regulation section 1.501(c)(3)-1(d)(2)'s exempt function of "advancement of religion," noting that an organization that advances religion within the meaning of the Treasury Regulation may also qualify under section 501(c)(3) as a charitable or educational organization. Importantly, TG 3-3 recognizes that "First Amendment considerations prevent Congress and the Service from establishing a concise or objective definition of the term religion." TG 3-3 notes, however, that two key attributes are considered: "a. That the particular religious beliefs of the organization are truly and sincerely held; and b. That the practices and rituals associated with the organization's religious beliefs or creed aren't illegal or contrary to clearly defined public policy."
Notably, TG 3-3 does not mention or cite Bostock v. Clayton County, 140 S.Ct. 1731 (June 15, 2020). In Bostock, the Supreme Court held that Title VII's prohibition of discrimination in employment because of an employee's "sex" includes a prohibition of discrimination based on the employee's sexual orientation, including homosexuality or transgender. TG 3-3 provides no guidance as to whether a tax-exempt religious organization may jeopardize its tax exemption if it engages in religious-based discrimination in employment matters. In part B.3.(2) of TG 3-3, the IRS refers to Bob Jones University v. United States, 461 U.S. 574 (1983) and Goldsboro Christian Schools v. United States, 461 U.S. 574 (1983). With reference to those two opinions, the IRS states that "The [United States Supreme] Court concluded that educational institutions, that practice racial discrimination based on religious beliefs, are not charitable in the generally accepted legal sense and thus do not qualify for federal tax exemption." This IRS guidance dovetails with but does not eliminate (and, actually, it further disrupts) the current collision of civil liberties illustrated in the recent Freeman Law Insights blog, The Righteous Stand Bold Like a Lion: Bostock, Religious Organization Employers, and Title VII.
TG 3-3 goes on to address other important characteristics of exempt functions described in section 501(c)(3), such as educational and scientific purposes, erecting public buildings or monuments, conservation, lessoning the burdens of government, and defending human and civil rights. The guidance also carefully mentions how advocacy may be considered educational and provides examples of advocacy efforts that may be qualifying and others that are non-qualifying.
TG 3-3 concludes with requirements and attributions for recognition of exemption and filing requirements.
TG 1 Instrumentalities of the United States, Government Corporations, and Federal Credit Unions
TG 1 addresses federal instrumentalities that are exempt from federal income tax under 26 U.S.C. § 501(c)(1), being corporations organized under an Act of Congress. TG 1 notes that state and municipal instrumentalities are not exempt under section 501(c)(1).
TG 1 addresses how the Tax Reform Act of 1984 disrupted exemption of federal instrumentalities, noting that unless an organization was exempt under its organizing Act before July 18, 1984, the organization could only qualify for section 501(c)(1) exemption if the exemption was specifically provided for in the Internal Revenue Code. Thus, TG 1 notes, section 501(l) was created for the list of those government corporations. Section 501(c)(1)(B) provides that the government corporations listed in section 501(l) are exempt from federal income tax under section 501(c)(1). For a government corporation created on or after July 18, 1984, to be tax-exempt under section 501(c)(1), the corporation must be listed in section 501(l). Government corporations created before that date are not listed in section 501(l). Section 501(c)(1)(A)(i) refers to those government corporations created before July 18, 1984. TG 1 provides an alphabetical list of those corporations.
TG 3-3 is truly a gem and a solid guiding resource. TG 3-3 should serve well tax practitioners and those seeking or operating as a tax exempt, nonprofit organizations. Much insight can be gleaned from TG 3-3 in regard to formation, organization, and operation of a qualified tax exempt organization. Also, TG 1 is a strong reminder of how federal instrumentalities are treated for federal income tax and tax-exemption purposes under sections 509 and 501 of the Code. TG 1 and TG 3-3 are useful tools, but, as each Guide expressly states on their respective page 1: "This document is not an official pronouncement of the law or the position of the IRS and cannot be used, cited, or relied upon as such." Thus, the Code, the Treasury Regulations, and judicial authorities on the subject should be carefully consulted.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.