Permissible Exempt Purposes Under 501(c)(3)
This page outlines the range of purposes that qualify an organization for tax exemption under section 501(c)(3) of the Internal Revenue Code. It explains how the IRS and courts interpret key terms — especially "charitable" — and how those interpretations shape eligibility.
Permissible Exempt Purposes Under 501(c)(3)
The Tax Code under section 501(c)(3) provides tax exemption for organizations that are organized and operated exclusively for certain purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
The specific meanings of those terms are further clarified in the Treasury Regulations, with much of the focus on the definition of the word charitable. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; and promotion of social welfare (lessening neighborhood tensions, eliminating prejudice and discrimination, defending human and civil rights secured by law, and combating community deterioration and juvenile delinquency).
These concepts are further expanded upon and defined through numerous IRS rulings and court decisions going back decades. The Tax Court of the United States found“ charity in its narrow sense includes only gratuities bestowed upon the needy or for the relief of suffering—in its broader meaning, charity is not so limited but also embraces any benevolent or philanthropic objective not prohibited by law or public policy which tends to advance the well-doing and wellbeing of man.”
Relief of the poor, the distressed, or the underprivileged
Assistance to individuals who are needy, meaning that they lack the necessities of life, involving physical, mental, or emotional well-being, because of poverty or temporary distress. This can include assistance to low-income individuals and those suffering from temporary hardship or who are the victims of a disaster. It can also include assistance to the elderly, sick, or disabled persons. The individual recipients of assistance must be members of a charitable class, and selection of recipients must be made pursuant to an objective, nondiscriminatory basis related to the purposes for which the assistance is being provided.
Advancement of religion
Because of the First Amendment, the government cannot establish a narrow definition of religion. Generally, the IRS will look at 1) whether the particular beliefs of the organization are truly and sincerely held, and 2) whether the practices and rituals associated with those beliefs are legal and consistent with public policy (i.e., no exemption for sects practicing ritual illegal drug use). The public policy test also resulted in a loss of exemption for Bob Jones University due to its prohibition on interracial relationships between students, even though it claimed that policy was based on sincerely held religious beliefs.
Advancement of education or science
Often furthered through educational scholarships to help individuals obtain an education or through grants to organizations that advance the arts, humanities, and sciences. Although courts and the IRS have clearly established that a school with racially discriminatory admissions policies cannot qualify for tax-exempt status, the IRS has also ruled that “[a] policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance will not constitute discrimination on the basis of race when the purpose and effect is to promote the establishment and maintenance of that school's racially nondiscriminatory policy as to students.”
Erecting or maintaining public buildings, monuments, or works
Providing parks and recreational facilities is not a charitable activity in and of itself. It is charitable only if it provides a community-wide benefit. Organizations whose activities are exclusionary or discriminatory will not be deemed to be operating in the public interest and do not qualify for tax exemption. This function is almost always used in conjunction with lessening the burdens of government, suggesting that these public buildings, monuments, or works are understood to be government-owned facilities. It is unlikely to be the sole justification for exemption, absent some connection to government.
Conservation organizations could potentially fall under this justification as long as their efforts in conserving environmentally significant lands benefit the entire community. Activities directed at combating climate change have been approved under the same rationale as conservation organizations, and similarly, their activities must provide a “direct environmental benefit to the public” rather than environmental benefits that are “incidental and tangential.”
Lessening the burdens of government
There needs to be some objective manifestation by the governmental unit that it considers activities of the organization to be its burden. This is not generally a justification that an organization can simply claim for itself without any involvement on the part of the governmental unit. The organization must demonstrate that a governmental unit considers the organization to be acting on the government’s behalf, thereby actually freeing up government assets that would otherwise have to be devoted to that particular activity. The fact that an organization is engaged in an activity that is sometimes undertaken by the government is insufficient to establish the governmental burden.
Promotion of social welfare
This category of activities includes:
- Lessening neighborhood tensions
- Eliminating prejudice and discrimination
- Defending human and civil rights secured by law, and
- Combatting community deterioration and juvenile delinquency.
Rulings on these charitable justifications have resulted in approvals for organizations focused on nondiscrimination in housing availability, equal access to job opportunities, stimulating economic development in high density urban areas by low-income minority and disadvantaged groups, and preventing physical blight in economically depressed neighborhoods. It is worth noting that many of these IRS rulings date from the mid-1960s through the early 1980s.
Charitability of Climate-Related Activities
Many charitable organizations, including grantmaking organizations, are engaging in climate-related work as part of their charitable mission. For some, their “climate-related work” includes conservation, reduction of greenhouse gas emissions, transition to “clean” or less polluting energy sources, ameliorating harm caused by climate/energy-related accidents (ex., oil spills), among other activities. While the Tax Code does not explicitly name “climate” as a charitable activity, many organizations have found ways to include this work with their charitable missions.
Most of the guidance around environmental activities was issued in the late 1960s and early to mid-1970s. Over the past fifty years, significant developments have occurred in scientific research and understanding of climate change. Many charitable organizations tie their climate-related activities and goals to other charitable purposes, like education. In addition, some climate-related grantmaking has extrapolated private letter rulings and exemption denials or hired legal counsel to guide their work.
Over the past 30 years, the IRS has granted tax-exempt status to many organizations working on climate change and fossil fuel reduction, particularly when tied to education or conservation. The IRS approved organizations that engage in the following:
- An organization formed to buy and maintain forest land as a “sanctuary for wild birds and animals” and would make it open to the public for educational purposes;
- An organization formed to “preserve and improve a lake used extensively as a public recreational facility” (the charitable activity being cleaning the water in the lake and allowing for recreational use of the lake);
- An organization formed to preserve the natural environment by “buying ‘ecologically significant undeveloped land’ and maintaining the land” (the charitable activity being preserving the land for future generations so they can access the natural environment).
However, an exemption is often denied when the private benefit is too significant or the public benefit is too limited.
In addition, under Section 170(h)(4)(A), a contribution that is made for any one of the following four conservation purposes qualifies for a charitable deduction: “(i) the preservation of land areas for outdoor recreation by, or the education of, the general public; (ii) the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem; (iii) the preservation of open space (including farmland and forest land) where such preservation is-- (I) for the scenic enjoyment of the general public, or (II) pursuant to a clearly delineated federal, state, or local governmental conservation policy, and will yield a significant public benefit, or (iv) the preservation of an historically important area or a certified historic structure.”
Charitability of Diversity, Equity and Inclusion (DEI) Activities
Eliminating prejudice and discrimination is one of the activities described in the definition of "charitable" in the Treasury Regulations interpreting Section 501(c)(3) of the Tax Code. Accordingly, in granting tax exemptions to organizations engaged in these activities, the IRS has supported efforts to lessen prejudice and discrimination or provide support to underrepresented individuals or groups.
In addition, regulations relating to private foundation scholarships still include an example that approves a program that solely provides funding to members of a certain ethnic minority (Treas. Reg. § 53.4945-4(b)(5) Example 2).
The IRS has offered specific guidance to specific organizations that qualify as charitable and tax-exempt, including organizations with the missions listed below (note that much of this guidance dates to the 1960s and 1970s but continues to be highlighted in recent IRS publications):
- Investigates causes of community tension, discrimination, physical deterioration, and juvenile delinquency, disseminates its findings, and attempts to educate the public.
- Investigates the existence of discrimination and seeks compliance with applicable laws.
- Studies employment conditions and informs the public on the advantages of non-discriminatory hiring.
- Promotes racial integration in housing by educating the public about integrated housing
- Educates the public about integrated housing and constructs new housing to reduce racial and ethnic imbalances.
- Seeks to eliminate discrimination against minorities seeking employment in construction by recruiting, educating, and counseling workers.
- Provides support to businesses in low-income, minority communities for the relief of poverty, the elimination of prejudice, the lessening of neighborhood tensions, and the combating of community deterioration in certain economically depressed areas, even though its program of financial assistance and other aid may go towards businesses that themselves may not qualify as charitable.
Additional Resources
Charitability of International Grantmaking
Foreign Grantmaking Generally
The Tax Code and regulations that govern charitable contributions and the activities and purposes of tax-exempt organizations fully support the ability of U.S.-based exempt organizations to make charitable grants to foreign charities and other entities. The list of charitable purposes enumerated under section 501(c)(3) and section 170(c)(2)(B) does not distinguish between charitable activities or beneficiaries located within the US and those located in foreign countries.
While charitable contributions cannot be deducted for direct contributions to foreign organizations, the regulations under section 170 make it clear that a charitable deduction is allowed for contributions made to domestic charities “even though all, or some portion, of the funds of the organization may be used in foreign countries for charitable or educational purposes.”
IRS guidance regarding the deductibility of such contributions has focused on whether the US entity has sufficient discretion and control over the contribution, and, in the case of private foundations, whether certain procedures are in place to ensure the grant funds are used for exclusively charitable purposes.
Discretion and Control
Two examples of situations where a domestic organization demonstrates sufficient discretion and control over a charitable contribution that is ultimately used to fund activities carried out in a foreign country are:
- The domestic organization is the “real beneficiary” of the contribution, but the domestic organization subsequently makes grants to a foreign charity for purposes that it has reviewed and determined to be in furtherance of its own exempt purposes. The grants are funded by the domestic organization’s general funds, and although that organization may generally solicit from the public, no specific funds are raised for the foreign grants.
A domestic charity solicits for a specific project of a foreign counterpart organization, but the domestic charity’s board has taken steps to review the project before approving any funding and continues monitoring the grantee’s use of all grant funds to ensure adherence to the domestic charity’s goals. Although the funds are earmarked for a foreign project, the domestic charity demonstrates sufficient control before solicitation, such that the domestic organization still has control and discretion over the use of the contributions.
Private Foundation Foreign Grantmaking
A significant potential risk from a tax perspective for international grantmaking by private foundations is that the grants would be treated as a taxable expenditure under section 4945 or not count toward the foundation’s qualifying distributions under section 4942.
General Rule: Under section 4945(d)(4), a grant to an organization that is not a section 509(1), (2), or (3) public charity or “exempt operating foundation” is a taxable expenditure unless the foundation exercises “expenditure responsibility as defined in section 4945(h).”
Expenditure responsibility means that the foundation is responsible for exerting all reasonable efforts and adequate procedures to:
- (1) See that the grant is spent solely for the purpose for which it is made,
- (2) Obtain full and complete reports from the grantee regarding how the funds were spent, and
- (3) Make full and detailed reports with respect to such expenditures to the Secretary [IRS].
The Treasury Regulations under section 4945 further clarify the requirements when exercising expenditure responsibility, which include:
- A pre-grant inquiry
- A written grant agreement with specific provisions
- Grant funds must be kept in a separate account or tracked using separate accounting.
Regulatory Provisions
Additional regulations address foreign grantmaking and provide less burdensome procedures in some circumstances.
Equivalency Determinations: If a private foundation makes a good faith determination that a foreign grantee organization is equivalent to a U.S. public charity then expenditure responsibility is not required. The regulations provide a safe harbor for the good-faith determination if the organization received written advice from a qualified tax practitioner that shows that the organization would likely qualify as a public charity or operating foundation.
Grants to a foreign governments or international organizations: A grant to a foreign government or its agencies, or to an international organization designated as such by Executive Order, may be treated by the grantor as a grant made to a public charity even if the grantee is not described in section 501(c)(3).
Charitability of Work Related to Immigration
Providing support for needy individuals is a charitable activity, and there is no requirement that an organization delineate between providing aid to citizens or non-citizens when giving aid. Therefore, humanitarian organizations can provide food, water, and housing to those in need, and legal aid organizations can provide low- or no-cost legal services to those seeking asylum or protection from deportation.
However, the question has arisen with respect to providing aid to undocumented immigrants that is specifically intended to prevent their detention or deportation. This is specifically true with respect to churches or other organizations intending to provide sanctuary. Harboring undocumented immigrants or helping refugees without status may be illegal and ultimately lead to a fine or prison term.
An organization that is found to be engaged in illegal activities that violate public policy will have its section 501(c)(3) status or application scrutinized. Factors considered include the effect, nature, and extent of the illegal activities. The nature of the act is as important as the quantity and substantiality.
One example of the IRS denying an application for exemption because the applicant engaged in illegal activities involves an organization whose primary activity was sponsoring antiwar protest demonstrations. The organization’s purpose was to “educate and inform the public on the principles of pacifism and nonviolent action,” but the activities urged participants to violate local ordinances and breach public order.
The IRS concluded that the organization could not be considered one that inadvertently violated a statutory regulation, but one that intentionally planned and sponsored events that encouraged criminal behavior. Therefore, the organization did not qualify for exemption.
If a religious group or house of worship offers sanctuary for undocumented immigrants, there may be procedural hurdles and protections that could deter the IRS from investigating them, such as the Church Audit Act and the Religious Freedom Restoration Act. In United States v. Living Word Christian Center, a church investigation was halted because there was a discrepancy in who was authorized as a “high level Treasury official” to initiate the church inquiry. There are no formal regulations issued on the matter, though in 2014, the IRS wrote a letter to the Justice Department identifying the Commissioner of Tax Exempt and Government Entities, directly or together with a determination of by the Director of Exempt Examinations as the required high level Treasury official.
If the illegal activities are only a small portion of the activities of the organization, then there is a possibility that those will not result in the revocation of an organization’s exemption. However, in cases relating to religious organization’s use of controlled substances, the IRS has held that any illegal activity is not consistent with tax exemption.
