The following overview is simply to provide some basic understanding of the evolution of charitable contributions and not to be construed as a justification in fact for establishment of a 501C3 or like entity. Any such attempt should be undertaken with the advice of licensed legal and accounting professionals.
1. Early History of Charity in the U.S.
Although the origins of the concept of charity go back to antiquity, the modern American legal concept of charity is derived principally from the Elizabethan Statute of Charitable Uses. The preamble of the Statute provides that some funds should be set aside for the following charities: Statute of Charitable Uses, 1601, 43 Eliz. 1, C4.
* * * for relief of aged, impotent and poor people, some for maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars in universities, some for repair of bridges, ports, havens, causeways, churches, sea-banks, and highways, some for education and preferment of orphans, some for marriages of poor maids, some for supportation, aid and help of young tradesmen, handicraftsmen, and persons decayed; and others for relief or redemption of prisoners or captives, and for aid or ease of any poor inhabitants * * *.
The rationale behind the granting of exemption from tax to private entities has been and continues to be based on the theory of shared social responsibility. The government and its citizens jointly share the responsibility for the well-being of the entire nation.
Early governmental authorities granted tax exemption because they were either unable or unwilling to satisfy obvious social needs. Later, exemption was extended or continued for organizations whose purposes and activities were socially desirable. Today, of course, government conducts many of the activities previously done only by private philanthropy. Even today some needs can be better met by private philanthropy. The present system for tax exemption reflects this philosophy. This dual system of public and private philanthropy seems likely to persist well into the indefinite future.
Almost universally, charitable entities are formed on a collaboration of the following motives
2. Charity under the Regulations
Treas. Reg. section 1.501(c)(3)-1(d)(2)
* * * The term "charitable" is used in section 501(c)(3) in it's generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of "charity" as developed by judicial decisions. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of government; and promotion of social welfare by organization designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency. ***
These major delineations of charity set forth in the regulations remain in effect today. This regulation section is quite plastic, however. In each category there have been expansions beyond the original meaning of the term at the time the regulations were enacted. As will be seen in the next section, each of the areas has expanded or changed as a result of court decisions, new types of organizations, and newly recognized charitable needs and classes.
3. Changing Service Concepts of Charity
Nothing is more constant than change and change in the Service's concept of what is charity is no exception. An examination of each of the categorizations of charity under the regulations indicates something of the nature of the evolution of the Service's concept of charity.
a. Charitable as Used in it's Generally Accepted Legal Sense
b. Relief of the Poor and Distressed or of the Underprivileged.
c. Advancement of Religion, Education, or Science
d. Erection or Maintenance of Public Buildings, Monuments, or Parks and
e. Lessening of the Burdens of Government
f. Promotion of Social Welfare
g. Promotion of Health
h. Environmental Action
i. Public Interest Law Firms
j. Public Policy (Schools, Discrimination, and Demonstrations)
k. Politicking
l. Amateur Athletic Organizations
4. The Evolving Concept of Charity
a. The Conduit Theory
In Rev. Rul. 68-489, 1968-2 C.B. 210, the Service ruled that an organization exempt under IRC 501(c)(3) that distributed part of its funds to organizations not themselves exempt under IRC 501(c)(3) but insured use of the funds for IRC 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes would not jeopardize its own exemption. The organization must retain control and discretion that the funds are used for IRC 501(c)(3) purposes. The principle established here is that an exempt organization may pursue its charitable purposes through organizations not exempt under IRC 501(c)(3). Thus, the recipient organization is the conduit through which the exempt organization performs its charitable purposes. This concept is not limited to the use of organizations exempt under IRC 501(c)(3). Individuals and businesses may be the conduits through which purposes may be pursued.
b. The Adjunct or Integral Part Theory
Under this theory an organization conducts activities not charitable in themselves. These activities would be permissible to an IRC 501(c)(3) organization. The organization conducting the activities is controlled by one or more IRC 501(c)(3) organizations. The organization is exempt under IRC 501(c)(3) because it is an "adjunct," an
c. The Essential Purpose Theory
With the enactment of IRC 7428, the declaratory judgment provision, by the Tax Reform Act of 1976, the "essential purpose" theory has found increasing use and favor with the courts. This theory avoids formalized requirements of IRC 501(c)(3) and concentrates instead on the essential purpose of the organization minimizing the importance of the business aspects of the organization's activities. As discussed in the section on charity under the regulations, the intent of the current regulations was to liberalize the Service position with respect to classification as charitable organizations of those social welfare organizations designed to accomplish one or more of the four enumerated social welfare purposes. Thus, for social welfare type organizations, if the essential objective, the essential purpose, of an organization is to promote social welfare by achieving any of these purposes, then the organization qualifies under IRC 501(c)(3) regardless of the fact that some or all of the individuals who benefit from the organization's activities are not members of a traditional class of charitable recipients.
The essential purpose theory inquires into the relationship between the activities of the organization and the results to be achieved and on this basis makes the determination that the organization meets, or does not meet, the requirements for exemption as a charitable organization under IRC 501(c)(3). This is very much a result-oriented test which looks to the result to determine intent and from intent, qualification as a charitable organization. Intent is, of course, almost always a question of fact derived from the facts and circumstances of the case.
d. Conclusion
Common among these theories is the fact that they permit exemption for organizations which cannot be clearly categorized as a particular type of charitable organization within the traditional types delineated in the regulations. Thus undifferentiated, the organizations rely upon these theories, or others closely akin to them, to justify exemption.
As the number and variety of exempt organizations increase, the number of organizations which are unable to fit into the recognized categories will also increase. The fact that the Service has in the past denied exemption to these organizations does not necessitate a similar result today. The declaratory judgment provision for IRC 501(c)(3) organizations will result in a large number of these undifferentiated organizations obtaining exemption through the courts.