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Discussion
I. In General
Section 501(a) exempts organizations described in section
501(c)(3) from Federal income tax. Section 501(c)(3) includes:
Corporations * * * organized and operated exclusively
for religious, charitable, * * * or educational
purposes, * * * 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 * * * and which
does not participate in, or intervene in, * * * any
political campaign * * *.
The requirement that a corporation be organized exclusively for
permitted purposes is referred to as the “organizational” test.
The requirement that a corporation be operated exclusively for
permitted purposes is referred to as the “operational” test.
Only the operational test is at issue in this case.
Section 1.501(c)(3)-1(c), Income Tax Regs., provides that an
organization will be regarded as “operated exclusively” for one
or more exempt purposes only if three requirements are satisfied:
(1) The organization engages primarily in activities that
accomplish exempt purposes, and no more than an insubstantial
part of its activities is in furtherance of a nonexempt purpose;
(2) the net earnings of the organization do not inure in whole or
in part to the benefit of private shareholders or individuals;
and (3) the organization is not an “action” organization that
attempts to influence legislation by propaganda or otherwise.
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Last modified: May 25, 2011