Does your nonprofit serve a charitable class? It matters, because, to obtain and maintain IRS 501(c)(3) tax-exempt status, non-profit corporations must serve a “charitable class.” The requirement that a non-profit serve a charitable class is closely related to the requirement that it serve a “public” as opposed to “private” interest, and that no inurement—or excessive—benefit is bestowed upon private individuals.
Thus, 501(c)(3) corporations should maintain a specific definition of the charitable class served in a manner consistent with IRS regulations. The IRS defines charitable purposes as those dedicated to the “relief of the poor and distressed or of the underprivileged…” or toward others showing need for support or help. Thus, whether a non-profit is established for charitable purposes will be decided by those served by its activities, or its charitable class.
In short, a charitable class served by a non-profit must be sufficiently large and/or indefinite so that the benefits of its work cannot be traced to pre-identified persons. So, for example, the IRS would not certify the establishment of a non-profit to pay for the cancer treatments of Jane Obermeyer from Lilliput, Arizona. Note, however, that any person or entity could create a “Go Fund Me” or other campaign to raise funds for Jane’s treatments. But such fund raising cannot be the purpose of a non-profit, and donations made for Jane’s treatments will not be tax-deductible.
The key here is that the class of “Jane” is not indefinite. Note that the IRS would certify a corporation as tax exempt if it were established to pay for the cancer treatments of residents of Lilliput, even if the only resident of Lilliput at the time of 501(c)(3) application were Jane Obermeyer. This charitable class would be “indefinite,” as other individuals could be served as the need arises. However, to obtain and maintain exempt status, the IRS would have to believe that The Lilliput Cancer Support Center was not providing a seemingly indefinite charitable class and charitable purpose only as a “veil” to cover its real purpose of helping only Jane. And thus, it is helpful for a non-profit to define a charitable class as not only indefinite, but sufficiently large to show that many other unidentifiable persons can, and most likely will, be benefited by the mission. Thus, if Lilliput only had only 10-20 residents, the IRS may decide Lilliput residents with cancer are not a valid charitable class. However, if Lilliput had several hundred or certainly if it has thousands of residents, it would be a charitable class, as there would be a strong chance that others would benefit from cancer treatment support.
Thus, for a corporation to ensure IRS tax exempt status it should describe its charitable class as:
- Indefinite (It will benefit persons from the public that are not yet identified.)
- Sufficiently Large (The class of those who will/may benefit is large enough to show that there is a strong probability that persons from the public not yet identified will benefit from the mission.)
It is, of course, IRS compliant and practically necessary to apply limiting parameters to the charitable class of a non-profit. For example, it would be valid for a non-profit in Phoenix to provide housing assistance to low-income residents of the city. Those who are not-low income Phoenix residents would be excluded, but the class is indefinite and large enough to ensure service can be provided to more than a pre-identified set of persons.
Basically, a non-profit must show that its mission does and will benefit the public, as opposed to private individuals. An important part of this, as described in the post, is the proper definition of the class that receives support and services from the non-profit. In our next post, we will explore another aspect of the case for public benefit—that the revenue and/or assets of a non-profit not inure to, or unduly benefit, private individuals.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at firstname.lastname@example.org.