The 501c(3) Factor – What Makes a Charity Charitable in the United States

Guest Blogger – Josh Swallow: Josh is a summer intern and attends Texas A&M University where he is studying Business Management with a Certificate in Not-for-Profit Business. “I have always wanted to help people but never knew exactly where that would take me in life. When I started to learn more about the multitude of nonprofits around the world and how much good they were doing I knew that was the industry that I wanted to end up in!”

Nonprofit organizations in the U.S. are in a very interesting position when it comes to taxation. If the qualifications are met, an organization can gain tax-exempt status which allows said organization to be exempt from paying some federal income taxes. While this is a fantastic concept that is absolutely helpful to the nonprofits that it applies to, I can’t help but feel that the qualifications for gaining this status may be too lenient. Thus, in this post I am going to talk about some of the baffling organizations who have gained and reatined this status and why I find this is troubling.

The umbrella classification of nonprofits who gain tax-exempt status is 501(c). An example of one of the most general classifications that can be earned is that of 501(c)(3). This is an organization that is operated exclusively for the exempt purposes which are, “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals” (Internal Revenue Code, "Internal Revenue Code Section 501(c)(3)" ).  

This is just one example.

In addition to the general classification, there are a few more different kinds of non-profit classifications. To get the ball rolling let’s talk about the NFL. The NFL was classified as a 501(c)(6) for 70 years until it decided to drop its tax exempt status due to the constant criticism that it received for being classified as such. This gave the massive organization the chance to miss out on close to $10 million a year from the tax break. In my opinion, it is commendable that the organization decided to drop this status it can be argued that doing so was just a publicity stunt that the league used to make itself look better at a time when it didn’t look too great.

As I was researching this piece I was made aware of other organizations that I find troubling because of legal and criminal issues that had been identified, and yet the organization was still allowed to operate as a 501c(3) . What I learned, is that the tax-exempt status “...could save the organizations tens of millions of dollars a year in taxes. In one case, a religious organization has been implicated in the deaths of its own members yet was still able to retain its  tax-exempt status (T. Ortega, "Mike Rinder on “The Hole” and How He Escaped Scientology") (T. Ortega, "Florida Charges Scientology In Church Member's Death").

I find it distressing that an organization that has been brought up on charges can retain the same classification as the United Nations Children’s Fund (UNICEF) or Human Rights Watch (HRW).  Or to bring it closer to home, your local soup kitchen or women’s emergency shelter.

Even though these were just a couple of examples I feel as though I got my point across. It seems to me that the process of granting the tax-exempt status needs to be reviewed and as part of the annual financial auditing process,  organizations who have gained this status should be asked questions around program implementation and impact. Of course this is just my opinion but it is something that is important to think about so that in the future the tax-exempt status will only be given to the organizations who are truly deserving of it.

At the organization I am currently interning with, Place2Give Foundation. We received our 501c(3) status late last year.  This coming year will be our first fulsome I990 filing.  While I won’t be here to see how this process goes, I am under the impression that as a funder of charities, we share with our network of donors the effectiveness of organizations upon use of proceeds more than just what is reported on the I990.