When a nonprofit provides assistance instead of or alongside the government, does that qualify as “charitable activity” under Section 501(c)(3)? Think disaster assistance, affordable housing, parks and recreation facilities, drug and alcohol recovery programs, and other health care services. The answer is seemingly obvious: yes, that all counts as charity – and rightfully so. But is it enough that a nonprofit only lessens a government burden, but does not otherwise provide charity, to qualify for Section 501(c)(3) status? And just what does “lessening a government burden” mean within this IRS context?
“Lessening Government Burdens” as a Charitable Category
Section 501(c)(3) provides for tax-exempt status based on a broad list of categories, commonly recited as “charitable, religious, educational” and so on. This list is derived from common law standards of charity and charitable trusts, in turn historically based on the seminal English “Statute of Charitable Uses of 1601.” One of these enumerated charitable categories has long been the lessening of government burdens, although such language was not codified in IRS regulations until 1959. In fact, it has only been since 1959 that the IRS has even cited this category as a sole basis for tax-exempt recognition, and then only rarely so. Far more commonly, nonprofit organizations include such a quality as an overlapping aspect of their charitable operations – i.e., as a hallmark of their charitable activity, rather than as the sole basis of their tax-exempt status.
Per applicable IRS guidance, however, “lessening government burdens” may be an independent, stand-alone charitable purpose, and no requirement exists that an organization be “doubly charitable” in order to qualify under Section 501(c)(3). See 1984 EO CPE Text: Instrumentalities – Lessening the Burdens of Government. For example, as cited in this 1984 IRS resource, lessening government burdens may include establishing parks, supplying water, fire protection, erecting public community buildings, building roads and bridges – in other words, doing what the government normally does – even if it benefits both rich and poor.
Fitting within the “lessening government burdens” tax-exempt category involves a two-part tax law inquiry. First, there must be an “objective manifestation” that the government considers the subject activity to be its burden. Second, the subject activity must actually lessen government burdens. Satisfaction of both elements depends on a “facts and circumstances” evaluation (as is common for many IRS-related issues).
Part One: Is It a Government Burden?
In a nutshell, the term “objective manifestation” simply means that the government appears to claim such activity as a government burden, such as based on historical government practices, current practices, and the nonprofit’s specific activities at issue. Some examples include the following: (a) the nonprofit organization is created by federal or state statute, to carry out specific activities such as industrial and manufacturing enterprises; (b) the government exerts significant control, such as through government representatives’ participation on the nonprofit’s board (in their official capacity, not personally); (c) the organization carries out activities that were regularly carried on by the government previously; (d) the organization carries out activities that the government is also currently doing; and (e) the government is funding the organization through grants (but not contracts, as fees for services). A strong working relationship between the government and the nonprofit is helpful, although mere praise from the government is not enough for the nonprofit to satisfy this first element nor is a nonprofit’s mere assertion of lessening government burdens.
Two examples addressed this question through companion IRS Revenue Rulings. One example concerned a nonprofit organization that was formed to train court-appointed guardians ad litem for children involved in court matters, while another example involved another nonprofit formed to raise funds for the purchase of drugs in undercover narcotics investigation. In the first ruling, the IRS recognized Section 501(c)(3) tax-exempt status based on the fact that government had previously taken on this responsibility itself and, if it were not for the efforts of the nonprofit, would still be doing so. Indeed, the government had included such costs in its budget, specifically as grants to the nonprofit. See Rev. Rul. 85-1. In the second ruling, the IRS likewise recognized tax-exempt status, concluding that without the nonprofit’s activity (albeit unusual), the government would not have the resources to support the undercover endeavors. See Rev. Rul. 85-2.
A third example is provided through an IRS Private Letter Ruling issued in 2014, in which the IRS recognized Section 501(c)(3) status for a nonprofit’s water conservation work. The nonprofit’s mission included “protecting the natural and scenic spaces of real property, protecting natural resources, and maintaining or enhancing water and air quality.” As part of such mission, the nonprofit protected the natural resources of a watershed that included a nature preserve owned by a governmentally-created “Commission” (pursuant to a special state statute) and leased to the nonprofit. As the IRS determined, such facts demonstrate “an objective manifestation that Commission considers the activity . . . including the water remediation activities . . . to be its burden.”
Part Two: Does the Activity Actually Lessen Government Burdens?
Merely doing what the government does (or would otherwise do) is not enough to qualify for Section 501(c)(3) status; the nonprofit must actually do it more cost effectively. Numbers here definitely tell a story, such as clear evidence that the government is not paying for benefits that the nonprofit is carrying out instead. In addition, it may be helpful for a nonprofit to have communications from the government reflecting such information. Ideally, a nonprofit would receive a letter from a government reading: “Enclosed is your grant award check for your organization’s drug rehabilitation facility, which saves our state government significant funds by not having to provide similar services at a likely higher overall cost.” A favorable working relationship between the government and nonprofit is also considered to provide strong evidence that the nonprofit satisfies this second required element. (See 1987 EO CPE Text: Update on Instrumentalities and Lessening the Burdens of Government, citing Rev. Rul. 85-2.) But simply taking on the government’s activities without any evidence of government savings will be insufficient, such as in a commercial fee-for-service government contract.
Rely Solely on “Lessening Government Burdens? Probably Not.
Obtaining Section 501(c)(3) tax-exempt recognition based solely on a showing of “lessening the burdens of government” may be quite challenging – and rare. If a nonprofit seeks such recognition, the IRS may well conduct an extensive analysis to determine whether (1) the government considers the activities of the organization its burden and (2) the organization’s activities actually lessen the government’s burden.
Basically, this “facts and circumstances” IRS inquiry is inherently ambiguous and uncertain. Most nonprofits that may satisfy the “lessening of government burdens” legal standard likely will also satisfy other categories for Section 501(c)(3) qualification, such as charitable, educational, or even scientific designations. Consequently, in seeking Section 501(c)(3) qualification, it typically will be far more prudent and wise for a nonprofit to showcase “lessening government burdens” only as a hallmark – but not a sine qua non – of tax-exempt status.