Investment Funds Maintained by Charitable Organizations

Section 3(c)(10)(A)(ii) of the Investment Company Act of 1940 generally exempts a private investment fund from registering as an investment company if it is maintained by a charitable organization and is organized and operated exclusively for religious, education, benevolent, fraternal, chartable or reformatory purposes (“Permitted Purposes”) for the collective investment and reinvestment of certain assets.  Recently, the SEC provided new guidance to alleviate concerns related to the use of this exemption.

The SEC’s Division of Investment Management clarified that a private investment fund that is a legal entity distinct from the charitable organization[1] maintaining the fund and that is organized and operated for the purpose of earning investment returns for charitable organizations will be able to use the exclusion under Section 3(c)(10)(A)(ii).  A fund must still conform to the other conditions Section 3(c)(10) and the staff’s corresponding existing no-action positions.

The staff recognized that a fund technically might not be “organized and operated exclusively” for Permitted Purposes, even though its proceeds are used exclusively for Permitted Purposes.  The staff, however, confirmed that they believe this is the type of entity that Congress intended to be exempt from Section 3(c)(10) because the fund will be used solely for the investment of permitted assets of charitable organizations that, in turn, will use the proceeds for Permitted Purposes.

In addition to the proscribed requirements, the staff has based no-action relief for funds seeking to rely on Section 3(c)(10)(A)(ii) on a number of related representations, which include:

(i) no part of the net earnings of the fund will inure to the benefit of any private shareholder or individual,

(ii) each investor will be a Section 501(c)(3) organization,

(iii) each investing organization will only invest funds over which it has immediate, unrestricted and exclusive use, benefit and enjoyment, and

(iv) on an annual basis, the fund will provide a written report on its financial condition and results of operation, including audited financial statements.

For more information, please speak with Elizabeth Kemery Sipes, Mark Weakley, another member of our Fund Formation Team or your Bryan Cave contact(s).

[1] A charitable organization means an organization described in Section 170(c)(1)-(5) or Section 501(c)(3) of the Internal Revenue Code.


IRS Issues Notice Regarding Functionally Integrated Supporting Organizations

IRS Notice 2014-4 provides interim guidance for Type III supporting organizations seeking to qualify as functionally integrated by supporting a governmental supported organization. It also modifies section 3 of Notice 2006-109, 2006-2 C.B. 1121, by providing interim guidance to certain grantors in determining whether a potential grantee is a Type I, Type II, or functionally integrated Type III supporting organization for purposes of the excise taxes imposed under §§ 4942, 4945, and 4966 of the Internal Revenue Code (Code).  View a copy here


Charitable Marijuana

In PLR 201224036, the organization at issue was dedicated to providing education about using “cannabis as medical therapy” and to providing “safe, legal access to cannabis.” The law of the state apparently allowed such use when prescribed by a doctor. The organization also provided:  

  • information about how to ingest cannabis
  • recipes that include cannabis
  • instructions to grow your own cannabis
  • grading services for homegrown cannabis

In order to pay for the cannabis, members pay a “suggested donation price” in cash or in exchange for (more…)


When 4% is greater than 100%

Section 502 of the Code provides that an organization with the “primary purpose of carrying on a trade or business for profit” is not exempt under Section 501 “on the grounds that profits are payable” to exempt organizations.  This section was enacted in 1950 and revoked the destination-of-income test that previously had permitted commercial organizations to be exempt on the grounds that they donated their profits to other charities.  Of course, a trade or business may otherwise constitute an exempt activity (such as the educational activities of an exempt school or the health care activities of an exempt hospital).  But Section 502 makes it clear that if the activity is not by itself exempt (more…)


Garage Sale Christmas

As a consumer and parent, I love garage sale-ing–you never knew what you will find. Garage sales are especially helpful for Christmas shopping for young children. In my opinion, there is no reason to buy a new present for anyone under the age of 5. And for anyone under the age of 18 months, there is no reason to get any presents at all. (In my experience, no matter what you wrap up, (more…)


Revised 990 Regulations

Until recently, when an organization sought public charity status on its Form 1023 and received a favorable determination letter from the Internal Revenue Service recognizing it as exempt under Section 501(c)(3) of the Code, its public charity status (if granted) would be for a five-year “advance ruling period”. After this advance ruling period, the organization would make a separate filing to the IRS to establish public charity status based on satisfaction of one of the Support Tests. On September 7, 2011, final regulations were issued that change the timing and process of determining public charity status.  A brief description of the changes can be read here.


Economic Development, Right and Wrong

Economic development organizations may be exempt if the assistance they provide is “targeted (1) to aid an economically depressed or blighted area; (2) to benefit a disadvantaged group, such as minorities, the unemployed or underemployed; and (3) to aid businesses that have actually experienced difficulty in obtaining conventional financing (a) because of the deteriorated nature of the area in which they were or would be located or (b) because of their minority composition, or to aid businesses that would locate or remain in the economically depressed or blighted area and provide jobs and training to the unemployed or underemployed from such area only if the economic development corporation’s assistance was available.” 1992 EO CPE Text G. Economic Development Corporations.

This basis for exemption seems to be often misunderstood–many organizations seek exemption on the grounds that (more…)


Charitable Vendors


One commonly held misconception regarding charities is that an organization can qualify under section 501(c)(3) on the grounds that it provides needed services to other 501(c)(3) organizations. In a seminal case in Rev. Rul. 72-369, an organization sought 501(c)(3) status on the grounds that it provided consulting services to 501(c)(3)s for a fee set at cost. The IRS ruled that paid consulting services is a commercial activity carried on for profit and the fact that the fee was set at cost was not sufficient to remove the commercial aspects. In GCM 37257, the general counsel declared that such service-providing organizations will only qualify themselves under section 501(c)(3) if the services they provide to the other 501(c)(3)s are “substantially below cost.”

 Recently, in PLR 201131025, the IRS examined an organization the provided classroom supplies to school teachers. The organization operated (more…)


Never Pay Taxes Again

Imagine you are talking to a friend of a friend at a party, who says that you can avoid ever paying income taxes by taking six simple steps:

(1) form a corporation with the word “church” in the title;
(2) appoint yourself president/minister of the church;
(3) transfer your home, car, weekly income and other assets to the church;
(4) transfer your debt (mortage), car loans, etc. to the church;
(5) continue to spend your time and money as you did before;
(6) have the church pay you for your services as president/minister and pay your expenses (home, car, credit cards, kid’s tuition, etc.)

What would you do? (more…)


Defining Church

In a previous blog , I described the revocation of church status of the Foundation for Human Understanding.  In that case, the Federal Circuit Court of Appeals  discussed three different tests to determine church status.  These tests (naturally) intrigued me so gave up playing angry birds for three days to dedicate myself to researching all of the cases I could find that determine church status.  I determined that all of the different approaches that have been used to determined if an organization is a church (and there are more than 3) could all fit under one of the tests–the approach set forth in the 1980 District Court case: American Guidance Foundation, Inc. v. U.S.  In short, the test requires examining 14 Factors established by the IRS and requires at a minimum that the organization have “a body of believers or communicants that assembles regularly in order to worship.”  For anyone who finds this interesting or is suffering from insomnia, the full paper can be accessed here.

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