Getting Exempt

The three tests: organizational, operational, public purpose

• Organizational test (Reg. §1.501(c)(3)-1(b)): the organizing document must (1) limit purposes to one or more of the eight §501(c)(3) purposes — religious, charitable, scientific, testing for public safety, literary, educational, fostering amateur sports competition, prevention of cruelty to children or animals; (2) not expressly empower the organization to engage, other than insubstantially, in activities that don’t further those purposes; and (3) permanently dedicate the assets — on dissolution they go to another (c)(3) purpose, the federal government, or a state or local government for a public purpose. Limiting purposes “within the meaning of §501(c)(3)” satisfies (1). State default law can sometimes supply a missing dissolution clause; Colorado’s nonprofit act does not reliably, so put it in the articles.
• Operational test: operated exclusively (read: primarily) for exempt purposes; no private inurement to insiders; no more than incidental private benefit to anyone; no substantial lobbying; no political campaign activity at all. Tax-exempt is not the same as charitable — charities are a subset.
• “Charitable” in its legal sense (Reg. §1.501(c)(3)-1(d)(2)): relief of the poor, distressed or underprivileged; advancement of religion, education or science; erection or maintenance of public buildings, monuments or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; combating community deterioration and juvenile delinquency.
• Entity forms: corporation, trust, unincorporated association, LLC. Almost all are non-stock corporations. A partnership cannot be a (c)(3). An LLC can, but only if every member is a (c)(3) or governmental unit, and under Notice 2021-56 its articles and operating agreement must carry the membership restriction, a contingency plan if a member loses status, the purpose and dissolution clauses, and (for a private foundation) the §508(e) Chapter 42 provisions, plus a signed representation that the provisions are enforceable under state law. An LLC that wants to be a disregarded entity of its exempt parent should not apply at all.
• The organizing document, whatever it is called, must at minimum state the legal name, the purposes and the date of adoption, signed by two officers (trustees for a trust). A state-filed certification (date filed and approved) goes with the application. Do not assume the state’s nonprofit-corporation minimums satisfy the federal test.

Form 1023 part by part

The course walked the 2017 paper form (eleven parts). The electronic Form 1023 (Rev. January 2020) that everyone files now has ten parts and Schedules A–H. The mapping below is to the current form; the course’s points are carried over. updated 2026

• Part I, Identification. EIN first (SS-4; the third-party designee box on the SS-4 lets the preparer get it without a 2848). A mailing address or P.O. box is fine and is wiser than an officer’s home address because the 1023 is a public document. The IRS will not discuss the application with anyone but an officer, director or employee without a Form 2848 or 8821 on file. Part I also asks whether anyone was paid to help form the organization — the IRS is screening for promoted structures (vehicle-donation and conservation-easement fundraisers, foreign operations, insider deals).
• Part II, Organizational Structure. Corporation, LLC, unincorporated association or trust; a copy of the state-certified articles (exact copy as filed), the bylaws, and for a trust the signed trust instrument. Wrong structure → application returned, fee kept; fix it within the time given and resubmit without a new fee.
• Part III, Required Provisions. Point to the page and paragraph of the articles that carry the purpose clause and the dissolution clause. IRS-suggested dissolution wording: “Upon dissolution, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3), or shall be distributed to the federal government, or to a state or local government, for a public purpose.”
• Part IV, Your Activities. The narrative. Past, present and planned substantial activities, each answered who / what / when / where / how it furthers the purpose / what percentage of total time / how it is funded. Actual or planned, not speculative — the after-school homework club gets described, the director’s brainstorm about a youth orchestra does not. Attach website pages if they help. The narrative is the application; have a point person at the organization write it under the preparer’s direction. Part IV also now carries the former Part VIII questions: political activity, lobbying, bingo and gaming, fundraising methods and contracts, governmental affiliation, economic development, management and development contracts, joint ventures with non-(c)(3)s, childcare (§501(k)), intellectual property, contributions of real estate, easements, closely held stock, vehicles or collectibles, foreign activities and grants, grants to organizations and to individuals, §501(e)/(f)/(n) cooperatives, and the schedule triggers: Schedule A churches, B schools, C hospitals, D supporting organizations, E effective date, F low-income or elderly housing, G successor organizations, H scholarships and grants to individuals.
• Part V, Compensation and Other Financial Arrangements. Name, title, mailing address and compensation for every officer, director and trustee; the five highest-paid employees over $50,000; the five highest-paid independent contractors over $50,000. “Compensation” is everything: salary, deferred compensation, retirement and fringe benefits, educational benefits, low-interest loans, payment of personal expenses, bonuses. Then the relationship questions (family and business relationships among the insiders, whether insiders are paid by related entities), whether the board follows a conflict-of-interest policy, whether comparables are used, whether compensation is approved in advance and documented, and any purchases, sales, leases or contracts with insiders. If nobody is paid, write “None” — do not leave it blank. Answer the relationship questions even when there is no compensation; the IRS is looking for private benefit to people in control.
• Part VI, Financial Data. Statement of revenues and expenses and a balance sheet. In existence under one year: current year plus two projected (three columns); one to five years: actual years plus projections to make four; five or more: the five most recent years. The old advance-ruling process is gone; a new organization is classified as publicly supported if it can reasonably be expected to be, and keeps that status for its first five years regardless of actual support. Schedule A on the Form 990 takes over from year six.
• Part VII, Foundation Classification. Public charity (and which paragraph: church, school, hospital, §170(b)(1)(A)(vi), §509(a)(2), supporting organization) or private foundation; private operating foundation. A private foundation must show its articles carry the §508(e) provisions or that state law supplies them. Detail on Public Charity or Private Foundation.
• Part VIII, Effective Date. Filed within 27 months? If not, Schedule E: the reasons, and whether the organization qualifies for an exception (it was a church, it had receipts under $5,000, or it is a successor to an organization that was exempt). Schedule E is also where an auto-revoked organization picks its Rev. Proc. 2014-11 reinstatement route (Sections 4–7; see reinstatement).
• Part IX, Annual Filing Requirements. Whether the organization claims to be excused from filing Form 990 (churches, certain affiliates) — almost always “No.”
• Part X, Signature. Officer, director or trustee. The e-signature method: type the name on Pay.gov and include in the uploaded PDF a page bearing the handwritten signature above the typed name, title, date and the penalties-of-perjury statement. No stamps, no fax images, no representatives. All attachments go in one PDF.

Why applications get bounced, and expediting

• The IRS’s own list of causes of delay: wrong or missing user fee; no complete organizing document with the state’s filing certification; no bylaws; wrong signer or a stamped or faxed signature; missing schedules; an activities narrative that restates the purpose instead of describing activities; no officer and director list with compensation; no accounting-period month (the IRS checks that the year-end matches the bylaws, the financials and any prior returns); too little financial data.
• Expedited handling is granted in writing for a compelling reason: a pending grant whose loss threatens operations, a disaster-relief purpose, delay caused by the IRS itself, or anything else the IRS thinks warrants it. Put “Request for Expedited Relief” on a cover sheet; if claiming IRS delay, give the original submission date and receipt. Paying an extra fee is not a reason — that was the exam’s distractor [Final Q5, D; marked].
• If the IRS proposes an adverse determination there is a protest and conference with EO Rulings and Agreements, then the Independent Office of Appeals (Rev. Proc. 2026-5, the annual successor to the Rev. Proc. 2021-5 the course cites) check.
• Material changes after the letter — form, activities, sources of support, mergers — are reported to the IRS (on the next Form 990, or by letter for a change that affects exemption); a private letter ruling is available in advance on a structural change. Termination: check “Final return” on the last 990 and complete Schedule N; a letter to EO Determinations in Cincinnati stops the IRS expecting returns.

Form 1023-EZ

• Three pages, $275, online only, and the IRS says about 70% of applicants are eligible. Eligibility is a 30-question worksheet in the instructions; any “Yes” forces the full 1023. The headline tests: projected gross receipts $50,000 or less in each of the current and next two years (and actual receipts not over $50,000 in any of the past three), total assets $250,000 or less, a corporation, unincorporated association or trust (no LLCs), formed and operating in the United States with a U.S. mailing address.
• Not eligible regardless of size: churches, schools, hospitals and medical research organizations, supporting organizations, private operating foundations, organizations testing for public safety, successors to for-profits, organizations more than 27 months old that want an earlier effective date, HMOs, accountable care organizations, credit counseling, donor-advised fund sponsors, and organizations that were previously revoked for reasons other than non-filing. An eligible organization may still file the full 1023 — and should if a funder will want to see a reviewed application.
• The EZ asks the applicant to attest to the organizational test rather than attach the articles. That is the trap: the IRS has rejected EZ filers on later examination whose articles never had the clauses. Read the articles before letting a client attest.

The 27-month rule and reliance

• A favorable determination is retroactive to the date of formation if a completed application is filed within 27 months after the end of the month the organization was formed. The 27 months is the 15-month statutory period of §508(a) plus the automatic 12-month extension of Reg. §301.9100-2(a)(2)(iv); further extensions are discretionary under §301.9100-3 where the organization acted reasonably and in good faith and the government is not prejudiced. [Final Q12, D; marked]
• Filed late: exempt from the postmark date forward, unless Schedule E establishes an exception or reasonable cause. The IRS has usually granted retroactivity to small organizations that simply never knew, but the organization must have met the (c)(3) requirements for its whole life. Most such organizations never filed a 990-series return either, so they are also auto-revoked and need the Rev. Proc. 2014-11 routes. Even a self-declared organization that need not apply must file the 990 series to keep its exemption.
• Contributions are generally not deductible until the letter issues — but gifts made before the letter are deductible if the application was timely. For a late filer, only gifts made after the filing date are deductible.
• Reliance (Reg. §1.170A-9(f)(5)(ii), §1.509(a)-7; Rev. Proc. 2018-32): a donor may rely on the determination letter, Tax Exempt Organization Search or the EO Business Master File extract until the IRS publicly announces a change, unless the donor caused or knew of the act that cost the organization its status. Pub. 78 is now a data set inside TEOS. A large donor whose gifts for the year are 25% or less of the organization’s total support for the prior four years is not treated as responsible for a change in public-support classification that its own gift caused, unless the donor holds a position of authority over the organization. Supporting-organization type (I, II, III, and functionally integrated or not) is also relied on from the deductibility code, which matters to private foundations and DAF sponsors deciding whether expenditure responsibility applies.

Everyone else: Forms 1024, 1024-A, 8976, 8871, 1028

• Form 1024 for every §501(c) paragraph other than (3) and (4), and for §501(d) apostolic organizations; $600; electronic on Pay.gov since January 3, 2022 (the exam’s 90-day grace period for paper is long over). (c)(9) VEBAs and (c)(17) SUB trusts must apply, with a 15-month rule for retroactivity; everyone else may self-declare. Letter applications are no longer accepted for any paragraph. [Final Q3, C; corrected to C in blue; Q9, C; marked]
• 2019 adverse determinations under (c)(6) for sports-referee associations: the benefit to the sport is general, the real purpose is jobs for the referees. Keep the stated activities inside the business-league definition.
• §501(c)(4): Form 8976 (Notice of Intent to Operate Under Section 501(c)(4)) within 60 days of formation, electronic, $50, under §506; the IRS acknowledges receipt but the notice is not a determination. Late notice: $20 a day up to $5,000 (§6652(c)(4)) check and a managers’ penalty if the IRS demands it in writing. Form 1024-A ($600, electronic since January 2021) gets the determination letter, and does not excuse the 8976. A (c)(4) may lobby without limit if the lobbying furthers its social-welfare purpose, and may do some campaign activity so long as it is not the primary activity — which is why a (c)(3) that wants to lobby heavily spins off a (c)(4). Donations are not deductible as charitable gifts; the organization’s income is still exempt. [Final Q8, B; Q11, B; marked]
• The 2013 proposed “candidate-related political activity” regulations for (c)(4)s (communications within 60 days of a general election or 30 days of a primary, voter drives, grants to §527s) were withdrawn and never finalized; the facts-and-circumstances test of Reg. §1.501(c)(4)-1 still governs. updated 2026
• §527 political organizations: Form 8871 within 24 hours of formation (electronic), Form 8872 periodic reports, Form 1120-POL, and a 990 if gross receipts are $25,000 or more. §521 farmers’ cooperatives: Form 1028 (or electronic 1024). Canadian registered charities are automatically (c)(3)s under the treaty, presumed private foundations; to be classified as public charities they file Part I, the classification part and signature of Form 1023 plus Form 8833, with no user fee.
• Getting copies: Form 4506-B for an organization’s own application and determination letter; Form 4506-A for filed returns; TEOS has letters issued since 2014 and returns received since 2017, so check it first. [Final Q6, D; marked]

Study questions 1–6

• A charity seeking recognition as a (c)(3) files Form 1023 — not the annual Form 990, not Form 1024, not Form 5768 (the lobbying election). [SQ 1, B; derived]
• Of an action organization that lobbies substantially, a church, and a family foundation, only the church is a public charity: the lobbyist is not a (c)(3) at all and the family foundation is the model private foundation. [SQ 2, B; derived]
• Failing to submit the bylaws or rules of operation delays an application; the treasurer and vice president are principal officers who may sign; the purpose need not be restated. [SQ 3, D; derived]
• A partnership may not qualify under §501(c)(3); corporations, trusts, associations and all-(c)(3)-member LLCs may. [SQ 4, A; derived]
• A conflict-of-interest policy is not required for exemption and does not confer it; its value is that it keeps people in authority from receiving inappropriate benefits. [SQ 5, B; derived]
• The organizing document must limit purposes to those in §501(c)(3) (by reference is fine), must not empower substantial non-exempt activity, and must dedicate assets permanently. [SQ 6, A; derived]

Private reference, not client advice. Notes taken from a continuing-education course, Form 990: A Practical Guide (Thomson Reuters Checkpoint Learning, 12 hours, 2022 edition written on 2021 law and the 2021 forms). Figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2025-32, T.D. 9933, T.D. 9898, the 2025 form instructions). Items tagged check are to be confirmed against primary sources before they are relied on.