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categories specified under section 509(a) of the Code (and discussed further below),
the organization is, by default, a private foundation. Generally, a private foundation
receives most of its support from one or a limited number of sources, such as a
single family or corporation. Unlike public charities, private foundations pay tax on
their investment income. Also, private foundations are subject to additional rules
and restrictions that do not apply to public charities.

(i) Public Charities

Public charities are covered in sections 509(a)(1) through 509(a)(4) of the
Code. They include (a) entities that are considered inherently public by virtue of
their activities (i.e., churches, schools, hospitals and medical research
organizations); (b) publicly supported organizations (including both (i) organizations
that normally receive a substantial part of their support from gifts, grants and
contributions from the general public and (ii) organizations that normally receive
more than one-third of their support from grants, contributions, membership fees,

and gross receipts derived from activities related to their exempt function); (c)
supporting organizations that are controlled by or in connection with one or more
public charities; and (d) organizations organized and operated exclusively for
testing for public safety.

Chapter 3 of IRS Publication 557 includes a detailed discussion of how private
foundation status and public charity status are determined. It is worth spending
time with this section of Publication 557 and determine which, if any, of the public
charity categories apply to your organization before you begin drafting your
organization’s Form 1023 (application for 501(c)(3) status). This will help you ensure
that you present information in your application that is relevant to the type of
public charity or private foundation status you hope to obtain.

(ii) Disadvantages of Private Foundation Status

Federal tax law treats private foundations less favorably than public charities.
Unlike public charities, private foundations must pay tax on their investment
income, are prohibited from engaging in any lobbying activity and are subject to a
variety of other highly technical and complicated requirements regarding how to
invest their assets and conduct operations. Failure to comply with these rules can
result in excise taxes imposed on the private foundation as well as on its officers,
directors or trustees. If your organization is a private foundation, you should
consult a legal professional.

WASHINGTON NONPROFIT HANDBOOK -67- 2018