By Zachary S. Kester, Executive Director and Robert Miller, Program Officer, Charitable Allies
Do not worry, you are not alone in this concern.
It is a common issue among nonprofit organizations and identifying a charitable class is paramount for those seeking to qualify as a 501(c)(3) organization. Some organizations may worry that its targeted population is simply too small. Others may not fully understand the IRS’s ostensibly rigid requirements.
Yet, sometimes ensuring that a charitable class is being served can morph into a difficult and burdensome exercise. However, by knowing the following key concepts of nonprofit law regarding serving a charitable class and adopting a few ways to ensure compliance, a tax-exempt nonprofit organization can avoid most, if not all risk, associated with this area of nonprofit operation.
Definition of charitable class
Generally, a charitable class is the group of people or other defined group, such as the homeless or indigent population, endangered animals, or wildlife habitats, that can properly receive assistance or programming from charitable organizations.
In this context, properly means that the class being served by the organization needs goods, services, or funds provided in a way that fits within a charitable purpose as laid out in the Internal Revenue Code § 501(c)(3), i.e. “for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition … or for the prevention of cruelty to children or animals.”
According to the IRS, a charitable class must be sufficiently large or indefinite so that aiding them benefits the whole community. Members of a charitable class can range from a person deemed indigent and in need of public housing to a prisoner or parolee needing rehabilitation services to a person suffering from a recent disaster and is need of temporary food, water, and shelter to endangered animals. Additionally, other potential charitable classes include, veterans, elderly individuals, physically or mentally handicapped, talented and/or gifted individuals, families of people killed in the line of duty, the poor, the distressed, and even other charitable organizations. In the end, you must ensure that you are serving a “charitable class” or you will not be given tax-exempt status under 501(c)(3).
Further, a charitable class may include a group of members not inherently considered a charitable class. Take for instance a for-profit business. For-profit businesses rarely constitute a charitable class. However, given the fact that a business may suffer just as much as an individual during a natural disaster, the IRS has typically allowed businesses to be included as members of a charitable class. This means that during a declared disaster or even in the wake of a terrorist act, the IRS may approve tax exemption for nonprofit organizations organized and operated to combat community deterioration, deeming the benefit to the business as incidental.
In order for a charitable class to be sufficiently large, tax-exempt organizations need to serve a large enough class to prove to the IRS that the entire community is benefiting from their activities, either directly or indirectly.
Similarly, tax-exempt organizations organized under 501(c)(3) are not permitted to serve only one individual or even a small, defined group of individuals. For example, an organization organized as the Jane Doe College Fund or the Children of John Doe’s College Fund operated to provide scholarships to Jane Doe and the children of John Doe, respectively, would not be given tax-exempt status as a defined charitable classes of such small sizes are not sufficiently large.
However, as mentioned above, being sufficiently large is not the only way to create a charitable class that meets the IRS’s requirements. To that end, the IRS does not require a charitable organization or nonprofit to determine every possible individual to lump into these groups. In fact, as mentioned above, the IRS specifically allows indefinite groups of individuals, where the number of individuals who may benefit from the charity or nonprofit has yet to be realized. This exception is understandable for a number of reasons, including the fact that the IRS has seemed to recognize that a new charity may only serve a small number of individuals before it is able to secure the necessary support to expand its services.
For example, the widows or widowers of firefighters killed in a given geographic area while discharging his or her duties would constitute a charitable class, even if the number of potential beneficiaries is undetermined. In fact, in some cases, the class might only include one person and the charitable class will be deemed sufficient so long as the potential class is indefinite. This can be accomplished in this specific scenario simply by organizing your nonprofit so as to support all widows or widowers of firefighters killed in the line of duty in a specific area. Therefore, even if there is only one widow or widower at the time the organization is organized, the class can still get larger and encompass more people.
To simplify, an organization created and operated solely for the benefit of one person would generally not qualify for tax-exemption as a charitable organization or nonprofit organization. Conversely, an organization organized and operated to benefit a large group or an indefinite group would qualify.
Ensuring your organization’s compliance
As difficult as it may seem it some instances, the IRS does require nonprofit organization’s to retain proof that it is serving members of a charitable class. In order to ensure that you are complaint with the rules surrounding charitable classes, the following practices have been identified as being able to provide such proof.
First, using in-take sheets to register the recipients and record their demographics is a good start. These demographics should include the basic information about age, sex, etc. along with any specific information your organization would need to prove that it is serving those within the charitable class it was organized to serve. For example, if your organization is supposed to be serving the poor, then part of the in-take sheet should include a request for documents that contain information about the recipient’s income, like a check stub, tax forms, etc.
Other information that should be received from the recipients of your organization’s services include identification documents, such as a driver’s license, state ID, Social Security card, birth certificate, passport, etc. Many grantors or donors require collection of this documentation too. Also, be sure to keep the information collected highly secure to avoid any privacy violations.
Lastly, these in-take sheets should include a sworn affidavit or affirmation attesting to the veracity of material information provided. In some cases, much of this information cannot be provided by the intended recipients due to their inability to access them, because the documents have been lost, or any number of other plausible reasons. Therefore, as insurance, your organization should also include a document that the individual can sign that states they do not have the necessary documentation and affirm that they meet the necessary requirements to receive the services being offered.
In the end, your organization needs to be aware that the IRS does require organizations to retain sufficient evidence that they are serving a charitable class. A simple assertion that a charitable class is being served is insufficient. Thankfully, there are a number of ways to prove this and the above examples are just some of the ways that have been identified to provide the IRS with the necessary information.
A charitable class must be sufficiently large or indefinite so that aiding them provides a benefit for the community as a whole. Additionally, a charitable class must be made up of individuals, organizations, animals, etc. that are eligible to receive assistance from nonprofit organizations due to their connection with one of the permissible charitable purposes. This may seem like a relatively easy step in creating a non-profit, but failing to ensure that your organization serves a charitable class can cause your organization to lose its tax-exempt status or be denied tax-exempt status in the first place.
Even once you receive your tax-exempt status, you cannot relax and forget about the concept of the charitable class. You must ensure that you can prove to the IRS that the recipients of your organization’s services would qualify to be members of a charitable class.
Overall, the concept of a charitable class is an often forgotten or overlooked aspect of operating a tax-exempt non-profit organization. However, if your organization follows the guidance and tips provided above, then your organization should be able to avoid risking its tax-exempt status due to something that is relatively easy to prevent by ensuring compliance with the requirements of serving a charitable class.
Attorney Zac Kester provides generalist and strategic nonprofit legal and consulting services. He holds a Master of Laws, a post-law school advanced degree, in which he studied the unique needs of tax-exempt nonprofit organizations. His legal and consulting career has focused on nonprofit organizations.
With highly experienced legal and training personnel, Charitable Allies provides all manner of legal and educational services for boards, officers, management and staff of myriad charities throughout the sector. From basic one-time questions about a single matter to training for boards and officers to complex reorganization or merger of activities, Charitable Allies is your go-to cost-effective provider of legal services to nonprofit organizations.
Contact Zac Kester, executive director, at 317-333-6065 or firstname.lastname@example.org with any questions.