501(c)(3)'s 100th Anniversary

501(c)(3)'s 100th Anniversary

When the 16th Amendment to the U.S. Constitution was ratified, it opened the door to income tax as we know it today.  The ancestor of today's Internal Revenue Code was signed into law on October 3, 1913.

Many kinds of tax exempt non-profits can trace their roots back to this hundred year old statute, including labor, agricultural and horticultural organizations, mutual savings banks, fraternal beneficiary societies, cemetery companies, business leagues, chambers of commerce, and the 501(c)(4) social welfare organizations that have been so much in the news lately.

By far the most popular tax exemption, however, is the one which covers charitable, educational and religious organizations.  As of August, 2013, 501(c)(3)s accounted for 74% of current exempt organizations, and a whopping 87% of all applications approved during 2013.

Although there have been many changes to the Internal Revenue Code in the last hundred years, most of us would still recognize this "antique" version of Section 501(c)(3) found in the Revenue Act of 1913:

       …any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational    

       purposes, no part of the net income of which inures to the benefit of any private stockholder or individual…

The years since 1913 have seen a number of changes to the statute:
 
The prevention of cruelty to children or animals was added as a qualifying "501(c)(3)" purpose in 1918.  1921 saw the addition of "literary" to the list of approved purposes.  "Testing for public safety" appeared as a 501(c)(3) purpose in the 1954 Internal Revenue Code, and when U.S. athletes won fewer medals than Russians and Germans at the 1976 Olympics, Congress saw fit to add the phrase "to foster national or international amateur sports competition," to the list of approved 501(c)(3) purposes. 

A prohibition against carrying on propaganda, or otherwise attempting to influence legislation was added to "501(c)(3)" in 1934, while a prohibition against political intervention was not added until 1954, when then Senate minority leader Lyndon Johnson proposed it as a floor amendment, and it was passed without discussion or debate.

In the last half century, Congress has changed the 501(c)(3) landscape several times without actually changing 501(c)(3), itself:

In 1969, reacting to a number of perceived abuses in the charitable sector, Congress divided the 501(c)(3) universe into two distinct subdivisions - private foundations and public charities.  At the same time, Congress enacted laws meant to rein in self-dealing and other suspect activities amongst those charities that do not have the checks and balances provided by broad public support.

In the 1970's, perhaps because of the success of charitable organizations in changing the laws governing drunk driving, Congress softened the prohibition against lobbying, allowing some charities to make an election allowing limited legislative activity, while imposing penalty taxes for exceeding those limits.

And in the 1990's, again in reaction to perceived abuses, Congress created the "Excess Benefit" laws, allowing the IRS to impose fines on public charity insiders who receive unreasonably high payments and on board members who make that possible.

The 1,040,000+ 501(c)(3) organizations on the rolls today include some of the largest, most influential, and even most infamous organizations ever.  It is anybody's guess what the next one hundred years hold for this all-important slice of tax law and history.

501(c)(3) - The Law Today
"Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

501(c)(3) By Any Other Name
The Code section currently known as 501(c)(3) has been known by many other names over the years.  In the Revenue Act of 1913, quoted above, it was section II(G)(a).  For the next 30 years, it ran through labels fairly quickly, jumping from 11(a)(6th) to 231(6), to 103(6).  The label applied by the Revenue Act of 1934, 101(6), stuck for 20 years, and the name by which we now know it, 501(c)(3), has been around for nearly 50 years.

Changes in Our Idea of Charity
As society has changed in the last century, so has the concept of charity, taking it well beyond simply helping the poor. Today's charities encompass a wide variety of activities that serve the common good, including establishing or maintaining public buildings, monuments or works, relieving the burdens of government, reducing neighborhood tensions, eliminating prejudice and discrimination, defending human and civil rights, battling community deterioration, combating juvenile delinquency, promoting the arts, and preserving and protecting the natural environment for the benefit of the public. 

Examples of 501(c)(3) organizations:
Churches, synagogues, mosques, temples, interchurch organizations, integrated auxiliaries of churches, non-profit hospitals and their auxiliaries, non-profit clinics and medical research facilities, colleges, universities, private schools, non-profit day care centers and preschools, adult education and community schools, legal aid organizations, historical societies, environmental organizations, museums, zoos, symphonies, orchestras and bands, opera groups, non-profit theater, dance and other performance groups, arts organizations, non-profit marriage, personal and vocational counseling, non-profit drug/alcohol abuse prevention/treatment/rehabilitation, youth organizations, humane societies, scholarship funds, aid to the homeless, aid to the handicapped, aid to the elderly, combating prejudice and discrimination, civil rights organizations, evangelist and missionary groups, and public television and radio. 

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