Order Code RL30877
CRS Report for Congress
Received through the CRS Web
Characteristics of and
Reporting Requirements for
Selected Tax-Exempt Organizations
March 8, 2001
Marie B. Morris
Legislative Attorney
American Law Division
Congressional Research Service ˜ The Library of Congress

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Characteristics of and Reporting Requirements For
Selected Tax-Exempt Organizations
Summary
This report addresses in summary fashion the differences among several kinds
of tax-exempt organizations described in Internal Revenue Code [IRC] subsections
501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), and section 527. Each of these types of
organization has a unique statutory definition, is subject to certain statutory
limitations on its activities, enjoys certain benefits from obtaining tax-exempt status,
and must share certain information with the general public. Following the report is
a table which summarizes this information.

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Contents
Organizational Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
IRC § 501(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
IRC § 501(c)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
IRC § 501(c)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
IRC § 501(c)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
IRC § 527 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Meaning and Benefits of Tax-Exempt Status . . . . . . . . . . . . . . . . . . . . . . . 3
Deductible contributions and dues . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Tax exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Restrictions on lobbying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Restrictions on political activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Requirements for Obtaining Exempt Status . . . . . . . . . . . . . . . . . . . . . . . . 4
IRC § 501(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
IRC § 501(c)(4), (c)(5), (c)(6) and (c)(7) . . . . . . . . . . . . . . . . . . . . . . 5
IRC § 527 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Public Disclosure of Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Requirements for Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Characteristics of and Reporting Requirements for Selected Tax-Exempt
Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Characteristics of and Reporting
Requirements For Selected Tax-Exempt
Organizations
The term tax-exempt organization encompasses more than 30 types of
organizations described in the Internal Revenue Code. By far the largest number of
tax-exempt organizations are grouped under five particular categories, and they are
usually referred to by their section or subsection of the Code, i.e., 501(c)(3),
501(c)(4), 501(c)(5), 501(c)(6), and section 527. This report was developed to
answer frequently asked questions about the differences among these types of
organizations: how they obtain exempt status; what they can and cannot do; and what
kind of information about them is publicly available.
Organizational Definitions
IRC § 501(c)(3). IRC § 501(c)(3) organizations are sometimes referred to as
“charitable” organizations. Typical examples of 501(c)(3) organizations include the
Red Cross, churches, schools, hospitals, Boy Scouts, Girl Scouts, animal shelters, and
the Little League. They are described as
“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 . . . or for the
prevention of cruelty to children or animals . . . no substantial part of the
activities of which is . . . attempting to influence legislation . . . 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.”
These organizations are permitted to engage in an insubstantial amount of lobbying,
but they are prohibited from engaging in political campaign activities. Taking
positions on issues is considered lobbying, not political campaign activities.
IRC § 501(c)(4). IRC § 501(c)(4) organizations are generally referred to as
“civic leagues” or “social welfare organizations.” These organizations often engage
in activities similar to 501(c)(3) organization activities, but they often try to achieve
their goals through influencing legislation, litigating, or inciting the public to political
action. There is no tax code prohibition on their lobbying or engaging in campaign
activities, but their principal purpose cannot be lobbying or campaigning. Those
activities must be in support of their exempt purpose. IRC § 501(c)(4) organizations
are

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CRS-2
“Civic leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare, or local associations of
employees, . . . the net earnings of which are devoted exclusively to
charitable, educational, or recreational purposes.”
Examples of 501(c)(4) organizations include the Sierra Club and the American Civil
Liberties Union.
IRC § 501(c)(5). IRC § 501(c)(5) organizations are described as “labor,
agricultural, or horticultural organizations.” Most of these organizations are labor
unions. There is no tax code prohibition on their lobbying or engaging in campaign
activities, but federal election laws generally require campaign activities to be
conducted in a political action committee.
IRC § 501(c)(6). IRC § 501(c)(6) organizations are generally thought of as
trade associations. There is no tax code prohibition on their lobbying or engaging in
campaign activities, but federal election laws generally require campaign activities to
be conducted in a political action committee. The Internal Revenue Code describes
these types of organizations as
“Business leagues, chambers of commerce, real estate boards,
boards of trade, or professional football leagues . . . not
organized for profit and no part of the net earnings of which
inures to the benefit of any private shareholder or individual.”
Examples of 501(c)(6) organizations include the Chamber of Commerce, Jaycees,
American Bar Association, American Medical Association, and the National
Association of Manufacturers.
IRC § 527. IRC § 527 organizations are political organizations or funds
“organized and operated primarily for the purpose of directly or indirectly accepting
contributions or making expenditures, or both, for an exempt function.” An exempt
function1 means
“influencing or attempting to influence the selection, nomination, election,
or appointment of any individual to any Federal, State, or local public office
or office in a political organization, or the election of Presidential or Vice-
Presidential electors, whether or not such individual or electors are
selected, nominated, elected, or appointed.”
IRC § 527 encompasses every kind of political committee from a candidate
committee, to a political party, to a political action committee set up by a union, a
corporation, or a group of politically-interested citizens. In recent years, “527" has
used to describe certain issue advocacy groups which intend to influence elections by
1In the remainder of this report, when exempt function is italicized, it is to emphasize the fact
that the term refers to political organization exempt function activities, i.e., influencing or
attempting to influence an election, etc., and not activities of other tax-exempt organizations.

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CRS-3
advertising about certain political issues; however, the tax definition of 527
organization is not limited to advocacy organizations.
It should be noted that it is not unusual for different types of exempt
organizations to form affiliates or related organizations to more effectively perform
their missions. For example, labor unions often have a related 501(c)(3) scholarship
fund, to which tax-deductible contributions may be made, and a 527 political action
committee, which can conduct campaign/endorsement activities which the union
cannot legally carry on inside the union itself. Similarly, a trade association might
have a lobbying affiliate, a charitable affiliate, and a political action committee. As
long as the entities carefully observe the requirements to be a separate organization,
these types of relationships are not prohibited.
Meaning and Benefits of Tax-Exempt Status
Deductible contributions and dues. Only 501(c)(3) charitable
organizations are eligible to receive tax-deductible charitable contributions. Dues to
many trade associations [501(c)(6) organizations] and labor unions [501(c)(5)] and
some charitable [501(c)(3)] or social welfare organizations [501(c)(4)] may be tax-
deductible business expenses for some or all of their members. A portion of the dues
paid to non-charitable organization may be non-deductible because of lobbying
activities of the organization.
Tax exemption. Whether or not they can receive tax-deductible contributions
or dues, most exempt organizations, including 501(c)(3)s, 501(c)(4)s, 501(c)(5)s, and
501(c)(6)s, are exempt from tax on all their income unless they have engaged in
certain business activities or certain activities which are subject to penalty taxes.
Most of the penalty taxes are aimed at 501(c)(3) organizations. There are taxes for
excess lobbying and excess political activities and excess personal benefit transactions.
If they have employees, exempt organizations pay the usual employer share of taxes
for social security and medicare, and they withhold income taxes.
Political organizations [527 organizations] are not exempt from tax on all their
income. Political organizations are taxed if they have income which is derived from
non-exempt function activities, essentially investment income, or if they spend money
on non-exempt function activities. If they only have exempt function income and
engage only in exempt function activities, they pay no income taxes. Section 527
exempt function income is not taxed if conducted by a 527 organization or fund, but
is subject to tax if the exempt function is conducted by another form of exempt
organization.
Restrictions on lobbying. In addition to the organizational restrictions on
lobbying placed on charitable organizations, IRC § 162(e) restricts the use of tax-
deductible dues for lobbying purposes. If a tax-exempt organization collects tax-
deductible dues from its members (e.g., a trade association, a labor union, or,
possibly, some charitable or social welfare organizations) and engages in lobbying, the
organization is required to notify its members of the portion of dues that is
nondeductible. That portion is determined by comparing the organization’s
expenditures on all activities with the percentage of expenditures for lobbying

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CRS-4
activities. If the organization chooses not to notify its members or fails to notify its
members of the portion of dues which is nondeductible, the organization will pay a
proxy tax on its lobbying expenditures. IRC § 6033(e)(2). Organizations whose dues
are generally nondeductible are not subject to these requirements.
Section 18 of the Lobbying Disclosure Act of 1995, P.L. 104-65, prohibited
organizations described in IRC § 501(c)(4) from receiving federal grants, loans,
contracts, or other awards if they engage in lobbying activities, even if they conducted
the lobbying with their own funds. This language was amended by P.L. 104-99 to
permit lobbying by certain tax-exempt organizations that received federal contracts,
but not grants or loans.
The Lobbying Disclosure Act also imposes registration and disclosure
requirements on organizations that have paid lobbyists whose lobbying activities on
behalf of the organization exceed certain time and monetary limits. For more
information on this topic, see CRS Report 96-809A. Lobbying Regulations on Non-
Profit Organizations, by Jack H. Maskell.
Restrictions on political activities. In addition to the organizational
restrictions on political campaign activities, IRC § 527(f) provides that any 501(c)
organization which is not a 527 political organization and which makes expenditures
for an exempt function is subject to tax on the lesser of its net investment income or
the amount spent on an exempt function. The tax rate is the highest corporate tax rate
with an allowance for capital gains, if any. This provision provides an inducement for
exempt organizations with substantial investment income to conduct their campaign
and other political activities in 527 organizations or funds.

Although the tax laws may permit organizations described in IRC §§ 501(c)(4)
social welfare organizations, 501(c)(5) labor unions, and 501(c)(6) trade associations
to engage in political campaign activities, providing that such activities are not the
organization’s primary means of accomplishing its exempt purposes, it should be
noted that the election laws ban corporations and labor unions from making any
contribution or expenditure in connection with federal elections. 2 U.S.C. § 441b.
This ban applies whether or not a corporation is for-profit or tax-exempt. Exceptions
may arise from the definitions used in election law rules, but it is important to observe
that the election law rules do not necessarily correspond to the tax law rules. This is
another inducement to conduct these activities in a 527 organization.
Requirements for Obtaining Exempt Status
Before any organization can apply for exempt status from the Internal Revenue
Service, it must be established under state law as whatever type of organization it
intends to be, usually a nonprofit corporation, and it must obtain an employer
identification number [EIN] from the IRS. This process will generally include
developing articles of incorporation and bylaws. Once that has been done, the
organization can apply to the IRS for tax-exempt status.
IRC § 501(c)(3). These organizations will file IRS Package 1023 within the
first 15 months of the organization’s life. This assures that the recognition of exempt

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CRS-5
status will date back to the date of the formation of the organization. Although there
are certain exceptions, generally, if the application is filed at a later time, the
determination will date back only to the date of the application.2 Churches, very small
organizations, and organizations which are essentially subsidiaries of organizations
which have a “group exemption letter” are not subject to these requirements.
IRC § 501(c)(4), (c)(5), (c)(6) and (c)(7). These types of organizations must
file IRS Package 1024, filling out the particular sections relevant to their
organizational type. There is no particular deadline for filing. For these types of
exempt organizations, the recognition of exempt status will date back to the date of
formation of the organization providing that the organization’s activities and purposes
have not changed over time. If the organization has altered its activities or
substantially amended its charter to qualify for exempt status, then the recognition of
exempt status will be effective as of a date determined by the Internal Revenue
Service.
IRC § 527. Political organizations notify either the Federal Election
Commission or the Internal Revenue Service of their formation. Political committees
required to notify the FEC must do so within 10 days of their formation. Those
required to notify the IRS must do so within 24 hours of their formation, using the
IRS web site and Form 8871. The penalty for failure to register with the IRS is that
the organization will be taxed at the maximum corporate tax rate on all gross receipts
(less certain expenses) for the period of the failure.
Reporting Requirements
IRC § 6033 requires every organization exempt under IRC § 501, with gross
income in excess of $25,000, with certain exceptions mainly for churches and
religious organizations, to file an annual return (Form 990). The return is to include
items of gross income, receipts, and disbursements, and such information as the
Secretary may require by regulations or by forms. IRC § 6033(b) adds a list of
specific information which is required to be furnished by IRC § 501(c)(3)
organizations, including
! total contributions and gifts and the names and addresses of all substantial
contributors (gifts in excess of $5,000);
! for 501(c)(3) organizations which have elected a numerical measurement of the
substantiality of their lobbying expenditures: their lobbying expenditures, the
permissible amount of their lobbying expenditures, their grassroots lobbying
expenditures, and the permissible amount of grassroots lobbying expenditures;
! information about transfers to and relationships with other 501(c) or 527
organizations in order to prevent diversion of funds from the organization’s
exempt purpose or misallocation of revenues or expenses; and
2IRC § 508(a).

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CRS-6
! any taxes imposed on the organization or organization manager for excess
expenditures to influence legislation, certain excess lobbying expenditures,
certain political expenditures, or certain excess benefit transactions (i.e.,
transactions where certain insiders realize unwarranted benefits from their
relationship with the exempt organization).
IRC § 6033(f) requires IRC § 501(c)(4) organizations to furnish the information listed
above relating to excess benefit transactions, the taxes paid in connection with such
transactions, and the persons involved those transactions.
Under prior law, 527 organizations with taxable income over $100 were required
to file Form 1120-POL. Public Law 106-230 retained this requirement and, in
addition, required 527 organizations with gross receipts of $25,000 or more to file
Form 1120-POL plus an annual information return [Form 990] with the IRS for
taxable years beginning after June 30, 2000. Under prior law, tax-exempt
organizations with gross receipts of $25,000 or more filed an annual information
return [Form 990] with the IRS, but 527 organizations were not required to do so.
The new law brings 527 organizations with gross receipts of at least $25,000 per year
under the annual information return requirement. In addition to the information that
other exempt organizations supply, 527 organizations will be required to publicly
disclose information about their substantial contributors.
Form 1120-POL is due on the 15th day of the third month following the close of
the taxable year. For a calendar year organization with over $100 of taxable income,
Form 1120-POL is due March 15. This is not a change from prior law. For those 527
organizations required by P.L. 106-230 to file Form 1120-POL because they have
gross receipts of $25,000, but which do not meet the taxable income requirement, the
first Form 1120-POL would be due on March 15, 2002, for calendar year
organizations. For fiscal year organizations with a fiscal year beginning July 1, the
first Form 1120-POL (assuming no taxable income) would be due September 15,
2001.
Form 990 is due on the 15th day of the fifth month after the close of the taxable
year. For calendar year 527 organizations, the first Form 990 will be due on May 15,
2002. For fiscal year 527 organizations, the first Form 990 will be due on the 15th day
of the fifth month after the close of the taxable year. For those whose taxable years
began July 1, 2000 and close June 30, 2001, the first Form 990 would be due on
November 15, 2001.
All exempt organizations described in IRC § 501(c) which conduct business
activities which are unrelated to their exempt purposes have to file a Form 990-T.
The regular corporate income tax, with certain adjustments, is imposed on these
activities. IRC § 511-514.
All exempt organizations which have employees are required to file the usual
employment related tax returns related to income tax withholding, social security and
medicare taxes [Form 941], and income reporting [W-2, W-3, Form 1099], and, in
many instances, unemployment tax reporting [Form 940].

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CRS-7
Public Disclosure of Returns
IRC § 6104 permits public disclosure of returns filed by organizations exempt
under 501(c) and (d). All 501(c) and (d) organizations are required to keep and make
available for public inspection during regular business hours a copy of their three most
recent annual returns and any materials relating to their applications for exempt status.
If an individual makes a request in person to inspect the returns or application, an
inspection copy must be provided immediately. If the request is made in writing, the
organization must respond within 30 days. The organization is permitted to charge
for copying and mailing. If the organization has made its documents widely available,
e.g. published them on a web site, it is not required to respond to individual requests
for inspection. Although exempt organizations disclose the names of their substantial
contributors to the IRS, they are not required to disclose the names and addresses of
contributors to the general public. IRC § 6104(d)(3).
Once they begin filing Form 990, political organizations will be subject to these
public disclosure requirements. Unlike other exempt organizations, political
organizations will be required to disclose the names and address of their substantial
contributors.
The penalty imposed on an organization for failing to file the annual information
return or failing to include the correct information on the return is $20 per day for
each day the return is not filed, up to the lesser of $10,000 or 5 percent of the
organization’s gross receipts for the year. For organizations with gross receipts over
$1,000,000, the daily penalty is $100, with a maximum penalty of $50,000. For
failing to comply with the public inspection requirements in IRC § 6104(d), the
organization is charged $20 per day for each day the failure continues, up to a
maximum of $10,000 per return. IRC § 6652(c)(1).
Finally, some political committees are required to file periodic disclosures of
contributions and expenditures with the IRS. The disclosure requirements do not
apply to political committees required to make similar reports to the FEC; state or
local committees of political parties; political committees of state or local candidates;
organizations which anticipate having gross receipts of less than $25,000 per year;
organizations exempt from tax under other sections of the Code; or to “expenditures”
which are “independent expenditures” under FECA.
Political organizations which are required to disclose must report each
expenditure of $500 or more, including the name and address and, if applicable,
occupation of the person or organization to whom the expenditure was made; and
each contribution of $200 or more, including the name, address, and, if applicable,
occupation and employer of all contributors. Contracts to spend or contribute are
treated as contributions or expenditures. The statute applies to expenditures made and
contributions received after July 1, 2000. The IRS has issued Form 8872, Political
Organization Report of Contributions and Expenditures, for use in complying with
the periodic reporting requirement.
Political committees reporting to the FEC make similar periodic disclosures of
contributions and expenditures in excess of $200, along with similar identifying
information.

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CRS-8
Employment tax returns are not subject to public disclosure.
Requirements for Contributors

Generally, there are no particular requirements placed on contributors to
501(c)(3) organizations. If a contributor wants to take a tax deduction for a
contribution of $250 or more, then the contributor needs to obtain “contemporaneous
written acknowledgment of the contribution” by the recipient organization, which
includes a description of the contribution and a good faith estimate of the value of any
property contributed, and a statement about whether anything of value was given in
return for the contribution. No deduction is allowed if a contribution is intended to
avoid other tax-law restrictions on lobbying activities.
Most of the contribution requirements fall on the recipient organizations. For
example, 501(c)(3) organizations must furnish the acknowledgment to contributors
to their organizations. They must obtain the names and addresses of substantial
contributors. Political organizations must obtain the names, addresses, occupations,
and names of the employers, of all contributors to their organizations. Trade
associations and 501(c)(4) organizations whose members might be deducting their
dues to the organization have to notify members if a portion of their dues deduction
is not tax deductible because of the lobbying activities of the organization.
The information contained in this report is summarized in the following chart.
Characteristics of and Reporting Requirements for Selected Tax-
Exempt Organizations
IRC section
501(c)(3)
501(c)(4)
501(c)(5)
501(c)(6)
527
short-hand
charity
social welfare
labor union
trade
political
name
organization
association
organization
charitable
yes
no
no
no
no
contribution
deduction
business
maybe
maybe (with
employee
usually (with
no
deduction for
reduction for
business
reduction for
dues
lobbying
expense (with
lobbying
expenses)
reduction for
expenses)
lobbying
expenses)

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CRS-9
taxed on
unrelated
unrelated
unrelated
unrelated
investment
business
business
business
business
income; other
income;
income;
income;
income;
non-political
political
political
political
political
income; all
expenditures;
expenditures;
expenditures;
expenditures;
expenditures
excess
excess benefit
proxy tax on
proxy tax on
for non-
lobbying
transactions;
lobbying
lobbying
political
expenditures;
proxy tax on
expenditures;
expenditures;
purposes;
excess benefit
lobbying
withholding
withholding
withholding
transactions;
expenditures
taxes on
taxes on
taxes on
withholding
withholding
employees
employees
employees
taxes on
taxes on
employees
employees
permitted to
non-
yes
yes
yes
to influence
lobby
substantial
the selection
amount
of a candidate
permitted to
no, but may
yes, but FECA
yes, but
yes, but FECA
yes
engage in
educate public
may prohibit
FECA may
may prohibit
campaign
about issues
certain
prohibit
certain
activities
activities
certain
activities
activities
application
Package 1023
Package 1024
Package 1024
Package 1024
Form 8871,
for exempt
unless exempt
status
or registered
with FEC
reports to IRS
Form 990 or
Form 990
Form 990
Form 990
Form 8872

Form 990PF
contains:
contains:
contains:
(unless filing
(not including
contains:
- name,
- name,
- name,
with FEC or
employment
- name,
- address,
- address,
- address,
otherwise
- revenue,
- revenue,
- revenue,
returns such
- address,
exempt);
- revenue,
- expenses,
- expenses,
- expenses,
as Forms 940,
- expenses,
- total assets
- total assets,
- total assets,
contains:
941, W-2, W-
- total assets,
- list of officers,
- list of officers,
- list of officers,
- name,
3, 1099, and
- functional
directors, key
directors, key
directors, key
- address,
employees,
employees,
employees,
- custodian of
the business
expenses,
- program
- functional
- functional
- functional
records,
income return
accomplishments.
expenses,
expenses,
expenses,
- contributors’
990-T)
- list of officers,
- program
- program
- program
names, addresses,
directors, key
accomplishments,
accomplishments,
accomplishments,
amounts given,
employees,
- compensation of
- compensation of
- compensation of
- itemized
- compensation of
highest paid
highest paid
highest paid
expenditures
highest paid
employees,
employees,
employees,
employees,
- compensation of
- compensation of
- compensation of
Form 990
- compensation of
highest paid
highest paid
highest paid
highest paid
independent
independent
independent
presumably the
independent
contractors
contractors
contractors
same as other
contractors,
990s, but still in
- major
draft form
contributors,
- relationships with
other exempt
Form 1120-
organizations
POL
contains:
- name,
- address
- income
- expenses
- tax

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public
yes, but major
yes
yes
yes
yes; major
disclosure of
contributors
contributors
Form 990
(contributions
will be
over $5,000)
disclosed
are not
disclosed
The forms are available on the IRS web site:
http://www.irs.gov/forms_pubs/forms.html

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