A Tale of Two Tax-Exempt Entities: Unraveling the Mystery of 501(c)(3) and 509(a)

Once upon a time, in the mystical land of the Internal Revenue Code, there lived two noble creatures: the 501(c)(3) and the 509(a). Both were benevolent beings, dedicated to serving the greater good, but they had their differences. Let's embark on a journey to explore the fascinating world of these tax-exempt entities and uncover the secrets that set them apart.

The 501(c)(3) is a well-known creature in the realm of charitable organizations. It is a public charity, beloved by many for its dedication to the betterment of society. To be classified as a 501(c)(3), an organization must meet the requirements of one of the following sub-categories:

1. Publicly supported organizations (Sec. 170(b)(1)(A)(vi)): These are the most common type of 501(c)(3) and include organizations like churches, schools, and hospitals. They rely on donations from the general public and government sources to support their noble missions.
2. Supporting organizations (Sec. 509(a)(3)): These are the unsung heroes of the 501(c)(3) world, providing support and assistance to other public charities. They may not be as well-known as their publicly supported counterparts, but their work is no less vital.
3. Publicly supported organizations with a 509(a)(2) designation: These are a special breed of 501(c)(3) that can use mission-related income from sales of goods and services, in addition to donations, to determine public support. Think of them as the entrepreneurial spirits of the 501(c)(3) family.

Now, let's turn our attention to the enigmatic 509(a). This creature is a private foundation, often misunderstood and shrouded in mystery. In fact, private foundations are often the default category for organizations that don't meet one of the public charity tests under 509(a).

Private foundations can be a good vehicle for setting up a nonprofit when the source of revenue is limited and the founders want to maintain control. However, private foundations do have some additional requirements and restrictions. For example, they are subject to a 5% payout rule and are prohibited from having "excess holdings." They are also subject to a 2% tax on net investment income, which can be reduced to 1% if the payout rule is met. In short, private foundations are the enigmatic guardians of the tax-exempt realm, with their own unique set of powers and responsibilities.

In conclusion, while both the 501(c)(3) and the 509(a) are tax-exempt entities dedicated to serving the greater good, they have their differences. The 501(c)(3) is a public charity, beloved by many for its dedication to the betterment of society, while the 509(a) is a private foundation, often misunderstood but no less vital in its role in the tax-exempt world.

So, the next time you come across these noble creatures in your travels, remember their unique qualities and the important roles they play in the enchanting realm of the Internal Revenue Code.