One question we are often asked here at Civitas is, “Can our corporation be a (c)(3)?” It’s not a surprising question, given that a (c)(3) corporation is the only type of nonprofit to which benefactors can make tax-free donations. That makes it both the most desirable – and the most difficult – status to obtain. And in recent years as scandal after scandal has unfolded, the IRS has grown increasingly uncharitable in granting (c)(3) status.
While we in the BID world are accustomed to working with the government, nothing compares to seeking exempt status from the IRS. The IRS has designated 29 different types of (c)-something corporations, but there are only two that usually apply to BIDs. Those two are (c)(4) organizations, also known as “social welfare organizations” and (c)(6) organizations, or “business leagues.”
The c(4) designation is usually the most appropriate for a traditional BID. A (c)(4) is a “civic league… operated exclusively for the promotion of social welfare.” Most BID activities, especially clean and safe programs, fall into the IRS’ definition of social welfare activities.
Some BIDs can also fall into the (c)(6) designation, which applies to “business leagues, chambers of commerce… boards of trade” and other similar organizations. This designation works well for tourism districts and BIDs focused on marketing and promotions.
While most BIDs fit well into either (c)(4) or (c)(6) designations, neither offers the tax-free donation benefits of a (c)(3). And, many BIDs also desire a (c)(3) as some grants require that status. The test for obtaining exempt status, however, is the corporation’s activities – its functions must fit into stringent standards. To qualify for (c)(3) status, a corporation must be “organized and operated exclusively for purposes that are charitable, religious, scientific, testing for public safety, literary, educational, fostering amateur sports competition, or preventing cruelty to children or animals.”
While these standards seem broad on the surface, the IRS has developed particular requirements for each of these purposes, especially “charitable.” To further compound the issue for BIDs, the IRS in 1975 ruled that “a nonprofit organization with membership limited to the residents and business operators within a city block and formed to preserve and beautify the public areas in the block, thereby benefitting the community as a whole as well as enhancing the members’ property rights, will not qualify for exemption under section 501(c)(3) of Code but may qualify under Section 501(c)(4).” Although BIDs usually cover more than one block, the IRS has used this ruling to deny 501(c)(3) status when considering applications from BID corporations.
What’s a BID to do when your activities don’t meet the (c)(3) test, but you still need grants? The best solution we’ve found is to form an affiliated (c)(3) organization. That organization can be structured to meet the organization and operational tests under section (c)(3), and can seek grants. This structure has been implemented successfully in many cities, and continues to be a popular choice for BIDs.
(4/9/2016)
