Title 26
SECTION 56.4911-4
56.4911-4 Exempt purpose expenditures.
§ 56.4911-4 Exempt purpose expenditures.(a) Application. This section provides rules under section 4911(e) for determining an electing public charity's “exempt purpose expenditures” for a taxable year for purposes of section 4911(c)(2) and § 56.4911-1(c)(2). Those two sections generally define an electing public charity's lobbying limit (lobbying nontaxable amount) as a sliding scale percentage of the organization's exempt purpose expenditures. In determining an electing public charity's exempt purpose expenditures, no expenditure shall be counted twice by an organization.
(b) Included expenditures. Amounts paid or incurred by an organization that are exempt purpose expenditures include -
(1) Amounts paid or incurred to accomplish a purpose enumerated in section 170(c)(2)(B), including (but not limited to) the amount of any transfer made by the organization (other than a transfer described in paragraph (e) of this section) to another organization to accomplish the transferor's exempt purposes, and including amounts expended by an organization out of transfers (other than a transfer described in paragraph (e) of this section) for which the organization is the transferee,
(2) Amounts paid or incurred as current or deferred compensation for an employee's services for a purpose enumerated in section 170(c)(2)(B),
(3) The allocable portion of administrative overhead, and other general expenditures attributable to the accomplishment of a purpose enumerated in section 170(c)(2)(B),
(4) Lobbying expenditures (as defined in § 56.4911-2(a)) whether or not for a purpose enumerated in section 170(c)(2)(B),
(5) Amounts paid or incurred for activities described in § 56.4911-2(c),
(6) Amounts paid or incurred for activities described in § 56.4811-5 that are not lobbying expenditures,
(7) A reasonable allowance for exhaustion, wear and tear, obsolescence or amortization, of assets to the extent used for one or more of the purposes described in paragraphs (b)(1) through (6) of this section, computed on a straight-line basis (for this purpose, an allowance for depreciation will be treated as reasonable if based on a useful life that would satisfy section 321(k)(3)(A) as in effect on January 1, 1985), and
(8) Fundraising expenditures (but see section 4911(e)(1)(C) and paragraphs (c)(3) and (4) of this section.)
(c) Excluded expenditures. Notwithstanding paragraph (b) of this section, exempt purpose expenditures do not include -
(1) Amounts paid or incurred that are neither expenditures to accomplish a purpose enumerated in section 170(c)(2)(B), lobbying expenditures (as defined in § 56.4911-2(a)), nor expenditures described in paragraph (b)(5), (6) or (8) of this section,
(2) The amounts of any transfer described in paragraph (e) of this section,
(3) Amounts paid to or incurred for a separate fundraising unit (as defined in paragraph (f)(2) of this section) of an organization or of an affiliated organization (see § 56.4911-7(a)),
(4) Amounts paid to or incurred for any person not an employee, or any organization not an affiliated organization, if paid or incurred primarily for fundraising, but only if such person or organization engages in fundraising, fundraising counselling or the provision of similar advice or services,
(5) Amounts paid or incurred that are properly chargeable to a capital account, determined in accordance with the principles that apply under section 263 or, as applicable, section 263A, with respect to an unrelated trade or business,
(6) Amounts paid or incurred for a tax that is not imposed in connection with the organization's efforts to accomplish a purpose described in section 170(c)(2)(B), such as taxes imposed under sections 511(a)(1) and 4911(a), and
(7) Amounts paid or incurred for the production of income. For purposes of this section, amounts are paid or incurred for the production of income if they are paid or incurred for a purpose or activity that is not substantially related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exercise or performance by the organization of its charitable, educational or other purpose or function constituting the basis for its exemption under section 501. For example, the costs of managing an endowment are amounts that are paid or incurred for the production of income and are thus not exempt purpose expenditures. Fundraising expenditures are not, for purposes of this section, amounts that are paid or incurred for the production of income. Instead, the determination of whether fundraising costs are exempt purpose expenditures must be made with reference to section 4911(e)(1)(C) and paragraphs (b)(8), (c)(3) and (c)(4) of this section.
(d) Certain transfers treated as exempt purpose expenditures - (1) An organization's transfer will be treated as an exempt purpose expenditure under paragraph (b)(1) of this section if it is -
(i) Described in either paragraph (d)(2) or (d)(3) of this section, and
(ii) Not described in paragraph (e) of this section.
(2) A transfer is described in this paragraph (d)(2) if it is made to an organization described in section 501(c)(3) in furtherance of the transferor's exempt purposes and is not earmarked for any purpose other than a purpose described in section 170(c)(2)(B). Thus, a payment of dues by a local or state organization to, respectively, a state or national organization that is described in section 501(c)(3) is considered an exempt purpose expenditure of the transferor to the extent it is not otherwise earmarked.
(3) A transfer is described in this paragraph (d)(3) if it is a controlled grant (as defined in paragraph (f)(3) of this section), but only to the extent of the amounts that are paid or incurred by the transferee that would be exempt purpose expenditures if paid or incurred by the transferor.
(e) Transfers not exempt purpose expenditures - (1) An organization's transfer is described in this paragraph (e) if it is described in one of paragraphs (e)(2) through (e)(4).
(2) A transfer is described in this paragraph (e)(2) if it is made to a member of any affiliated group (as defined in § 56.4911-7(e)) of which the transferor is a member.
(3) A transfer is described in this paragraph (e)(3) if the Commissioner determines that the transfer artificially inflates the amount of the transferor's or transferee's exempt purpose expenditures. In general, the Commissioner will make that determination if a substantial purpose of a transfer is to inflate those exempt purpose expenditures. A transfer described in this paragraph will not be considered an exempt purpose expenditure of the transferor, but will be an exempt purpose expenditure of the transferee to the extent that the transferee expends the transfer in the active conduct of its charitable activities or attempts to influence legislation. Standards similar to those found in § 53.4942(b)-1(b) may be applied in determining whether the transferee has expended amounts in the “active conduct” of its charitable activities or attempts to influence legislation.
(4) A transfer is described in this paragraph (e)(4) if it is not a controlled grant and is made to an organization not described in section 501(c)(3) that does not attempt to influence legislation.
(f) Definitions - (1) For purposes of paragraph (c) of this section, “fundraising” includes -
(i) Soliciting dues or contributions from members of the organization, from persons whose dues are in arrears, or from the general public,
(ii) Soliciting grants from businesses or other organizations, including organizations described in section 501(c)(3), or
(iii) Soliciting grants from a governmental unit referred to in section 170(c)(1), or any agency or instrumentality thereof.
(2) For purposes of paragraph (c) of this section, a separate fundraising unit of any organization must consist of either two or more individuals a majority of whose time is spent on fundraising for the organization, or any separate accounting unit of the organization that is devoted to fundraising. For purposes of paragraph (c) of this section, amounts paid to or incurred for a separate fundraising unit include all amounts incurred for the creation, production, copying, and distribution of the fundraising portion of a separate fundraising unit's communication. (For example, an electing public charity that has a separate fundraising unit may not count the cost of postage for a separate fundraising unit's communication as an exempt purpose expenditure even though, under the electing public charity's accounting system, that cost is attributable to the mailroom rather than to the separate fundraising unit.)
(3) For purposes of this section, a “controlled grant” is a grant made by an eligible organization described in § 1.501(h)-2(b) to an organization not described in section 501(c)(3) that meets the following requirements:
(i) The donor limits the grant to a specific project of the recipient that is in furtherance of the donor's (nonlobbying) exempt purposes; and
(ii) The donor maintains records to establish that the grant is used in furtherance of the donor's (nonlobbying) exempt purposes.
(4) A transfer, including a grant or payment of dues, is “earmarked” for a specific purpose -
(i) To the extent that the transferor directs the transferee to add the amount transferred to a fund established to accomplish the purpose, or
(ii) To the extent of the amount transferred or, if less, the amount agreed upon to the expended to accomplish the purpose, if there exists an agreement, oral or written, whereby the transferor may cause the transferee to expend amounts to accomplish the purpose or whereby the transferee agrees to expend an amount to accomplish the purpose.
(g) Example. The provisions of this section are illustrated by the following example:
Example.Organization X is an exempt organization described in section 501(c)(3) that is organized for the purpose of rehabilitating alcoholics. X elected to be subject to the provisions of section 501(h) in 1981. For 1981, X had the following expenditures that are included in its exempt purpose expenditures to the extent indicated.| Description | Total (dollars) | Includible (dollars) |
|---|---|---|
| Cost of real estate purchased for use as half-way house for alcoholics, attributable to the following: | ||
| Land | 30,000 | |
| Building | 200,000 | |
| Depreciation 40-year useful life | 5,000 | |
| Expenses of operating its half-way house | 170,000 | 170,000 |
| Administrative expenses of the organization allocated to the operation of its half-way house | 95,000 | 95,000 |
| Depreciation and allowances for equipment | 10,000 | 10,000 |
| Expenses related to attempts to influence legislation (lobbying expenditures) | 40,000 | 40,000 |
| Amounts paid to Z by the Organization for fundraising | 35,000 | |
| Total | 580,000 | 320,000 |
For 1981, X's exempt purpose expenditures total $320,000. The $35,000 paid by X to Z for fundraising is not included in the exempt purpose expenditures total. All lobbying expenses are included in full. Only depreciation computed on a straight-line basis is included in exempt purpose expenditures.