Nonprofit instructions for Form 1023 Part VIII – Specific Activities – Fundraising, Gambling, Influencing Legislation
Form 1023 Part VIII – Specific Activities is a part of the longest section of the application and the trickiest one as well. When the IRS ask you to be specific, just buckle up. What I will explain in this page will relate to almost 95% of charities out there, I will however leave out schools, hospitals, governmental entities, child care services, economic developers and other odd entities. I have provided examples of answers which should clarify the nature of the question.
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Form 1023 Part VIII, Line 1a) Do you support or oppose candidates in political campaigns in any way?
Answer NO to support and opposition of candidates. You cannot do that. The term “political” used by the IRS means only opposing and supporting candidate for public offices; Senate, Congress, the White House, etc. It means participating or intervening in any political campaign on behalf of, or in opposition to candidates for public office. This doesn’t mean that you cannot criticize the existing governor, president or the Joint Chiefs of Staff. I see many nonprofit organizations who go silent on matters that directly affects them and the public, and they do nothing for the fear of IRS penalizing them. That’s your freedom of speech, and it is your civil duty to your country to defend it when and where you see fit, so don’t be scared to exercise it.
Form 1023 Part VIII, Line 2a and 2b. Do you attempt to influence legislation?
To answer this section, first you need to understand what legislation actually is.
For this purpose, legislation includes action by Congress, any state legislature, any local council or similar governing body, with respect to acts, bills, resolutions or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment or similar procedure. It does not include actions by executive, judicial or administrative bodies.
School boards, housing authorities, sewer and water districts, zoning boards and other similar federal, state or local special purpose bodies, whether elective or appointive, are considered administrative bodies.
Now influencing means either directly or indirectly (Grass Roots) affecting the outcome of a legislation process. Direct lobbying refers to communications with members or employees of a legislative body, or with any other government official or employee who may participate in formulating the legislation, if the principal purpose of the communication is to influence legislation. Indirect or Grass roots lobbying refers to efforts to influence legislation through an attempt to affect the opinions of the general public or any segment of the general public.
Influencing legislation and lobbying are not illegal, but you have to keep it whitin permissible limits. In fact, a non-profit organization is nothing without political power to further its agenda, so don’t shoot yourself in the foot by answering no. You can either choose to make the “election”, by filing the simple one-page Form 5768 with the IRS (if you are formed to support another charity, this option is not available to you), or you can opt for “substantiality” test. If you opt for substantiality test, 1 to 5 percent of your total revenue should keep you on the safe side. You can answer like this:
We have not yet spent any volunteer time or any part of our budget to influence legislation. Our legislative activities will always be “insubstantial” and less than 2% of our volunteer time and expenses, if we decide to do so. Currently we have no plans or program in place to undertake such activities.
Here’s an Excellent article by Jeffrey S. Tenenbaum on lobbying which can guide you to make the right choice.
Form 1023 Part VIII, Line 3a. Do you or will you operate Bingo or gaming activities?
Be specific when describing your gaming activities. A non-profit organization is entitled to hold gambling events, but most likely the income will be an unrelated business income (Bingo excluded). Don’t say no to gambling, it’s a great way of fundraising. If you are not sure what to say, here is an example. If you are conducting raffles and such on your site, you need to make that clear now:
We will not operate Bingo but will utilize raffle games in our annual banquet fundraisers or at times on the corporation’s website.
An example of this activity would be offering 50/50 raffle games at our fundraising banquets and auctions. The participants will buy tickets of low value (e.g. $1) and with each ticket; they would have one chance of winning half of the pot at the end of the event. The other half of the pot will go towards the fundraising goal. Participants will generally donate their winnings back to the pot to be used toward the event’s goal.
Another example of games would be holding contests on our website to raise awareness for our mission. One type of contest would require the participants to write an essay regarding Malnutrition and Hunger to be considered and with that, would have the chance of winning a prize (e.g. $25 gift card to a sponsoring restaurant) at the end of the contest.
There will be no compensation of any sort for volunteers who carry on or help with these activities and all income and expenses will be documented as they occur.
Form 1023, Part VIII, Line 3c. List the states and local jurisdictions, including Indian Reservations, in which you conduct or will conduct gaming or bingo.
Here’s an example answer:
In general, we anticipate holding our banquets in State of Montana and so the gaming activities related to such events. Our web contests will be conducted on our website which resides on a server in Montana. If the event would be held outside of the state of Montana, we will observe and comply with all applicable Federal and State laws in carrying on such activities and that holds true for all 50 states of the United States.
Form 1023, Part VIII, Line 4a. Do you or will you undertake fundraising? If “Yes,” check all the fundraising programs you do or will conduct. Attach a description of each fundraising program.
Of course you will be fundraising. List everything that come to mind and be specific for each item. But before you go crazy on listing all the cute thoughts you have about fundraising, stop everything and read the content of this page from top to bottom, and then bottom to top. This document is the complete extract from the fundraising section of the IRS procedure and guideline used by federal agents to evaluate your tax exemption application( it is the manual that IRS agents use to evaluate your application) . This text is invaluable because it pin points what they are looking for exactly in your application. It is also of utmost importance that exempt organizations read this manual and familiarize themselves with the laws and limitation involved in fundraising activities, which non-compliance to these laws can result in revocation of the exempt status of the organization.
Once you are done reading that document, you can see the examples below:
“Yes” to the following:
Mail solicitations, email solicitation, personal solicitation, foundation grant solicitations, vehicles, accept donations on your website and other.
We will be sending fundraising letters to businesses and individuals at least annually to request that they donate funds to support Transcontinental Humanitarian Corp. or to be cordially invited to attend our annual fundraising banquet and auction.
We will be utilizing internet solicitation methods, including but not limited to email, social media contacts and other mediums.
We will be fundraising by approaching a broad spectrum of entities and individuals in person to share the mission of Transcontinental Humanitarian Corp. and seek public support.
Foundation Grant Solicitations
We will be applying for private or public foundation grants. We have no current arrangement for this method at this time.
Vehicle, Boat, Plane, or Similar Donations
We do not anticipate donation of boat or planes, but in case of donated vehicle ( such as automobile) we accept this kind of donations with the intent of using the vehicles for the corporation’s mission. The donated vehicles will not be use for any other activities other than those that will further our status.
Accept Donations on Your Website
We do accept donations on our website. This function will be accessible through “donate” tab on the website of the corporation. The payments are processed by PayPal, Inc. and are directed to the corporation’s bank account.
Slideshows and Lectures. We will be accepting donations during our lectures and slideshow program and expeditions. (Please see the Narrative of our Activities for further information regarding this activity.)
Small Scale Fundraising Events. At times we will be holding road-side small-scale fundraising events. The work performed for such events shall be “Volunteer Labor” and without compensation. The material used for such events shall only come from the gifts or contributed products. Volunteer charity lemonade or cookie sale would be an example.
Banquet and Auctions. We will also be holding at least one fundraising banquet and auction annually. All auction items will be from the gifts or contributed merchandise and all the work performed for such events shall be volunteer labor and without compensation.
Web-related Donations. We may make arrangements with commercial organizations for donations based on sales referrals. For example, some web sites (such as Amazon.com) allow nonprofit organizations to receive donations for sales which were referred from their web site. Some local businesses in our area might also make such offers to non-profit organizations. We would only consider this for items and services related to our organization’s activities and topics (e.g. books on Malnutrition and Hunger). We currently have no specific plans or contracts, but it’s prudent to mention the possibility.
Sale of Merchandise. We will have shirts, hats, mugs and similar items available through our website which will bear our logo and mission statement. We are only considering the sale of donated and contributed products at this time. The revenue from this activity is anticipated to be insubstantial and we have no current arrangement or contract for this.
Form 1023, Part VIII, Line 4c. Do you or will you engage in fundraising activities for other organizations?
If you fundraise for other organizations be very specific and explain why you engage in such activity. As a nonprofit organization yourself, you should raise funds for your own programs and not for others. If you do not fundraise for other organizations, answer NO and clarify it as so:
No. We do not fundraise for any specific organization and Transcontinental Humanitarian Corp. is not organized solely to contribute or fund-raise for any specific entity. However, at the discretion of the board of directors we may at times, choose to contribute to other 501 (c)(3) organizations which share a similar mission and only if the contributions further our exempt status. (Please see the Narrative of our Activities for more information regarding how we contribute to other organizations.)
Form 1023, Part VIII, Line 4e. Do you or will you maintain separate accounts for any contributor under which the contributor has the right to advise on the use or distribution of funds?
Answer yes to this line, since some donors may ask you for separate account and they may have very specific requests. Answer it as so:
We do not anticipate soliciting contributions where the donor has the right to advise how to use or distribute the funds. However, we will comply with and recognize special requests, notes, terms and conditions which are specified by contributors and will maintain a separate account for that specific donation. An example of this rule is foundation grants. There may be situations whereby we solicit a foundation grant for a specific purpose; (e.g. education) and in those cases the grant, if awarded, will probably have restrictions on the activities it can support. Honoring those terms is inherent in the grant application process.
Form 1023, Part VIII, Line 4d. List all states and local jurisdictions in which you conduct fundraising. For each state or local jurisdiction listed, specify whether you fundraise for your own organization, you fundraise for another organization, or another organization fundraises for you.
This really depends on the size, budget and the mission of your organization. If you are a community organization giving services to one city or state, just name your State and be done with it. But if you serve a much broader class, make it all 50 States. You can answer like so:
Transcontinental Humanitarian Corp. is primarily based in the state of Montana, however, we will engage in fundraising in all 50 states of the United States whether via internet solicitation, mail-outs, banquets or activities such as our ambassador program or slide-shows and presentations. For more information about these activities please refer to the Narrative of Our Activities.
We will not raise funds for other organizations; No other organization will raise funds for us and we will only fundraise for ourselves. This rule holds true for all 50 States of the United States.
Form 1023, Part VIII, Line 11. Do you or will you accept contributions of: real property; conservation easements; closely held securities; intellectual property such as patents, trademarks, and copyrights; works of music or art; licenses; royalties; automobiles, boats, planes, or other vehicles; or collectibles of any type?
You want to answer yes to this question, as someone might like to donate a car to your organization. You can clarify your answer like the following:
We may accept contributions of: real property, closely held securities, intellectual property such as patents, trademarks, and copyrights, works of music or art, licenses, royalties, automobiles, boats, planes, or other vehicles, or collectibles of any type if said contributions further the purposes of this corporation. We will not accept donations if any conditions imposed by the donor on the contribution limit the corporation’s ability to achieve its purposes or force this corporation to conduct activities that are not in furtherance of 501(c)(3) purposes. We will ensure that donations are accepted in accordance with 501(c)(3) regulations and we will properly determine fair market value according to IRS Publication 561. We currently have no specific plans, but it’s prudent to mention the possibility.
Form 1023 Part VIII, Line 12a. Do you or will you operate in a foreign country or countries?
This section is for those who will be operating in foreign countries. Since the 9/11, the IRS has gone crazy over distribution of funds outside the United States. If your organization is formed to support a foreign charity, you are 99% doomed. Also for operating outside of the United States, you should show exactly what you mean by “operation” and when it comes to clarification of this section, the more is always more. This section should be carefully answered.
Answers to Form 1023, Part VIII, Line 12 a, b, c, and d are as follow:
It is the mission, duty and purpose of Transcontinental Humanitarian Corp. to address, educate, coordinate and provide aid and relief to eradicate chronic malnutrition and hunger regardless of its geographical position. Therefore Transcontinental Humanitarian Corp. may operate in any country and any region in any country around the world where we may fulfill our mission and further our exempt status. Transcontinental Humanitarian Corp. will obtain any required permits or permissions from the respective governments of any country we may operate in as required by law. This includes complying with the sanctions, embargoes, and other restrictions imposed by the United Sates government to such countries. For detailed information regarding our foreign activities please refer to the section of our Narrative of our Activities titled: Foreign activities. We may work closely with other non-profit and non-governmental organizations who are active participants in the same field. This will allow us to further our exempt status by providing the services and aid in a timely and effective manner.
Note the rulings; this is how you make your case:
(Note: Working closely with other organizations does not constitute a “Close Connection” as it is defined on page 11, line 15 of the IRS publication of instruction for form 1023. It merely refers to exchange of information, non-financial data, suggestions and advices on locations and ways to address and direct the focus based on up-to-date information.)
Please Note: Rev. Rul. 71-460, 1971-2 C.B. 231
- “A domestic corporation that conducts a part or all of its charitable activities in a foreign country is not precluded from exemption under section 501(c)(3) of the Code. A domestic corporation that is otherwise exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954 carries on part of its charitable activities in foreign countries. Held, since its activities are charitable within the meaning of section 501(c)(3) of the Code when carried on within the United States, the conduct of such activities elsewhere does not preclude the organization from qualifying as an exempt organization under that section.
- The same conclusion applies if all of its charitable activities are carried on in foreign countries. With respect to deductibility of contributions to the organization under section 170 of the Code, see Revenue Ruling 63-252, C.B. 1963-2, 101 and Revenue Ruling 66-79, C.B. 1966-1, 48.”
Form 1023 Part VIII, Line 13a. Do you or will you make grants, loans, or other distributions to organization(s)?
This is really organization specific. You can answer YES if you do, or NO, if you don’t. Either way, be specific about your selection and approval methods if you do make grants, loans, or other distributions to other organizations. If you do one of the three, answer it like so:
We do not offer or provide grants or loans to other organizations. Distributions to other organizations will be documented with copies of receipts, letters or other relevant documents. According to our bylaws, any distribution would have to be approved by the board of directors. The method of approval would be documented. Distributions to organizations have not yet occurred since the incorporation.
Please Note: Rev. Rul. 68-489, 1968-2 C.B. 210 (More rulings)
- An organization will not jeopardize its exemption under section 501(c)(3) of the Code, even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for section 501(c)(3) purposes.
- An organization exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954 distributed part of its funds to organizations not themselves exempt under that provision. The exempt organization ensured use of the funds for section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes. It retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for section 501(c)(3) purposes. Held, the distributions did not jeopardize the organization’s exemption under section 501(c)(3) of the Code.
Form 1023 Part VIII, Line 13b. Describe how your grants, loans, or other distributions to organizations further your exempt purposes.
This question is the followup of the last question. If you answered YES, you need to list real-life scenarios to clarify the situation. One thing that you need to be very careful about is that your organization should always be in control of the loaned, granted, or distributed funds. You may answer like the following:
We do not offer or provide loans or grants to other organizations. Our contributions to other organizations will only include funds necessary to carry on our mission as it has been described in the Narrative of our Activities. These contributions would be funds donated to other organizations which are active in the field and are capable of addressing the issues of chronic malnutrition, hunger, or disaster relief aid in a more timely and effective way than Transcontinental Humanitarian Corp. would be able to at that given time. The board of directors will conduct due diligence and maintain control of any funds contributed to any organizations regardless of their exempt status and will comply with all applicable laws and guidelines to further our exempt status.
Form 1023 Part VIII, Line 14a. Do you or will you make grants, loans, or other distributions to foreign organizations?
This is same as above, but needs more convincing that your funds don’t end up in North Korea or in hands of terrorists. Be very, very, very specific here. This is an example:
We do not offer or provide grants or loans to any foreign or domestic organizations. If we decide that a contribution or distribution is necessary to fulfill our mission and our duty to further our exempt status, we will contribute at the discretion of the board of directors to foreign organizations. An example would be contributing to a health institution that is providing treatment for chronic malnutrition. If we decide to contribute to such an institution, we will stipulate how the funds shall be used and will require the recipient to provide us with detailed records and financial proof of how the funds were utilized.
Although adherence and compliance with the US Department of the Treasury’s publication the “Voluntary Best Practice for US. Based Charities” is not mandatory, we the directors of Transcontinental Humanitarian Corp. willfully and voluntarily recognize and put to practice these guidelines and suggestions to reduce, develop, re-evaluate and strengthen a risk-based approach to guard against the threat of diversion of charitable funds or exploitation of charitable activity by terrorist organizations and their support networks.
We also comply and put to practice the federal guidelines, suggestion, laws and limitation set forth by pre-existing U.S. legal requirements related to combating terrorist financing, which include, but are not limited to, various sanctions programs administered by the Office of Foreign Assets Control (OFAC) in regard to our foreign activities.
Form 1023 Part VIII, Line 14b. Provide the name of each foreign organization, the country and regions within a country in which each foreign organization operates, and describe any relationship you have with each foreign organization.
Again, you should be specific in explaining your foreign activities. If you think you explained it enough, add two more sentences to it to be on the safe side. Example answer:
At this time Transcontinental Humanitarian Corp. has no relationship with any foreign organizations nor are there any current plans in progress to establish such relationships. Therefore, we cannot list any countries or regions at this time. That is not to say that it is not our intent to possibly establish a relationship with a foreign organization in the future but specific organizations and countries have not been identified at this time. Should there be any attempts to establish relationships in the future, Transcontinental Humanitarian Corp. will act with due diligence and in full accordance of any laws and requirements governing this corporation.
Form 1023, Part VIII, Line 14c. Does any foreign organization listed in line 14b accept contributions earmarked for a specific country or specific organization?
Answer NO earmarking and explain it:
As mentioned above, we have no relationship with any foreign organizations, hence there are no organizations to list from line 14b. Furthermore, if we were to contribute to any foreign organizations in the future, we would not contribute to any organizations that specify, earmark or require that any part of our contributions be out of our control or in any way to be directed to any other organization other than the recipient(s) or organization(s) originally selected by Transcontinental Humanitarian Corp. We will maintain full control of the contributed funds at all times with records and receipts, and if available, with supervision of our ambassadors in the field.
Form 1023 Part VIII, Line 14d. Do your contributors know that you have ultimate authority to use contributions made to you at your discretion for purposes consistent with your exempt purposes?
This is a great question and many thanks to the IRS for asking it. You should be very transparent on where, when, and how your funds are going to be spent, and the general public needs to know this information at the time of making the donation. Use your website, your donation forms, and any other medium you have at your disposal to make it very clear to the donor ahead of time. Example answer:
It is very clear to our contributors and especially the public how we operate, direct funds and the nature of programs. The donation page of our website lists where the donations go and for what purpose. For contributions other than credit cards, we have a donation form available which every contributor is required to fill and it specifically points out our mission, goals and functions. A copy of this form is included in with this attachment for your consideration.
Form 1023 Part VIII, Line 14e. Do you or will you make pre-grant inquiries about the recipient organization?
This a perfect example of answering this question:
We do not offer or provide grants to any individuals or organizations. But for any contributions made by Transcontinental Humanitarian Corp. to any organization, we take into consideration the tax-exempt status, overall financial standing of the recipient and we inquire about:
- The recipient’s name in English, in the language of origin, and any acronym or other names used to identify the recipient
- The jurisdictions in which the recipient maintains a physical presence;
- Any reasonably available historical information about the recipient that assures us of the recipient’s identity and integrity;
- The available postal, email and website addresses and phone number of each place of business of the recipient;
- A statement of the principal purpose of the recipient, including a detailed report of the recipient’s projects and goals;
- Copies of any public filings or releases made by the recipient, including the most recent official registry documents, annual reports, and annual filings with the pertinent government, as applicable; and
- The recipient’s sources of income, such as official grants, private endowments, and commercial activities.
Form 1023 Part VIII, Line 14f. Do you or will you use any additional procedures to ensure that your distributions to foreign organizations are used in furtherance of your exempt purposes?
Again, more explanation is order. Use the following example to put the IRS mind at ease and of course practice it as it’s a good way of ensuring that your are not going to get in trouble in future:
We generally will not contribute to any organization unless we have an ambassador in that country overseeing the distribution of the funds regardless of their location, domestic or foreign. The board of directors will conduct due diligence and maintain control of any funds contributed to any organizations and will comply with all applicable laws and guidelines. We will also, at our discretion, conduct the following to verify and ensure that funds are used appropriately and safely:
- conducting a reasonable search of publicly available information to determine whether the recipient is suspected of activity relating to terrorism, including terrorist financing or other support;
- assuring that recipients do not appear on OFAC’s master list of Specially Designated Nationals (the “SDN List”), maintained on OFAC’s website at www.treas.gov and are not otherwise subject to OFAC sanctions;
- with respect to key employees, members of the governing board, or other senior management at the recipient’s principal place of business, and for key employees at the recipient’s other business locations, we will, to the extent reasonable, obtain the full name in English, in the language of origin, and any acronym or other names used; nationality; citizenship; current country of residence; and place and date of birth;
- As a pre-condition to the issuance of a charitable contribution, we will require the recipient to certify that they are in compliance with all laws, statutes, and regulations restricting U.S. persons from dealing with any individuals, entities, or groups subject to OFAC sanctions.
Please note that since the events of 9/11, the department of treasury published a controversial article called “Anti-Terrorist Financing Guidelines”. It’s in your best interest to refer to this article if you want a smooth ruling.