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Www irs gov com 14. Www irs gov com   Sale of Property Table of Contents Reminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities Reminder Foreign income. Www irs gov com  If you are a U. Www irs gov com S. Www irs gov com citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U. Www irs gov com S. Www irs gov com law. Www irs gov com This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer. Www irs gov com Introduction This chapter discusses the tax consequences of selling or trading investment property. Www irs gov com It explains the following. Www irs gov com What a sale or trade is. Www irs gov com Figuring gain or loss. Www irs gov com Nontaxable trades. Www irs gov com Related party transactions. Www irs gov com Capital gains or losses. Www irs gov com Capital assets and noncapital assets. Www irs gov com Holding period. Www irs gov com Rollover of gain from publicly traded securities. Www irs gov com Other property transactions. Www irs gov com   Certain transfers of property are not discussed here. Www irs gov com They are discussed in other IRS publications. Www irs gov com These include the following. Www irs gov com Sales of a main home, covered in chapter 15. Www irs gov com Installment sales, covered in Publication 537, Installment Sales. Www irs gov com Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets. Www irs gov com Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules. Www irs gov com    Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. Www irs gov com Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. Www irs gov com It also discusses investment-related expenses. Www irs gov com Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 8949 Sales and Other Dispositions of Capital Assets 8824 Like-Kind Exchanges Sales and Trades If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Www irs gov com Generally, you should receive the statement by February 15 of the next year. Www irs gov com It will show the gross proceeds from the sale. Www irs gov com If you sold a covered security in 2013, your 1099-B (or substitute statement) will show your basis. Www irs gov com Generally, a covered security is a security you acquired after 2010, with certain exceptions. Www irs gov com See the Instructions for Form 8949. Www irs gov com The IRS will also get a copy of Form 1099-B from the broker. Www irs gov com Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Www irs gov com What Is a Sale or Trade? This section explains what is a sale or trade. Www irs gov com It also explains certain transactions and events that are treated as sales or trades. Www irs gov com A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Www irs gov com A trade is a transfer of property for other property or services and may be taxed in the same way as a sale. Www irs gov com Sale and purchase. Www irs gov com   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Www irs gov com The sale and purchase are two separate transactions. Www irs gov com But see Like-kind exchanges under Nontaxable Trades, later. Www irs gov com Redemption of stock. Www irs gov com   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. Www irs gov com Dividend versus sale or trade. Www irs gov com   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Www irs gov com Both direct and indirect ownership of stock will be considered. Www irs gov com The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend (see chapter 8), There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Www irs gov com Redemption or retirement of bonds. Www irs gov com   A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. Www irs gov com   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Www irs gov com For details, see Regulations section 1. Www irs gov com 1001-3. Www irs gov com Surrender of stock. Www irs gov com   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. Www irs gov com The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Www irs gov com Worthless securities. Www irs gov com    Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. Www irs gov com This affects whether your capital loss is long term or short term. Www irs gov com See Holding Period , later. Www irs gov com   Worthless securities also include securities that you abandon after March 12, 2008. Www irs gov com To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Www irs gov com All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. Www irs gov com    If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Www irs gov com Do not deduct them in the year the stock became worthless. Www irs gov com How to report loss. Www irs gov com    Report worthless securities in Part I or Part II, whichever applies, of Form 8949. Www irs gov com In column (a), enter “Worthless. Www irs gov com ”    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Www irs gov com See Form 8949 and the Instructions for Form 8949. Www irs gov com For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Www irs gov com See also Schedule D (Form 1040), Form 8949, and their separate instructions. Www irs gov com Filing a claim for refund. Www irs gov com   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. Www irs gov com You must use Form 1040X, Amended U. Www irs gov com S. Www irs gov com Individual Income Tax Return, to amend your return for the year the security became worthless. Www irs gov com You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Www irs gov com For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Www irs gov com How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. Www irs gov com Gain. Www irs gov com   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. Www irs gov com Loss. Www irs gov com   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Www irs gov com Adjusted basis. Www irs gov com   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. Www irs gov com See chapter 13 for more information about determining the adjusted basis of property. Www irs gov com Amount realized. Www irs gov com   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Www irs gov com Amount realized includes the money you receive plus the fair market value of any property or services you receive. Www irs gov com If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized. Www irs gov com If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. Www irs gov com For more information, see Publication 537. Www irs gov com Fair market value. Www irs gov com   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Www irs gov com Example. Www irs gov com You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Www irs gov com Your gain is $3,000 ($10,000 − $7,000). Www irs gov com Debt paid off. Www irs gov com    A debt against the property, or against you, that is paid off as a part of the transaction, or that is assumed by the buyer, must be included in the amount realized. Www irs gov com This is true even if neither you nor the buyer is personally liable for the debt. Www irs gov com For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. Www irs gov com Example. Www irs gov com You sell stock that you had pledged as security for a bank loan of $8,000. Www irs gov com Your basis in the stock is $6,000. Www irs gov com The buyer pays off your bank loan and pays you $20,000 in cash. Www irs gov com The amount realized is $28,000 ($20,000 + $8,000). Www irs gov com Your gain is $22,000 ($28,000 − $6,000). Www irs gov com Payment of cash. Www irs gov com   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Www irs gov com Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. Www irs gov com If the result is a positive number, it is a gain. Www irs gov com If the result is a negative number, it is a loss. Www irs gov com No gain or loss. Www irs gov com   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Www irs gov com In this case, you may have neither a gain nor a loss. Www irs gov com See Basis Other Than Cost in chapter 13. Www irs gov com Nontaxable Trades This section discusses trades that generally do not result in a taxable gain or deductible loss. Www irs gov com For more information on nontaxable trades, see chapter 1 of Publication 544. Www irs gov com Like-kind exchanges. Www irs gov com   If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. Www irs gov com To be nontaxable, a trade must meet all six of the following conditions. Www irs gov com The property must be business or investment property. Www irs gov com You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Www irs gov com Neither property may be property used for personal purposes, such as your home or family car. Www irs gov com The property must not be held primarily for sale. Www irs gov com The property you trade and the property you receive must not be property you sell to customers, such as merchandise. Www irs gov com The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. Www irs gov com However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. Www irs gov com Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later. Www irs gov com There must be a trade of like property. Www irs gov com The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. Www irs gov com The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. Www irs gov com The trade of a piece of machinery for a store building is not a trade of like property. Www irs gov com Real property located in the United States and real property located outside the United States are not like property. Www irs gov com Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. Www irs gov com The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. Www irs gov com The property to be received must be received by the earlier of: The 180th day after the date on which you transfer the property given up in the trade, or The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. Www irs gov com    If you trade property with a related party in a like-kind exchange, a special rule may apply. Www irs gov com See Related Party Transactions , later in this chapter. Www irs gov com Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties. Www irs gov com Partly nontaxable exchange. Www irs gov com   If you receive money or unlike property in addition to like property, and the above six conditions are met, you have a partly nontaxable trade. Www irs gov com You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the unlike property you receive. Www irs gov com You cannot deduct a loss. Www irs gov com Like property and unlike property transferred. Www irs gov com   If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. Www irs gov com The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value. Www irs gov com Like property and money transferred. Www irs gov com   If all of the above conditions (1) – (6) are met, you have a nontaxable trade even if you pay money in addition to the like property. Www irs gov com Basis of property received. Www irs gov com   To figure the basis of the property received, see Nontaxable Exchanges in chapter 13. Www irs gov com How to report. Www irs gov com   You must report the trade of like property on Form 8824. Www irs gov com If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. Www irs gov com See the instructions for Line 22 in the Instructions for Form 8824. Www irs gov com   For information on using Form 4797, see chapter 4 of Publication 544. Www irs gov com Corporate stocks. Www irs gov com   The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. Www irs gov com Corporate reorganizations. Www irs gov com   In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. Www irs gov com If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not recognize gain or loss. Www irs gov com Stock for stock of the same corporation. Www irs gov com   You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. Www irs gov com This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation. Www irs gov com Convertible stocks and bonds. Www irs gov com   You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate. Www irs gov com Property for stock of a controlled corporation. Www irs gov com   If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. Www irs gov com This rule applies both to individuals and to groups who transfer property to a corporation. Www irs gov com It does not apply if the corporation is an investment company. Www irs gov com   For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation. Www irs gov com   If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. Www irs gov com For details, see Regulations section 1. Www irs gov com 351-3. Www irs gov com Additional information. Www irs gov com   For more information on trades of stock, see Nontaxable Trades in chapter 4 of Publication 550. Www irs gov com Insurance policies and annuities. Www irs gov com   You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade: A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract, An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract, An annuity contract for annuity contract or for a qualified long-term care insurance contract, or A qualified long-term care insurance contract for a qualified long-term care insurance contract. Www irs gov com   You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. Www irs gov com For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. Www irs gov com Revenue Ruling 2003-76 is available at www. Www irs gov com irs. Www irs gov com gov/irb/2003-33_IRB/ar11. Www irs gov com html. Www irs gov com Revenue Procedure 2008-24 is available at www. Www irs gov com irs. Www irs gov com gov/irb/2008-13_IRB/ar13. Www irs gov com html. Www irs gov com For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. Www irs gov com Revenue Procedure 2011-38 is available at www. Www irs gov com irs. Www irs gov com gov/irb/2011-30_IRB/ar09. Www irs gov com html. Www irs gov com   For tax years beginning after December 31, 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. Www irs gov com A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. Www irs gov com The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. Www irs gov com   Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. Www irs gov com Demutualization of life insurance companies. Www irs gov com   If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. Www irs gov com See Demutualization of Life Insurance Companies in Publication 550. Www irs gov com U. Www irs gov com S. Www irs gov com Treasury notes or bonds. Www irs gov com   You can trade certain issues of U. Www irs gov com S. Www irs gov com Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. Www irs gov com See Savings bonds traded in chapter 1 of Publication 550 for more information. Www irs gov com Transfers Between Spouses Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. Www irs gov com This nonrecognition rule does not apply in the following situations. Www irs gov com The recipient spouse or former spouse is a nonresident alien. Www irs gov com Property is transferred in trust and liability exceeds basis. Www irs gov com Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. Www irs gov com For other situations, see Transfers Between Spouses in chapter 4 of Publication 550. Www irs gov com Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. Www irs gov com The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Www irs gov com This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. Www irs gov com This rule applies for purposes of determining loss as well as gain. Www irs gov com Any gain recognized on a transfer in trust increases the basis. Www irs gov com A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage. Www irs gov com Related Party Transactions Special rules apply to the sale or trade of property between related parties. Www irs gov com Gain on sale or trade of depreciable property. Www irs gov com   Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. Www irs gov com See chapter 3 of Publication 544 for more information. Www irs gov com Like-kind exchanges. Www irs gov com   Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. Www irs gov com See Like-kind exchanges , earlier, under Nontaxable Trades. Www irs gov com   This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. Www irs gov com However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. Www irs gov com See Related Party Transactions in chapter 4 of Publication 550 for exceptions. Www irs gov com Losses on sales or trades of property. Www irs gov com   You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. Www irs gov com Members of your family. Www irs gov com This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Www irs gov com ), and lineal descendants (children, grandchildren, etc. Www irs gov com ). Www irs gov com A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Www irs gov com A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Www irs gov com (See Constructive ownership of stock , later. Www irs gov com ) A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. Www irs gov com   In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. Www irs gov com A grantor and fiduciary, or the fiduciary and beneficiary, of any trust. Www irs gov com Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Www irs gov com A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust. Www irs gov com A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership. Www irs gov com Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Www irs gov com Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Www irs gov com An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest). Www irs gov com Two corporations that are members of the same controlled group. Www irs gov com (Under certain conditions, however, these losses are not disallowed but must be deferred. Www irs gov com ) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. Www irs gov com Multiple property sales or trades. Www irs gov com   If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. Www irs gov com The gain on each item may be taxable. Www irs gov com However, you cannot deduct the loss on any item. Www irs gov com Also, you cannot reduce gains from the sales of any of these items by losses on the sales of any of the other items. Www irs gov com Indirect transactions. Www irs gov com   You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. Www irs gov com This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged. Www irs gov com Constructive ownership of stock. Www irs gov com   In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Www irs gov com Rule 1. Www irs gov com   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Www irs gov com Rule 2. Www irs gov com   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Www irs gov com Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Www irs gov com Rule 3. Www irs gov com   An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Www irs gov com Rule 4. Www irs gov com   When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. Www irs gov com But stock constructively owned by an individual under rule 2 or rule 3 is not treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock. Www irs gov com Property received from a related party. Www irs gov com    If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. Www irs gov com This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. Www irs gov com This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales. Www irs gov com   If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. Www irs gov com Example 1. Www irs gov com Your brother sells you stock for $7,600. Www irs gov com His cost basis is $10,000. Www irs gov com Your brother cannot deduct the loss of $2,400. Www irs gov com Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. Www irs gov com Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother). Www irs gov com Example 2. Www irs gov com If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). Www irs gov com You cannot deduct the loss that was not allowed to your brother. Www irs gov com Capital Gains and Losses This section discusses the tax treatment of gains and losses from different types of investment transactions. Www irs gov com Character of gain or loss. Www irs gov com   You need to classify your gains and losses as either ordinary or capital gains or losses. Www irs gov com You then need to classify your capital gains and losses as either short term or long term. Www irs gov com If you have long-term gains and losses, you must identify your 28% rate gains and losses. Www irs gov com If you have a net capital gain, you must also identify any unrecaptured section 1250 gain. Www irs gov com   The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. Www irs gov com Reporting capital gains and losses is explained in chapter 16. Www irs gov com Capital or Ordinary Gain or Loss If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Www irs gov com Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. Www irs gov com A sale or trade of a noncapital asset generally results in ordinary gain or loss. Www irs gov com Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. Www irs gov com In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss. Www irs gov com Capital Assets and Noncapital Assets For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Www irs gov com Some examples are: Stocks or bonds held in your personal account, A house owned and used by you and your family, Household furnishings, A car used for pleasure or commuting, Coin or stamp collections, Gems and jewelry, and Gold, silver, or any other metal. Www irs gov com Any property you own is a capital asset, except the following noncapital assets. Www irs gov com Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. Www irs gov com For an exception, see Capital Asset Treatment for Self-Created Musical Works , later. Www irs gov com Depreciable property used in your trade or business, even if fully depreciated. Www irs gov com Real property used in your trade or business. Www irs gov com A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is: Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Www irs gov com For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later. Www irs gov com Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1). Www irs gov com U. Www irs gov com S. Www irs gov com Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price. Www irs gov com Certain commodities derivative financial instruments held by commodities derivatives dealers. Www irs gov com Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. Www irs gov com Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Www irs gov com Investment Property Investment property is a capital asset. Www irs gov com Any gain or loss from its sale or trade is generally a capital gain or loss. Www irs gov com Gold, silver, stamps, coins, gems, etc. Www irs gov com   These are capital assets except when they are held for sale by a dealer. Www irs gov com Any gain or loss you have from their sale or trade generally is a capital gain or loss. Www irs gov com Stocks, stock rights, and bonds. Www irs gov com   All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. Www irs gov com However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock, in chapter 4 of Publication 550. Www irs gov com Personal Use Property Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. Www irs gov com However, you cannot deduct a loss from selling personal use property. Www irs gov com Capital Asset Treatment for Self-Created Musical Works You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if: Your personal efforts created the property, or You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Www irs gov com You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. Www irs gov com You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. Www irs gov com You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions. Www irs gov com For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Www irs gov com See also Schedule D (Form 1040), Form 8949, and their separate instructions. Www irs gov com You can revoke the election if you have IRS approval. Www irs gov com To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. Www irs gov com See, for example, Rev. Www irs gov com Proc. Www irs gov com 2013-1, corrected by Announcement 2013–9, and amplified and modified by Rev. Www irs gov com Proc. Www irs gov com 2013–32, available at www. Www irs gov com irs. Www irs gov com gov/irb/2013-01_IRB/ar06. Www irs gov com html. Www irs gov com Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset. Www irs gov com Discounted Debt Instruments Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. Www irs gov com Short-term government obligations. Www irs gov com   Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. Www irs gov com This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. Www irs gov com Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. Www irs gov com   However, do not treat these gains as income to the extent you previously included the discount in income. Www irs gov com See Discount on Short-Term Obligations in chapter 1 of Publication 550. Www irs gov com Short-term nongovernment obligations. Www irs gov com   Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). Www irs gov com This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. Www irs gov com   However, to the extent you previously included the discount in income, you do not have to include it in income again. Www irs gov com See Discount on Short-Term Obligations in chapter 1 of Publication 550. Www irs gov com Tax-exempt state and local government bonds. Www irs gov com   If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. Www irs gov com To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. Www irs gov com   If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. Www irs gov com For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550. Www irs gov com   Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. Www irs gov com If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. Www irs gov com If you bought the bonds after April 30, 1993, the gain is ordinary income. Www irs gov com   You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. Www irs gov com For more information, see Market Discount Bonds in chapter 1 of Publication 550. Www irs gov com    A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss. Www irs gov com Redeemed before maturity. Www irs gov com   If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to you. Www irs gov com   If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. Www irs gov com However, you must report the unearned part of OID as a capital gain. Www irs gov com Example. Www irs gov com On July 2, 2002, the date of issue, you bought a 20-year, 6% municipal bond for $800. Www irs gov com The face amount of the bond was $1,000. Www irs gov com The $200 discount was OID. Www irs gov com At the time the bond was issued, the issuer had no intention of redeeming it before it matured. Www irs gov com The bond was callable at its face amount beginning 10 years after the issue date. Www irs gov com The issuer redeemed the bond at the end of 11 years (July 2, 2013) for its face amount of $1,000 plus accrued annual interest of $60. Www irs gov com The OID earned during the time you held the bond, $73, is not taxable. Www irs gov com The $60 accrued annual interest also is not taxable. Www irs gov com However, you must report the unearned part of OID ($127) as a capital gain. Www irs gov com Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). Www irs gov com   If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of the sale or redemption is ordinary income. Www irs gov com The rest of the gain is capital gain. Www irs gov com If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. Www irs gov com This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter. Www irs gov com Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). Www irs gov com   If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. Www irs gov com Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. Www irs gov com See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return. Www irs gov com   If you sell or trade the debt instrument before maturity, your gain is a capital gain. Www irs gov com However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. Www irs gov com In this case, the rest of the gain is capital gain. Www irs gov com Market discount bonds. Www irs gov com   If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. Www irs gov com If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. Www irs gov com The rest of the gain is capital gain. Www irs gov com See Market Discount Bonds in chapter 1 of Publication 550. Www irs gov com   A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. Www irs gov com See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550. Www irs gov com Retirement of debt instrument. Www irs gov com   Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. Www irs gov com Notes of individuals. Www irs gov com   If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. Www irs gov com An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met. Www irs gov com The lender is not in the business of lending money. Www irs gov com The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less. Www irs gov com Avoiding federal tax is not one of the principal purposes of the loan. Www irs gov com   If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. Www irs gov com When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. Www irs gov com The rest of the gain, if any, is capital gain. Www irs gov com Any loss on the sale or redemption is capital loss. Www irs gov com Deposit in Insolvent or Bankrupt Financial Institution If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. Www irs gov com Ordinary loss. Www irs gov com Casualty loss. Www irs gov com Nonbusiness bad debt (short-term capital loss). Www irs gov com  For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550. Www irs gov com Sale of Annuity The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. Www irs gov com Losses on Section 1244 (Small Business) Stock You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. Www irs gov com Report the loss on Form 4797, line 10. Www irs gov com Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Www irs gov com Report the gain on Form 8949. Www irs gov com See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Www irs gov com For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Www irs gov com See also Schedule D (Form 1040), Form 8949, and their separate instructions. Www irs gov com Holding Period If you sold or traded investment property, you must determine your holding period for the property. Www irs gov com Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. Www irs gov com Long-term or short-term. Www irs gov com   If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. Www irs gov com If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. Www irs gov com   To determine how long you held the investment property, begin counting on the date after the day you acquired the property. Www irs gov com The day you disposed of the property is part of your holding period. Www irs gov com Example. Www irs gov com If you bought investment property on February 6, 2012, and sold it on February 6, 2013, your holding period is not more than 1 year and you have a short-term capital gain or loss. Www irs gov com If you sold it on February 7, 2013, your holding period is more than 1 year and you will have a long-term capital gain or loss. Www irs gov com Securities traded on established market. Www irs gov com   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them. Www irs gov com    Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made. Www irs gov com Example. Www irs gov com You are a cash method, calendar year taxpayer. Www irs gov com You sold stock at a gain on December 30, 2013. Www irs gov com According to the rules of the stock exchange, the sale was closed by delivery of the stock 4 trading days after the sale, on January 6, 2014. Www irs gov com You received payment of the sales price on that same day. Www irs gov com Report your gain on your 2013 return, even though you received the payment in 2014. Www irs gov com The gain is long term or short term depending on whether you held the stock more than 1 year. Www irs gov com Your holding period ended on December 30. Www irs gov com If you had sold the stock at a loss, you would also report it on your 2013 return. Www irs gov com U. Www irs gov com S. Www irs gov com Treasury notes and bonds. Www irs gov com   The holding period of U. Www irs gov com S. Www irs gov com Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. Www irs gov com The holding period of U. Www irs gov com S. Www irs gov com Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted. Www irs gov com Automatic investment service. Www irs gov com   In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. Www irs gov com Your holding period starts on the day after the bank's purchase date. Www irs gov com If a share was bought over more than one purchase date, your holding period for that share is a split holding period. Www irs gov com A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds. Www irs gov com Nontaxable trades. Www irs gov com   If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property. Www irs gov com Property received as a gift. Www irs gov com   If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started. Www irs gov com   If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift. Www irs gov com Inherited property. Www irs gov com   Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. Www irs gov com This is true regardless of how long you actually held the property. Www irs gov com However, if you inherited property from someone who died in 2010, see the information below. Www irs gov com Inherited property from someone who died in 2010. Www irs gov com   If you inherit investment property from a decedent who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your holding period. Www irs gov com Real property bought. Www irs gov com   To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. Www irs gov com However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. Www irs gov com The holding period cannot start until there is an actual contract of sale. Www irs gov com The holding period of the seller cannot end before that time. Www irs gov com Real property repossessed. Www irs gov com   If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. Www irs gov com Your holding period does not include the time between the original sale and the repossession. Www irs gov com That is, it does not include the period during which the first buyer held the property. Www irs gov com Stock dividends. Www irs gov com   The holding period for stock you received as a taxable stock dividend begins on the date of distribution. Www irs gov com   The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. Www irs gov com This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation. Www irs gov com Nontaxable stock rights. Www irs gov com   Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. Www irs gov com The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised. Www irs gov com Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. Www irs gov com You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. Www irs gov com Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. Www irs gov com To be deductible, nonbusiness bad debts must be totally worthless. Www irs gov com You cannot deduct a partly worthless nonbusiness debt. Www irs gov com Genuine debt required. Www irs gov com   A debt must be genuine for you to deduct a loss. Www irs gov com A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Www irs gov com Basis in bad debt required. Www irs gov com    To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. Www irs gov com For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. Www irs gov com If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. Www irs gov com When deductible. Www irs gov com   You can take a bad debt deduction only in the year the debt becomes worthless. Www irs gov com You do not have to wait until a debt is due to determine whether it is worthless. Www irs gov com A debt becomes worthless when there is no longer any chance that the amount owed will be paid. Www irs gov com   It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Www irs gov com You must only show that you have taken reasonable steps to collect the debt. Www irs gov com Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Www irs gov com How to report bad debts. Www irs gov com    Deduct nonbusiness bad debts as short-term capital losses on Form 8949. Www irs gov com    Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949, Part I, with box C checked. Www irs gov com    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Www irs gov com See also Schedule D (Form 1040), Form 8949, and their separate instructions. Www irs gov com   For each bad debt, attach a statement to your return that contains: A description of the debt, including the amount, and the date it became due, The name of the debtor, and any business or family relationship between you and the debtor, The efforts you made to collect the debt, and Why you decided the debt was worthless. Www irs gov com For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. Www irs gov com Filing a claim for refund. Www irs gov com    If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. Www irs gov com To do this, use Form 1040X to amend your return for the year the debt became worthless. Www irs gov com You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Www irs gov com For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Www irs gov com Additional information. Www irs gov com   For more information, see Nonbusiness Bad Debts in Publication 550. Www irs gov com For information on business bad debts, see chapter 10 of Publication 535, Business Expenses. Www irs gov com Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. Www irs gov com A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. Www irs gov com If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). Www irs gov com The result is your basis in the new stock or securities. Www irs gov com This adjustment postpones the loss deduction until the disposition of the new stock or securities. Www irs gov com Your holding period for the new stock or securities includes the holding period of the stock or securities sold. Www irs gov com For more information, see Wash Sales, in chapter 4 of Publication 550. Www irs gov com Rollover of Gain From Publicly Traded Securities You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. Www irs gov com This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. Www irs gov com You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. Www irs gov com This postpones your gain until the year you dispose of the replacement property. Www irs gov com You qualify to make this choice if you meet all the following tests. Www irs gov com You sell publicly traded securities at a gain. Www irs gov com Publicly traded securities are securities traded on an established securities market. Www irs gov com Your gain from the sale is a capital gain. Www irs gov com During the 60-day period beginning on the date of the sale, you buy replacement property. Www irs gov com This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). Www irs gov com This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993. Www irs gov com Amount of gain recognized. Www irs gov com   If you make the choice described in this section, you must recognize gain only up to the following amount. Www irs gov com The amount realized on the sale, minus The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities). Www irs gov com  If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. Www irs gov com If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. Www irs gov com Limit on gain postponed. Www irs gov com   The amount of gain you can postpone each year is limited to the smaller of: $50,000 ($25,000 if you are married and file a separate return), or $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years. Www irs gov com Basis of replacement property. Www irs gov com   You must subtract the amount of postponed gain from the basis of your replacement property. Www irs gov com How to report and postpone gain. Www irs gov com    See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of Publication 550 for details. 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Www irs gov com 3. Www irs gov com   Section 501(c)(3) Organizations Table of Contents IntroductionChild care organizations. Www irs gov com Topics - This chapter discusses: Useful Items - You may want to see: Contributions to 501(c)(3) OrganizationsCertain annuity contracts. Www irs gov com Certain contracts held by a charitable remainder trust. Www irs gov com Excise Taxes. Www irs gov com Indoor tanning services. Www irs gov com Application for Recognition of ExemptionPolitical activity. Www irs gov com Private delivery service. Www irs gov com Amendments to organizing documents required. Www irs gov com How to show reasonable action and good faith. Www irs gov com Not acting reasonably and in good faith. Www irs gov com Prejudicing the interest of the Government. Www irs gov com Procedure for requesting extension. Www irs gov com More information. Www irs gov com Organizations Not Required To File Form 1023 Articles of OrganizationOrganizational Test Dedication and Distribution of Assets Educational Organizations and Private SchoolsEducational Organizations Private Schools Organizations Providing InsuranceCharitable Risk Pools Other Section 501(c)(3) OrganizationsCharitable Organizations Religious Organizations Scientific Organizations Literary Organizations Amateur Athletic Organizations Prevention of Cruelty to Children or Animals Private Foundations and Public CharitiesPrivate Foundations Public Charities Private Operating Foundations Lobbying ExpendituresLobbying expenditures. Www irs gov com Grass roots expenditures. Www irs gov com Lobbying nontaxable amount. Www irs gov com Grass roots nontaxable amount. Www irs gov com Organization that no longer qualifies. Www irs gov com Tax on organization. Www irs gov com Tax on managers. Www irs gov com Taxes on organizations. Www irs gov com Taxes on managers. Www irs gov com Political expenditures. Www irs gov com Correction of expenditure. Www irs gov com Introduction An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes. Www irs gov com Religious. Www irs gov com Charitable. Www irs gov com Scientific. Www irs gov com Testing for public safety. Www irs gov com Literary. Www irs gov com Educational. Www irs gov com Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment; however, see Amateur Athletic Organizations , later in this chapter). Www irs gov com The prevention of cruelty to children or animals. Www irs gov com To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. Www irs gov com A trust is a fund or foundation and will qualify. Www irs gov com However, an individual or a partnership will not qualify. Www irs gov com Examples. Www irs gov com   Qualifying organizations include: Nonprofit old-age homes, Parent-teacher associations, Charitable hospitals or other charitable organizations, Alumni associations, Schools, Chapters of the Red Cross, Boys' or Girls' Clubs, and Churches. Www irs gov com Child care organizations. Www irs gov com   The term educational purposes includes providing for care of children away from their homes if substantially all the care provided is to enable individuals (the parents) to be gainfully employed and the services are available to the general public. Www irs gov com Instrumentalities. Www irs gov com   A state or municipal instrumentality may qualify under section 501(c)(3) if it is organized as a separate entity from the governmental unit that created it and if it otherwise meets the organizational and operational tests of section 501(c)(3). Www irs gov com Examples of a qualifying instrumentality might include state schools, universities, or hospitals. Www irs gov com However, if an organization is an integral part of the local government or possesses governmental powers, it does not qualify for exemption. Www irs gov com A state or municipality itself does not qualify for exemption. Www irs gov com Topics - This chapter discusses: Contributions to 501(c)(3) organizations, Applications for recognition of exemption, Articles of Organization, Educational organizations and private schools, Organizations providing insurance, Other section 501(c)(3) organizations, Private foundations and public charities, and Lobbying expenditures. Www irs gov com Useful Items - You may want to see: Forms (and Instructions) 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code See chapter 6 for information about getting publications and forms. Www irs gov com Contributions to 501(c)(3) Organizations Contributions to domestic organizations described in this chapter, except organizations testing for public safety, are deductible as charitable contributions on the donor's federal income tax return. Www irs gov com Fundraising events. Www irs gov com   If the donor receives something of value in return for the contribution, a common occurrence with fundraising efforts, part or all of the contribution may not be deductible. Www irs gov com This may apply to fundraising activities such as charity balls, bazaars, banquets, auctions, concerts, athletic events, and solicitations for membership or contributions when merchandise or benefits are given in return for payment of a specified minimum contribution. Www irs gov com   If the donor receives or expects to receive goods or services in return for a contribution to your organization, the donor cannot deduct any part of the contribution unless the donor intends to, and does, make a payment greater than the fair market value of the goods or services. Www irs gov com If a deduction is allowed, the donor can deduct only the part of the contribution, if any, that is more than the fair market value of the goods or services received. Www irs gov com You should determine in advance the fair market value of any goods or services to be given to contributors and tell them, when you publicize the fundraising event or solicit their contributions, how much is deductible and how much is for the goods or services. Www irs gov com See Disclosure of Quid Pro Quo Contributions in chapter 2. Www irs gov com Exemption application not filed. Www irs gov com   Donors cannot deduct any charitable contribution to an organization that is required to apply for recognition of exemption but has not done so. Www irs gov com Separate fund—contributions that are deductible. Www irs gov com   An organization that is exempt from federal income tax other than as an organization described in section 501(c)(3) can, if it desires, establish a fund, separate and apart from its other funds, exclusively for religious, charitable, scientific, literary, or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. Www irs gov com   If the fund is organized and operated exclusively for these purposes, it may qualify for exemption as an organization described in section 501(c)(3), and contributions made to it will be deductible as provided by section 170. Www irs gov com A fund with these characteristics must be organized in such a manner as to prohibit the use of its funds upon dissolution, or otherwise, for the general purposes of the organization creating it. Www irs gov com Personal benefit contracts. Www irs gov com   Generally, charitable deductions will not be allowed for a transfer to, or for the use of, a section 501(c)(3) or (c)(4) organization if in connection with the transfer: The organization directly or indirectly pays, or previously paid, a premium on a personal benefit contract for the transferor, or There is an understanding or expectation that anyone will directly or indirectly pay a premium on a personal benefit contract for the transferor. Www irs gov com   A personal benefit contract with respect to the transferor is any life insurance, annuity, or endowment contract, if any direct or indirect beneficiary under the contract is the transferor, any member of the transferor's family, or any other person designated by the transferor. Www irs gov com Certain annuity contracts. Www irs gov com   If an organization incurs an obligation to pay a charitable gift annuity, and the organization purchases an annuity contract to fund the obligation, individuals receiving payments under the charitable gift annuity will not be treated as indirect beneficiaries if the organization owns all of the incidents of ownership under the contract, is entitled to all payments under the contract, and the timing and amount of the payments are substantially the same as the timing and amount of payments to each person under the obligation (as such obligation is in effect at the time of the transfer). Www irs gov com Certain contracts held by a charitable remainder trust. Www irs gov com   An individual will not be considered an indirect beneficiary under a life insurance, annuity, or endowment contract held by a charitable remainder annuity trust or a charitable remainder unitrust solely by reason of being entitled to the payment if the trust owns all of the incidents of ownership under the contract, and the trust is entitled to all payments under the contract. Www irs gov com Excise tax. Www irs gov com   If the premiums are paid in connection with a transfer for which a deduction is not allowable under the deduction denial rule, without regard to when the transfer to the charitable organization was made, an excise tax will be applied that is equal to the amount of the premiums paid by the organization on any life insurance, annuity, or endowment contract. Www irs gov com The excise tax does not apply if all of the direct and indirect beneficiaries under the contract are organizations. Www irs gov com Excise Taxes. Www irs gov com   A charitable organization liable for excise taxes must file Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. Www irs gov com Generally, the due date for filing Form 4720 occurs on the fifteenth day of the fifth month following the close of the organization's tax year. Www irs gov com Indoor tanning services. Www irs gov com   If your organization provides an indoor tanning bed service, the ACA imposed a 10% excise tax on services provided after June 30, 2010. Www irs gov com For more information, go to IRS. Www irs gov com gov and select Affordable Care Act Tax Provisions. Www irs gov com Application for Recognition of Exemption This discussion describes certain information to be provided upon application for recognition of exemption by all organizations created for any of the purposes described earlier in this chapter. Www irs gov com For example, the application must include a conformed copy of the organization's articles of incorporation, as discussed under Articles of Organization , later in this chapter. Www irs gov com See the organization headings that follow for specific information your organization may need to provide. Www irs gov com Form 1023. Www irs gov com   Your organization must file its application for recognition of exemption on Form 1023. Www irs gov com See chapter 1 and the instructions accompanying Form 1023 for the procedures to follow in applying. Www irs gov com Some organizations are not required to file Form 1023. Www irs gov com See Organizations Not Required To File Form 1023, later. Www irs gov com    Additional information to help you complete your application can be found online. Www irs gov com Go to Exemption Requirement – Section 501(c)(3) Organizations and select the link at the bottom of the Web page for step by step help with the application process. Www irs gov com See Exemption Requirements - Section 501(c)(3) Organizations. Www irs gov com   Form 1023 and accompanying statements must show that all of the following are true. Www irs gov com The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (religious, charitable, etc. Www irs gov com ) specified in the introduction to this chapter. Www irs gov com No part of the organization's net earnings will inure to the benefit of private shareholders or individuals. Www irs gov com You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. Www irs gov com The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. Www irs gov com See Political activity, next, and Lobbying Expenditures , near the end of this chapter. Www irs gov com Political activity. Www irs gov com   If any of the activities (whether or not substantial) of your organization consist of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, your organization will not qualify for tax-exempt status under section 501(c)(3). Www irs gov com Such participation or intervention includes the publishing or distributing of statements. Www irs gov com   Whether your organization is participating or intervening, directly or indirectly, in any political campaign on behalf of (or in opposition to) any candidate for public office depends upon all of the facts and circumstances of each case. Www irs gov com Certain voter education activities or public forums conducted in a nonpartisan manner may not be prohibited political activity under section 501(c)(3), while other so-called voter education activities may be prohibited. Www irs gov com Effective date of exemption. Www irs gov com   Most organizations described in this chapter that were organized after October 9, 1969, will not be treated as tax exempt unless they apply for recognition of exemption by filing Form 1023. Www irs gov com These organizations will not be treated as tax exempt for any period before they file Form 1023, unless they file the form within 27 months from the end of the month in which they were organized. Www irs gov com If the organization files the application within this 27-month period, the organization's exemption will be recognized retroactively to the date it was organized. Www irs gov com Otherwise, exemption will be recognized only from the date of receipt. Www irs gov com The date of receipt is the date of the U. Www irs gov com S. Www irs gov com postmark on the cover in which an exemption application is mailed or, if no postmark appears on the cover, the date the application is stamped as received by the IRS. Www irs gov com Private delivery service. Www irs gov com   If a private delivery service designated by the IRS, rather than the U. Www irs gov com S. Www irs gov com Postal Service, is used to deliver the application, the date of receipt is the date recorded or marked by the private delivery service. Www irs gov com The following private delivery services have been designated by the IRS. Www irs gov com DHL Express (DHL): DHL “Same Day” Service. Www irs gov com Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First. Www irs gov com United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A. Www irs gov com M. Www irs gov com , UPS Worldwide Express Plus, and UPS Worldwide Express. Www irs gov com Amendments to organizing documents required. Www irs gov com   If an organization is required to alter its activities or to make substantive amendments to its organizing document, the ruling or determination letter recognizing its exempt status will be effective as of the date the changes are made. Www irs gov com If only a nonsubstantive amendment is made, exempt status will be effective as of the date it was organized, if the application was filed within the 15-month period, or the date the application was filed. Www irs gov com Extensions of time for filing. Www irs gov com   There are two ways organizations seeking exemption can receive an extension of time for filing Form 1023. Www irs gov com Automatic 12-month extension. Www irs gov com Organizations will receive an automatic 12-month extension if they file an application for recognition of exemption with the IRS within 12 months of the original deadline. Www irs gov com To get this extension, an organization must add the following statement at the top of its application: “Filed Pursuant to Section 301. Www irs gov com 9100-2. Www irs gov com ” Discretionary extensions. Www irs gov com An organization that fails to file a Form 1023 within the extended 12-month period will be granted an extension to file if it submits evidence (including affidavits) to establish that: It acted reasonably and in good faith, and Granting a discretionary extension will not prejudice the interests of the government. Www irs gov com How to show reasonable action and good faith. Www irs gov com   An organization acted reasonably and showed good faith if at least one of the following is true. Www irs gov com The organization requests relief before its failure to file is discovered by the IRS. Www irs gov com The organization failed to file because of intervening events beyond its control. Www irs gov com The organization exercised reasonable diligence (taking into account the complexity of the return or issue and the organization's experience in these matters) but was not aware of the filing requirement. Www irs gov com The organization reasonably relied upon the written advice of the IRS. Www irs gov com The organization reasonably relied upon the advice of a qualified tax professional who failed to file or advise the organization to file Form 1023. Www irs gov com An organization cannot rely on the advice of a tax professional if it knows or should know that he or she is not competent to render advice on filing exemption applications or is not aware of all the relevant facts. Www irs gov com Not acting reasonably and in good faith. Www irs gov com   An organization has not acted reasonably and in good faith under the following circumstances. Www irs gov com It seeks to change a return position for which an accuracy-related penalty has been or could be imposed at the time the relief is requested. Www irs gov com It was informed of the requirement to file and related tax consequences, but chose not to file. Www irs gov com It uses hindsight in requesting relief. Www irs gov com The IRS will not ordinarily grant an extension if specific facts have changed since the due date that makes filing an application advantageous to an organization. Www irs gov com Prejudicing the interest of the Government. Www irs gov com   Prejudice to the interest of the Government results if granting an extension of time to file to an organization results in a lower total tax liability for the years to which the filing applies than would have been the case if the organization had filed on time. Www irs gov com Before granting an extension, the IRS can require the organization requesting it to submit a statement from an independent auditor certifying that no prejudice will result if the extension is granted. Www irs gov com The interests of the Government are ordinarily prejudiced if the tax year in which the application should have been filed (or any tax year that would have been affected had the filing been timely) are closed by the statute of limitations before relief is granted. Www irs gov com The IRS can condition a grant of relief on the organization providing the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced. Www irs gov com Procedure for requesting extension. Www irs gov com   To request a discretionary extension, an organization must submit (to the IRS address shown on Form 1023 and Notice 1382) the following. Www irs gov com A statement showing the date Form 1023 was required to have been filed and the date it was actually filed. Www irs gov com Any documents relevant to the application. Www irs gov com An affidavit describing in detail the events that led to the failure to apply and to the discovery of that failure. Www irs gov com If the organization relied on a tax professional's advice, the affidavit must describe the engagement and responsibilities of the professional and the extent to which the organization relied on him or her. Www irs gov com This affidavit must be accompanied by a dated declaration, signed by an individual who has personal knowledge of the facts and circumstances, who is authorized to act for the organization, which states, “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. Www irs gov com ” Detailed affidavits from individuals having knowledge or information about the events that led to the failure to make the application and to the discovery of that failure. Www irs gov com This includes the organization's return preparer, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer on the application. Www irs gov com The affidavits must describe the engagement and responsibilities of the individual and the advice that he or she provided. Www irs gov com These affidavits must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. Www irs gov com ” The organization must state whether the returns for the tax year in which the application should have been filed or any tax years that would have been affected by the application had it been timely made are being examined by the IRS, an appeals office, or a federal court. Www irs gov com The organization must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the organization's request for relief is pending. Www irs gov com The organization, if requested, has to submit copies of its tax returns, and copies of the returns of other affected taxpayers. Www irs gov com   A request for this relief in connection with an application for exemption does not require payment of an additional user fee. Www irs gov com Also, a request for relief under the automatic 12-month extension does not require payment of a user fee. Www irs gov com More information. Www irs gov com   For more information about these procedures, see Regulations sections 301. Www irs gov com 9100-1, 301. Www irs gov com 9100-2, 301. Www irs gov com 9100-3, Revenue Procedure 2013-4, section 6. Www irs gov com 04, 2013-1 I. Www irs gov com R. Www irs gov com B. Www irs gov com 126, and Revenue Procedure 2013-8, 2013-1 I. Www irs gov com R. Www irs gov com B. Www irs gov com 237. Www irs gov com See Revenue Procedure 2013-4 and Revenue Procedure 2013-8. Www irs gov com Notification from the IRS. Www irs gov com   Organizations filing Form 1023 and satisfying all requirements of section 501(c)(3) will be notified of their exempt status in writing. Www irs gov com Organizations Not Required To File Form 1023 Some organizations are not required to file Form 1023. Www irs gov com These include: Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men's or women's organization, religious school, mission society, or youth group. Www irs gov com Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later). Www irs gov com These organizations are exempt automatically if they meet the requirements of section 501(c)(3). Www irs gov com Filing Form 1023 to establish exemption. Www irs gov com   If the organization wants to establish its exemption with the IRS and receive a ruling or determination letter recognizing its exempt status, it should file Form 1023. Www irs gov com By establishing its exemption, potential contributors are assured by the IRS that contributions will be deductible. Www irs gov com A subordinate organization (other than a private foundation) covered by a group exemption letter does not have to submit a Form 1023 for itself. Www irs gov com Private foundations. Www irs gov com   See Private Foundations and Public Charities, later in this chapter, for more information about the additional notice required from an organization in order for it not to be presumed to be a private foundation and for the additional information required from a private foundation claiming to be an operating foundation. Www irs gov com Gross receipts test. Www irs gov com   For purposes of the gross receipts test, an organization normally does not have more than $5,000 annually in gross receipts if: During its first tax year the organization received gross receipts of $7,500 or less, During its first 2 years the organization had a total of $12,000 or less in gross receipts, and In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less. Www irs gov com   An organization with gross receipts more than the amounts in the gross receipts test, unless otherwise exempt from filing Form 1023, must file a Form 1023 within 90 days after the end of the period in which the amounts are exceeded. Www irs gov com For example, an organization's gross receipts for its first tax year were less than $7,500, but at the end of its second tax year its gross receipts for the 2-year period were more than $12,000. Www irs gov com The organization must file Form 1023 within 90 days after the end of its second tax year. Www irs gov com   If the organization had existed for at least 3 tax years and had met the gross receipts test for all prior tax years but fails to meet the requirement for the current tax year, its tax-exempt status for the prior years will not be lost even if Form 1023 is not filed within 90 days after the close of the current tax year. Www irs gov com However, the organization will not be treated as a section 501(c)(3) organization for the period beginning with the current tax year and ending with the filing of Form 1023. Www irs gov com Example. Www irs gov com   An organization is organized and operated exclusively for charitable purposes and is not a private foundation. Www irs gov com It was incorporated on January 1, 2009, and files returns on a calendar-year basis. Www irs gov com It did not file a Form 1023. Www irs gov com The organization's gross receipts during the years 2009 through 2012 were as follows: 2009 $3,600 2010 2,900 2011 400 2012 12,600   The organization's total gross receipts for 2009, 2010, and 2011 were $6,900. Www irs gov com Therefore, it did not have to file Form 1023 and is exempt for those years. Www irs gov com However, for 2010, 2011, and 2012 the total gross receipts were $15,900. Www irs gov com Therefore, the organization must file Form 1023 within 90 days after the end of its 2012 tax year. Www irs gov com If it does not file within this time period, it will not be exempt under section 501(c)(3) for the period beginning with tax year 2012 ending when the Form 1023 is received by the IRS. Www irs gov com The organization, however, will not lose its exempt status for the tax years ending before January 1, 2012. Www irs gov com   The IRS will consider applying the Commissioner's discretionary authority to extend the time for filing Form 1023. Www irs gov com See the procedures for this extension discussed earlier. Www irs gov com Articles of Organization Your organization must include a conformed copy of its articles of organization with the application for recognition of exemption. Www irs gov com This may be its trust instrument, corporate charter, articles of association, or any other written instrument by which it is created. Www irs gov com Organizational Test The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. Www irs gov com These conditions for exemption are referred to as the organizational test. Www irs gov com Section 501(c)(3) is the provision of law that grants exemption to the organizations described in this chapter. Www irs gov com Therefore, the organizational test may be met if the purposes stated in the articles of organization are limited in some way by reference to section 501(c)(3). Www irs gov com The requirement that your organization's purposes and powers must be limited by the articles of organization is not satisfied if the limit is contained only in the bylaws or other rules or regulations. Www irs gov com Moreover, the organizational test is not satisfied by statements of your organization's officers that you intend to operate only for exempt purposes. Www irs gov com Also, the test is not satisfied by the fact that your actual operations are for exempt purposes. Www irs gov com In interpreting an organization's articles, the law of the state where the organization was created is controlling. Www irs gov com If an organization contends that the terms of its articles have a different meaning under state law than their generally accepted meaning, such meaning must be established by a clear and convincing reference to relevant court decisions, opinions of the state attorney general, or other appropriate state authorities. Www irs gov com The following are examples illustrating the organizational test. Www irs gov com Example 1. Www irs gov com Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). Www irs gov com These articles appropriately limit the organization's purposes. Www irs gov com The organization meets the organizational test. Www irs gov com Example 2. Www irs gov com An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. Www irs gov com The organization will not be properly limited as to its purposes since all research is not scientific. Www irs gov com The organization does not meet the organizational test. Www irs gov com Example 3. Www irs gov com An organization's articles state that its purpose is to receive contributions and pay them over to organizations that are described in section 501(c)(3) and exempt from taxation under section 501(a). Www irs gov com The organization meets the organizational test. Www irs gov com Example 4. Www irs gov com If a stated purpose in the articles is the conduct of a school of adult education and its manner of operation is described in detail, such a purpose will be satisfactorily limited. Www irs gov com Example 5. Www irs gov com If the articles state the organization is formed for charitable purposes, without any further description, such language ordinarily will be sufficient since the term charitable has a generally accepted legal meaning. Www irs gov com On the other hand, if the purposes are stated to be charitable, philanthropic, and benevolent, the organizational requirement will not be met since the terms philanthropic and benevolent have no generally accepted legal meaning and, therefore, the stated purposes may, under the laws of the state, permit activities that are broader than those intended by the exemption law. Www irs gov com Example 6. Www irs gov com If the articles state an organization is formed to promote American ideals, or to foster the best interests of the people, or to further the common welfare and well-being of the community, without any limitation or provision restricting such purposes to accomplishment only in a charitable manner, the purposes will not be sufficiently limited. Www irs gov com Such purposes are vague and may be accomplished other than in an exempt manner. Www irs gov com Example 7. Www irs gov com A stated purpose to operate a hospital does not meet the organizational test since it is not necessarily charitable. Www irs gov com A hospital may or may not be exempt depending on the manner in which it is operated. Www irs gov com Example 8. Www irs gov com An organization that is expressly empowered by its articles to carry on social activities will not be sufficiently limited as to its power, even if its articles state that it is organized and will be operated exclusively for charitable purposes. Www irs gov com Dedication and Distribution of Assets Assets of an organization must be permanently dedicated to an exempt purpose. Www irs gov com This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the Federal Government or to a state or local government for a public purpose. Www irs gov com If the assets could be distributed to members or private individuals or for any other purpose, the organizational test is not met. Www irs gov com Dedication. Www irs gov com   To establish that your organization's assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. Www irs gov com Although reliance can be placed upon state law to establish permanent dedication of assets for exempt purposes, your organization's application probably can be processed much more rapidly if its articles of organization include a provision ensuring permanent dedication of assets for exempt purposes. Www irs gov com Distribution. Www irs gov com   Revenue Procedure 82-2, 1982-1 C. Www irs gov com B. Www irs gov com 367, identifies the states and circumstances in which the IRS will not require an express provision for the distribution of assets upon dissolution in the articles of organization. Www irs gov com The procedure also provides a sample of an acceptable dissolution provision for organizations required to have one. Www irs gov com   If a named beneficiary is to be the distributee, it must be one that would qualify and would be exempt within the meaning of section 501(c)(3) at the time the dissolution takes place. Www irs gov com Since the named beneficiary at the time of dissolution may not be qualified, may not be in existence, or may be unwilling or unable to accept the assets of the dissolving organization, a provision should be made for distribution of the assets for one or more of the purposes specified in this chapter in the event of any such contingency. Www irs gov com Sample articles of organization. Www irs gov com   See sample articles of organization in the Appendix in the back of this publication. Www irs gov com Educational Organizations and Private Schools If your organization wants to obtain recognition of exemption as an educational organization, you must submit complete information as to how your organization carries on or plans to carry on its educational activities, such as by conducting a school, by panels, discussions, lectures, forums, radio and television programs, or through various cultural media such as museums, symphony orchestras, or art exhibits. Www irs gov com In each instance, you must explain by whom and where these activities are or will be conducted and the amount of admission fees, if any. Www irs gov com You must submit a copy of the pertinent contracts, agreements, publications, programs, etc. Www irs gov com If you are organized to conduct a school, you must submit full information regarding your tuition charges, number of faculty members, number of full-time and part-time students enrolled, courses of study and degrees conferred, together with a copy of your school catalog. Www irs gov com See also Private Schools , discussed later. Www irs gov com Educational Organizations The term educational relates to: The instruction or training of individuals for the purpose of improving or developing their capabilities, or The instruction of the public on subjects useful to individuals and beneficial to the community. Www irs gov com Advocacy of a position. Www irs gov com   Advocacy of a particular position or viewpoint may be educational if there is a sufficiently full and fair exposition of pertinent facts to permit an individual or the public to form an independent opinion or conclusion. Www irs gov com The mere presentation of unsupported opinion is not educational. Www irs gov com Method not educational. Www irs gov com   The method used by an organization to develop and present its views is a factor in determining if an organization qualifies as educational within the meaning of section 501(c)(3). Www irs gov com The following factors may indicate that the method is not educational. Www irs gov com The presentation of viewpoints unsupported by facts is a significant part of the organization's communications. Www irs gov com The facts that purport to support the viewpoint are distorted. Www irs gov com The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of emotion than of objective evaluations. Www irs gov com The approach used is not aimed at developing an understanding on the part of the audience because it does not consider their background or training. Www irs gov com   Exceptional circumstances, however, may exist where an organization's advocacy may be educational even if one or more of the factors listed above are present. Www irs gov com Qualifying organizations. Www irs gov com   The following types of organizations may qualify as educational: An organization, such as a primary or secondary school, a college, or a professional or trade school, that has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled student body in attendance at a place where the educational activities are regularly carried on, An organization whose activities consist of conducting public discussion groups, forums, panels, lectures, or other similar programs, An organization that presents a course of instruction by correspondence or through the use of television or radio, A museum, zoo, planetarium, symphony orchestra, or other similar organization, A nonprofit children's day-care center, and A credit counseling organization. Www irs gov com College book stores, cafeterias, restaurants, etc. Www irs gov com   These and other on-campus organizations should submit information to show that they are controlled by and operated for the convenience of the faculty and student body or by whom they are controlled and whom they serve. Www irs gov com Alumni association. Www irs gov com   An alumni association should establish that it is organized to promote the welfare of the university with which it is affiliated, is subject to the control of the university as to its policies and destination of funds, and is operated as an integral part of the university or is otherwise organized to promote the welfare of the college or university. Www irs gov com If your association does not have these characteristics, it may still be exempt as a social club if it meets the requirements described in chapter 4, under 501(c)(7) - Social and Recreation Clubs . Www irs gov com Athletic organization. Www irs gov com   This type of organization must submit evidence that it is engaged in activities such as directing and controlling interscholastic athletic competitions, conducting tournaments, and prescribing eligibility rules for contestants. Www irs gov com If it is not so engaged, your organization may be exempt as a social club described in chapter 4. Www irs gov com Raising funds to be used for travel and other activities to interview and persuade prospective students with outstanding athletic ability to attend a particular university does not show an exempt purpose. Www irs gov com If your organization is not exempt as an educational organization, see Amateur Athletic Organizations , later in this chapter. Www irs gov com Private Schools Every private school filing an application for recognition of tax-exempt status must supply the IRS (on Schedule B, Form 1023) with the following information. Www irs gov com The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. Www irs gov com (This information also must be projected, so far as may be feasible, for the next academic year. Www irs gov com ) The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards. Www irs gov com A list of the school's incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations. Www irs gov com A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed. Www irs gov com The public school district and county in which the school is located. Www irs gov com How to determine racial composition. Www irs gov com   The racial composition of the student body, faculty, and administrative staff can be an estimate based on the best information readily available to the school, without requiring student applicants, students, faculty, or administrative staff to submit to the school information that the school otherwise does not require. Www irs gov com Nevertheless, a statement of the method by which the racial composition was determined must be supplied. Www irs gov com The identity of individual students or members of the faculty and administrative staff should not be included with this information. Www irs gov com   A school that is a state or municipal instrumentality (see Instrumentalities , near the beginning of this chapter), whether or not it qualifies for exemption under section 501(c)(3), is not considered to be a private school for purposes of the following discussion. Www irs gov com Racially Nondiscriminatory Policy To qualify as an organization exempt from federal income tax, a private school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and that it does not discriminate against applicants and students on the basis of race, color, or national or ethnic origin. Www irs gov com Also, the school must circulate information that clearly states the school's admission policies. Www irs gov com A racially nondiscriminatory policy toward students means that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administering its educational policies, admission policies, scholarship and loan programs, and athletic and other school-administered programs. Www irs gov com The IRS considers discrimination on the basis of race to include discrimination on the basis of color or national or ethnic origin. Www irs gov com The existence of a racially discriminatory policy with respect to the employment of faculty and administrative staff is indicative of a racially discriminatory policy as to students. Www irs gov com Conversely, the absence of racial discrimination in the employment of faculty and administrative staff is indicative of a racially nondiscriminatory policy as to students. Www irs gov com A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance is not discrimination on the basis of race when the purpose and effect of this policy is to promote establishing and maintaining the school's nondiscriminatory policy. Www irs gov com A school that selects students on the basis of membership in a religious denomination or unit is not discriminating if membership in the denomination or unit is open to all on a racially nondiscriminatory basis. Www irs gov com Policy statement. Www irs gov com   The school must include a statement of its racially nondiscriminatory policy in all its brochures and catalogs dealing with student admissions, programs, and scholarships. Www irs gov com Also, the school must include a reference to its racially nondiscriminatory policy in other written advertising that it uses to inform prospective students of its programs. Www irs gov com Publicity requirement. Www irs gov com   The school must make its racially nondiscriminatory policy known to all segments of the general community served by the school. Www irs gov com Selective communication of a racially nondiscriminatory policy that a school provides solely to leaders of racial groups will not be considered an effective means of communication to make the policy known to all segments of the community. Www irs gov com To satisfy this requirement, the school must use one of the following two methods. Www irs gov com Method one. Www irs gov com   The school can publish a notice of its racially nondiscriminatory policy in a newspaper of general circulation that serves all racial segments of the community. Www irs gov com Such publication must be repeated at least once annually during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. Www irs gov com When more than one community is served by a school, the school can publish the notice in those newspapers that are reasonably likely to be read by all racial segments in the communities that the school serves. Www irs gov com If this method is used, the notice must meet the following printing requirements. Www irs gov com It must appear in a section of the newspaper likely to be read by prospective students and their families. Www irs gov com It must occupy at least 3 column inches. Www irs gov com It must have its title printed in at least 12 point bold face type. Www irs gov com It must have the remaining text printed in at least 8 point type. Www irs gov com The following is an acceptable example of the notice:   NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS     The M School admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. Www irs gov com It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. Www irs gov com   Method two. Www irs gov com   The school can use the broadcast media to publicize its racially nondiscriminatory policy if this use makes the policy known to all segments of the general community the school serves. Www irs gov com If the school uses this method, it must provide documentation showing that the means by which this policy was communicated to all segments of the general community was reasonably expected to be effective. Www irs gov com In this case, appropriate documentation would include copies of the tapes or scripts used and records showing that there was an adequate number of announcements. Www irs gov com The documentation also would include proof that these announcements were made during hours when they were likely to be communicated to all segments of the general community, that they were long enough to convey the message clearly, and that they were broadcast on radio or television stations likely to be listened to by substantial numbers of members of all racial segments of the general community. Www irs gov com Announcements must be made during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. Www irs gov com Exceptions. Www irs gov com   The publicity requirements will not apply in the following situations. Www irs gov com First, if for the preceding 3 years the enrollment of a parochial or other church-related school consists of students at least 75% of whom are members of the sponsoring religious denomination or unit, the school can make known its racially nondiscriminatory policy in whatever newspapers or circulars the religious denomination or unit uses in the communities from which the students are drawn. Www irs gov com These newspapers and circulars can be distributed by a particular religious denomination or unit or by an association that represents a number of religious organizations of the same denomination. Www irs gov com If, however, the school advertises in newspapers of general circulation in the community or communities from which its students are drawn and the second exception (discussed next) does not apply to the school, then it must comply with either of the publicity requirements explained earlier. Www irs gov com Second, if a school customarily draws a substantial percentage of its students nationwide, worldwide, from a large geographic section or sections of the United States, or from local communities, and if the school follows a racially nondiscriminatory policy as to its students, the school may satisfy the publicity requirement by complying with the instructions explained earlier under Policy statement . Www irs gov com   The school can demonstrate that it follows a racially nondiscriminatory policy either by showing that it currently enrolls students of racial minority groups in meaningful numbers or, except for local community schools, when minority students are not enrolled in meaningful numbers, that its promotional activities and recruiting efforts in each geographic area were reasonably designed to inform students of all racial segments in the general communities within the area of the availability of the school. Www irs gov com The question as to whether a school demonstrates such a policy satisfactorily will be determined on the basis of the facts and circumstances of each case. Www irs gov com   The IRS recognizes that the failure by a school drawing its students from local communities to enroll racial minority group students may not necessarily indicate the absence of a racially nondiscriminatory policy when there are relatively few or no such students in these communities. Www irs gov com Actual enrollment is, however, a meaningful indication of a racially nondiscriminatory policy in a community in which a public school or schools became subject to a desegregation order of a federal court or are otherwise expressly obligated to implement a desegregation plan under the terms of any written contract or other commitment to which any federal agency was a party. Www irs gov com   The IRS encourages schools to satisfy the publicity requirement by using either of the methods described earlier, even though a school considers itself to be within one of the Exceptions. Www irs gov com The IRS believes that these publicity requirements are the most effective methods to make known a school's racially nondiscriminatory policy. Www irs gov com In this regard, it is each school's responsibility to determine whether either of the exceptions applies. Www irs gov com Such responsibility will prepare the school, if it is audited by the IRS, to demonstrate that the failure to publish its racially nondiscriminatory policy in accordance with either one of the publicity requirements was justified by one of the exceptions. Www irs gov com Also, a school must be prepared to demonstrate that it has publicly disavowed or repudiated any statements purported to have been made on its behalf (after November 6, 1975) that are contrary to its publicity of a racially nondiscriminatory policy as to students, to the extent that the school or its principal official was aware of these statements. Www irs gov com Facilities and programs. Www irs gov com   A school must be able to show that all of its programs and facilities are operated in a racially nondiscriminatory manner. Www irs gov com Scholarship and loan programs. Www irs gov com   As a general rule, all scholarship or other comparable benefits obtainable at the school must be offered on a racially nondiscriminatory basis. Www irs gov com This must be known throughout the general community being served by the school and should be referred to in its publicity. Www irs gov com Financial assistance programs, as well as scholarships and loans made under financial assistance programs, that favor members of one or more racial minority groups and that do not significantly detract from or are designed to promote a school's racially nondiscriminatory policy will not adversely affect the school's exempt status. Www irs gov com Certification. Www irs gov com   An individual authorized to take official action on behalf of a school that claims to be racially nondiscriminatory as to students must certify annually, under penalties of perjury, on Schedule E (Form 990 or 990-EZ) or Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax, whichever applies, that to the best of his or her knowledge and belief the school has satisfied all requirements that apply, as previously explained. Www irs gov com   Failure to comply with the guidelines ordinarily will result in the proposed revocation of the exempt status of a school. Www irs gov com Recordkeeping requirements. Www irs gov com With certain exceptions, given later, each exempt private school must maintain the following records for a minimum period of 3 years, beginning with the year after the year of compilation or acquisition. Www irs gov com Records indicating the racial composition of the student body, faculty, and administrative staff for each academic year. Www irs gov com Records sufficient to document that scholarship and other financial assistance is awarded on a racially nondiscriminatory basis. Www irs gov com Copies of all materials used by or on behalf of the school to solicit contributions. Www irs gov com Copies of all brochures, catalogs, and advertising dealing with student admissions, programs, and scholarships. Www irs gov com (Schools advertising nationally or in a large geographic segment or segments of the United States need only maintain a record sufficient to indicate when and in what publications their advertisements were placed. Www irs gov com ) The racial composition of the student body, faculty, and administrative staff can be determined in the same manner as that described at the beginning of this section. Www irs gov com However, a school cannot discontinue maintaining a system of records that reflect the racial composition of its students, faculty, and administrative staff used on November 6, 1975, unless it substitutes a different system that compiles substantially the same information, without advance approval of the IRS. Www irs gov com The IRS does not require that a school release any personally identifiable records or personal information except in accordance with the requirements of the Family Educational Rights and Privacy Act of 1974. Www irs gov com Similarly, the IRS does not require a school to keep records prohibited under state or federal law. Www irs gov com Exceptions. Www irs gov com   The school does not have to independently maintain these records for IRS use if both of the following are true. Www irs gov com Substantially the same information has been included in a report or reports filed with an agency or agencies of federal, state, or local governments, and this information is current within 1 year. Www irs gov com The school maintains copies of these reports from which this information is readily obtainable. Www irs gov com If these reports do not include all of the information required, as discussed earlier, records providing such remaining information must be maintained by the school for IRS use. Www irs gov com Failure to maintain records. Www irs gov com   Failure to maintain or to produce the required records and information, upon proper request, will create a presumption that the organization has failed to comply with these guidelines. Www irs gov com Organizations Providing Insurance An organization described in sections 501(c)(3) or 501(c)(4) may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. Www irs gov com However, this rule does not apply to state-sponsored organizations described in sections 501(c)(26) or 501(c)(27), which are discussed in chapter 4, or to charitable risk pools, discussed next. Www irs gov com Charitable Risk Pools A charitable risk pool is treated as organized and operated exclusively for charitable purposes if it: Is organized and operated only to pool insurable risks of its members (not including risks related to medical malpractice) and to provide information to its members about loss control and risk management, Consists only of members that are section 501(c)(3) organizations exempt from tax under section 501(a), Is organized under state law authorizing this type of risk pooling, Is exempt from state income tax (or will be after qualifying as a section 501(c)(3) organization), Has obtained at least $1,000,000 in startup capital from nonmember charitable organizations, Is controlled by a board of directors elected by its members, and Is organized under documents requiring that: Each member be a section 501(c)(3) organization exempt from tax under section 501(a), Each member that receives a final determination that it no longer qualifies under section 501(c)(3) notify the pool immediately, and Each insurance policy issued by the pool provide that it will not cover events occurring after a final determination described in (b). Www irs gov com Other Section 501(c)(3) Organizations In addition to the information required for all organizations, as described earlier, you should include any other information described in this section. Www irs gov com Charitable Organizations If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. Www irs gov com Some examples of this type of organization are those organized for: Relief of the poor, the distressed, or the underprivileged, Advancement of religion, Advancement of education or science, Erection or maintenance of public buildings, monuments, or works, Lessening the burdens of government, Lessening of neighborhood tensions, Elimination of prejudice and discrimination, Defense of human and civil rights secured by law, and Combating community deterioration and juvenile delinquency. Www irs gov com The rest of this section contains a description of the information to be provided by certain specific organizations. Www irs gov com This information is in addition to the required inclusions described in chapter 1, and other statements requested on Form 1023. Www irs gov com Each of the following organizations must submit the information described. Www irs gov com Charitable organization supporting education. Www irs gov com   Submit information showing how your organization supports education — for example, contributes to an existing educational institution, endows a professorial chair, contributes toward paying teachers' salaries, or contributes to an educational institution to enable it to carry on research. Www irs gov com Scholarships. Www irs gov com   If the organization awards or plans to award scholarships, complete Schedule H of Form 1023. Www irs gov com Also, submit the following: Criteria used for selecting recipients, including the rules of eligibility. Www irs gov com How and by whom the recipients are or will be selected. Www irs gov com If awards are or will be made directly to individuals, whether information is required assuring that the student remains in school. Www irs gov com If awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer— Whether any preference is or will be accorded an applicant by reason of the parent's position, length of employment, or salary, Whether as a condition of the award the recipient must upon graduation accept employment with the company, and Whether the award will be continued even if the parent's employment ends. Www irs gov com A copy of the scholarship application form and any brochures or literature describing the scholarship program. Www irs gov com Hospital. Www irs gov com   If you are organized to operate a charitable hospital, complete and attach Section I of Schedule C, Form 1023. Www irs gov com   If your hospital was transferred to you from proprietary ownership, complete and attach Schedule G of Form 1023. Www irs gov com You must attach a list showing: The names of the active and courtesy staff members of the proprietary hospital, as well as the names of your medical staff members after the transfer to nonprofit ownership, and The names of any doctors who continued to lease office space in the hospital after its transfer to nonprofit ownership and the amount of rent paid. Www irs gov com Submit also an appraisal showing the fair rental value of the rented space. Www irs gov com Clinic. Www irs gov com   If you are organized to operate a clinic, attach a statement including: A description of the facilities and services, To whom the services are offered, such as the public at large or a specific group, How charges are determined, such as on a profit basis, to recover costs, or at less than cost, By whom administered and controlled, Whether any of the professional staff (that is, those who perform or will perform the clinical services) also serve or will serve in an administrative capacity, and How compensation paid the professional staff is or will be determined. Www irs gov com Home for the aged. Www irs gov com   If you are organized to operate a home for the aged, complete and attach Schedule F of Form 1023 and required attachments. Www irs gov com Community nursing bureau. Www irs gov com   If you provide a nursing register or community nursing bureau, provide information showing that your organization will be operated as a community project and will receive its primary support from public contributions to maintain a nonprofit register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses for the benefit of hospitals, health agencies, doctors, and individuals. Www irs gov com Organization providing loans. Www irs gov com   If you make, or will make, loans for charitable and educational purposes, submit the following information. Www irs gov com An explanation of the circumstances under which such loans are, or will be, made. Www irs gov com Criteria for selection, including the rules of eligibility. Www irs gov com How and by whom the recipients are or will be selected. Www irs gov com Manner of repayment of the loan. Www irs gov com Security required, if any. Www irs gov com Interest charged, if any, and when payable. Www irs gov com Copies in duplicate of the loan application and any brochures or literature describing the loan program. Www irs gov com Public-interest law firms. Www irs gov com   If your organization was formed to litigate in the public interest (as opposed to providing legal services to the poor), such as in the area of protection of the environment, you should submit the following information. Www irs gov com How the litigation can reasonably be said to be representative of a broad public interest rather than a private one. Www irs gov com Whether the organization will accept fees for its services. Www irs gov com A description of the cases litigated or to be litigated and how they benefit the public generally. Www irs gov com Whether the policies and program of the organization are the responsibility of a board or committee representative of the public interest, which is neither controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in this chapter. Www irs gov com Whether the organization is operated, through sharing of office space or otherwise, in a way to create identification or confusion with a particular private law firm. Www irs gov com Whether there is an arrangement to provide, directly or indirectly, a deduction for the cost of litigation that is for the private benefit of the donor. Www irs gov com Acceptance of attorneys' fees. Www irs gov com   A nonprofit public-interest law firm can accept attorneys' fees in public-interest cases if the fees are paid directly by its clients and the fees are not more than the actual costs incurred in the case. Www irs gov com Upon undertaking a representation, the organization cannot withdraw from the case because the litigant is unable to pay the fee. Www irs gov com   Firms can accept fees awarded or approved by a court or an administrative agency and paid by an opposing party if the firms do not use the likelihood or probability of fee awards as a consideration in the selection of cases. Www irs gov com All fee awards must be paid to the organization and not to its individual staff attorneys. Www irs gov com Instead, a public-interest law firm can reasonably compensate its staff attorneys, but only on a straight salary basis. Www irs gov com Private attorneys, whose services are retained by the firm to assist it in particular cases, can be compensated by the firm, but only on a fixed fee or salary basis. Www irs gov com   The total amount of all attorneys' fees (court awarded and those received from clients) must not be more than 50% of the total cost of operations of the organization's legal functions, calculated over a 5-year period. Www irs gov com   If, in order to carry out its program, an organization violates applicable canons of ethics, disrupts the judicial system, or engages in any illegal action, the organization will jeopardize its exemption. Www irs gov com Religious Organizations To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines. Www irs gov com That the particular religious beliefs of the organization are truly and sincerely held. Www irs gov com That the practices and rituals associated with the organization's religious belief or creed are not illegal or contrary to clearly defined public policy. Www irs gov com Therefore, your group (or organization) may not qualify for treatment as an exempt religious organization for tax purposes if its actions, as contrasted with its beliefs, are contrary to well established and clearly defined public policy. Www irs gov com If there is a clear showing that the beliefs (or doctrines) are sincerely held by those professing them, the IRS will not question the religious nature of those beliefs. Www irs gov com Churches. Www irs gov com   Although a church, its integrated auxiliaries, or a convention or association of churches is not required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions, the organization may find it advantageous to obtain recognition of exemption. Www irs gov com In this event, you should submit information showing that your organization is a church, synagogue, association or convention of churches, religious order, or religious organization that is an integral part of a church, and that it is engaged in carrying out the function of a church. Www irs gov com   In determining whether an admittedly religious organization is also a church, the IRS does not accept every assertion that the organization is a church. Www irs gov com Because beliefs and practices vary so widely, there is no single definition of the word church for tax purposes. Www irs gov com The IRS considers the facts and circumstances of each organization applying for church status. Www irs gov com Convention or association of churches. Www irs gov com   Any organization that is otherwise a convention or association of churches will not fail to qualify as a church merely because the membership of the organization includes individuals as well as churches or because the individuals have voting rights in the organization. Www irs gov com Integrated auxiliaries. Www irs gov com   An organization is an integrated auxiliary of a church if all the following are true. Www irs gov com The organization is described both in sections 501(c)(3) and 509(a)(1), 509(a)(2), or 509(a)(3). Www irs gov com It is affiliated with a church or a convention or association of churches. Www irs gov com It is internally supported. Www irs gov com An organization is internally supported unless both of the following are true. Www irs gov com It offers admissions, goods, services, or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for a small part of the cost). Www irs gov com It normally gets more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses. Www irs gov com Special rule. Www irs gov com   Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy (1) and (2) shown earlier are integrated auxiliaries of a church even if they are not internally supported. Www irs gov com   In order for an organization (including a church and religious organization) to qualify for tax exemption, no part of its net earnings can inure to any individual. Www irs gov com   Although an individual is entitled to a charitable deduction for contributions to a church, the assignment or similar transfer of compensation for personal services to a church generally does not relieve a taxpayer of federal income tax liability on the compensation, regardless of the motivation behind the transfer. Www irs gov com Scientific Organizations You must show that your organization's research will be carried on in the public interest. Www irs gov com Scientific research will be considered to be in the public interest if the results of the research (including any patents, copyrights, processes, or formulas) are made available to the public on a nondiscriminatory basis; if the research is performed for the United States or a state, county, or municipal government; or if the research is carried on for one of the following purposes. Www irs gov com Aiding in the scientific education of college or university students. Www irs gov com Obtaining scientific information that is published in a treatise, thesis, trade publication, or in any other form th