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Charitable Organization

In: Business and Management

Submitted By dmiranda9012
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Generosity is a quality, the desire to give to others without being asked. Before even the enactment of any legislation, philanthropists helped to shape the way we organize to support the less fortunate. The history of charitable organizations in the United States originated almost at the same time as the formation of our new nation. Benjamin Franklin, was one the founders of our nations and the earliest American philanthropists. He founded the University of Pennsylvania to educate youth. The early setters formed charitable and voluntary associations to help with issues of the era like education, orphanages, and illness (Arnsberger, Ludlum, Riley & Stanton, 2008 p. 1). Young Americans were able to form charitable organizations to fill gaps in the social welfare programs. Back then, charities were mainly hospitals and orphanages support by religious groups and wealthy individuals. During the 19th century, these organizations were controlled and founded by private corporations or a person (Arnsberger, Ludlum, Riley & Stanton, 2008 p. 2). The bloom of the American industry gave birth to bigger corporations; at the same time, the increase of more formal charitable organizations. It wasn’t until the late 19th century that government began paying more attention to this new sector. The first legislation the government imposed was in1894, the Tariff Act that established a flat two percent tax to corporate income, but excluded charities. However, the Tariff Act was declared unconstitutional two years after it was approved (Arnsberger, Ludlum, Riley & Stanton, 2008 p. 20). Later, a variety of additional legislation placed important restrictions on tax exempt organizations. Nevertheless, the legislation enacted between 1917and 1969 remain the cornerstone of tax-exemption in the United States (Arnsberger, Ludlum, Riley & Stanton, 2008 P. 18). In the last two decades, the tax-exempt sector has grown substantially and congress has frequently updated the tax code to reflect this growth and evolution (Arnsberger, Ludlum, Riley & Stanton, 2008 pp. 9-18). The graph below shows the top ten public charities in terms of total assets for the tax year 1985 and 2004 (Arnsberger, Ludlum, Riley & Stanton, 2008 p. 9).

Non-Profit Organization vs. Charity
A non-profit organization is a not conducted or maintained for the purpose of making a profit ("Nonprofit," 2011). ). The Internal Revenue Service defines a non-profit organization as a tax-except entity. Not all non-profit organizations are tax-exempt under federal law. To be tax-exempt, the organization must be described in section 501(c) and apply for recognition of exemption (Intro and Tax-Exempt Status 2010 p. 4). Below is a list of most common tax-exempt or non-profit organizations: * 501(c)(3) Religious, Educational, Charitable * 501(c)(4) Civic Leagues, Social Welfare Organizations * 501(c)(5) Labor, Agricultural, or Horticultural * 501(c)(6) Business Leagues, Chambers of Commerce * 501(c)(7) Social and Recreational Clubs * 501(c)(8) Fraternal Beneficiary Societies and Associations * 501(c)(10) Domestic Fraternal Societies and Associations * 501(c)(19) Veterans’ Organizations Charity
Non-profit organizations are simply any organization that fits under 501(c). Nonetheless, charities are only the ones that exercise and comply with the requirements listed on 501(c)(3) of the Internal Revenue Code (IRC).
The definition of charity in Webster’s dictionary is described in different ways: benevolent goodwill toward or love of humanity; generosity and helpfulness especially toward the needy or suffering, an institution engaged in relief of the poor, public provision for the relief of the needy; gift for public benevolent purposes, an institution (as a hospital) founded by such a gift ("Merriam - Webster," 2011). On the other hand, government classifies a charity based on IRC section 501(c)(3). Organizations that meet the requirements under this section are exempt from federal income tax. In addition, contributions made to charitable organizations from individuals and corporations are deductible under Code section 170 (Intro and Tax-Exempt Status 2010 p. 3). Every tax-exempt charitable organization is classified as either a public charity or a private foundation. Generally, organizations that are classified as public charities are those that are (Intro and Tax-Exempt Status 2010 pp. 9-11): (i) churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities (ii) have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes (iv) actively function in a supporting relationship to one or more existing public charities.
Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs ("Life cycle of," 2013).
Once an organization applies for tax-exempt, it is considered a private foundation with the exception of churches and certain educational organizations and trusts. (Intro and Tax-Exempt Status 2010 p.10). An organization’s level of public support is calculated on the basis of a 5-year moving average, which includes the current tax year and the 4 years following the current year (Intro and Tax-Exempt Status 2010 pp. 9-10). The primary distinction between a public charity and a private foundation lies in the source of financial support. A public charity typically has a broad base of public support whereas a private foundation generally is supported by just a few individuals, such as members of a family (Intro and Tax-Exempt Status 2010 p. 9). Whether a 501(c)(3) organization is classified as a public charity or private foundation is important because different tax rules apply to each. For example, the deductibility of contributions to a private foundation is more limited than the deductibility of contributions to a public charity. (Intro and Tax-Exempt Status 2010 p. 9). Pubic charitable organizations are required to comply with federal tax law to maintain tax-exempt status and avoid penalties. They must be organized and operate exclusively for one or more exempt purpose: charitable, educational, religious, scientific, literary, fostering national or international amateur sports competition, preventing cruelty to children or animals and testing for public safety (Intro and Tax-Exempt Status 2010 pp. 5-8). If charitable organization fails to comply, IRS revokes its license for failure to comply.
According to IRS Statistics of Income (SOI), nonprofit charities exempt under 501(c)(3) represent the vast majority of organizations, and account for the bulk of the financial activity for the tax-exempt sector. For Tax Year 2008, over 315,000 charities exempt under section 501(c)(3) filed Forms 990 with the IRS, and those organizations reported nearly $2.5 trillion in assets and over $1.4 billion in revenue (IRS SOI 2008 p.1). Large hospitals and universities dominated the financial activity of the nonprofit charitable sector. In fact, nine of the ten largest organizations (measured by assets) were hospitals or university-affiliated organizations. Large organizations received the majority of their revenue from program services. Smaller organizations relied on contributions, gifts, and grants as their primary source of revenue (IRS SOI 2008 p.1).

The Boston Globe “In Nonprofit Game, Athletes Post Losing Records”
Recently Boston Globe published an article regarding professional athletes and their charitable organizations. The newspaper scrutinized the financial records of 50 professional athletes. The newspaper pulled the IRS records and found out that half of these athletes spent less than 65 percent of the revenues on their charitable organizations. For example, only 37 cents of every dollar raised by the Josh Beckett Foundation went toward its mission to “improve the health and well-being of children.” That’s far less than the 65 to 75 cents that nonprofit specialists say is an acceptable minimum. Boston Globe named other high profile athletes that fell low on the acceptable standard. A foundation started by New York Yankees third baseman, Alex Rodriguez gave only 1 percent of proceeds to charity during its first year of operation in 2006, and then he stopped submitting mandatory financial reports to the IRS. Baltimore Ravens receiver Anquan Boldin received an award for charity and volunteerism in 2010, but his organization gave away less than a fifth of the money he raised (Borchers, Callum 2013). There is nothing legally specifying how much should be allocated to the cause, so they keep a big percentage to themselves. However, there are other successful professional athletes who have succeeded by simplifying fund-raising efforts, being generous with their own money, or hiring a professional staff (Borchers, Callum 2013). Here are three who put those principles into practice: San Francisco 49ers quarterback Alex Smith, raised $839,244 and gave away 91% to his Alex Smith Foundation. Carmelo Anthony raised $3.3 million and 87% was given to his Carmelo Anthony Foundation. Retired quarterback/ESPN analyst Steve Young raised $6.2 million and 75% was given to Forever Young Foundation for Children (Borchers, Callum 2013). Athlete’s charity organizations are subject to fail because most of the athletes are not trained in how to raise and distribute the money. Perhaps they feel obligated by societal expectations that they are blessed to make millions playing and feel the need to give back to the community (Borchers, Callum 2013).

Life cycle of a public charity/private foundation. (2013, February 1). Retrieved from
Arnsberger, P., Ludlum, M., Riley, M., & Stanton, M. (2008). Retrieved from Statistics of Income Bulletin website:
IRS SOI (2008). Retrieved from website:
IRS. (2011). Retrieved from IRS website:
Nonprofit. (2011, November 27). Retrieved from
Merriam - webster dictionary. (2011). Retrieved from
IRS. (2012). Retrieved from IRS website:
Intro and Tax-Exempt Status, Chapter 1 and 2 (2010, March 28). Retrieved from IRS Website: Borchers, Callum. (2013, February 24). “In Nonprofit Game, Athletes Post Losing Records” Retrieved from:

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