What is IRS Code Section 170(c)(2)?

Internal Revenue Code Section 170 is the foundation of the U.S. system for deducting charitable donations. It outlines the rules for when and how much individuals and corporations can deduct from their taxes for contributions made to qualified organizations. Within this section, subsection 170(c)(2) provides a specific definition for one of the most common types of eligible recipients, which must be based in the United States.

For a taxpayer to deduct a contribution, the recipient organization must satisfy a set of criteria laid out within this part of the tax code. These standards govern the organization’s legal structure, its mission, its financial operations, and its political activities. Understanding these requirements is necessary for both the organizations seeking to receive these contributions and the donors who wish to claim a deduction.

Organizational and Purpose Tests

The initial requirements of Section 170(c)(2) focus on an organization’s legal structure and its stated mission. The entity must be established as a specific type of legal form: a corporation, a trust, or a community chest, fund, or foundation. The law mandates that the organization must be created or organized in the United States or in any of its possessions. This domestic requirement ensures that the benefits of the U.S. tax deduction are directed toward entities governed by U.S. law.

A key part of this section is the “organized and operated exclusively” test. This dual requirement means an organization must be both formed for and primarily engaged in activities that accomplish specific exempt purposes. The term “organized exclusively” refers to the entity’s legal charter or founding documents, such as articles of incorporation or a trust instrument. These documents must explicitly limit the organization’s purposes to one or more of the exempt activities listed in the statute.

The “operated exclusively” part of the test examines the organization’s actual activities. While the term “exclusively” is not interpreted literally by the IRS, it does mean that the organization’s activities must primarily be directed at its exempt mission. Any non-exempt activities must be an insubstantial part of its overall operations. The law specifies a list of qualifying purposes: religious, charitable, scientific, literary, or educational. The category of “charitable” is interpreted broadly and includes activities such as relief of the poor, advancement of religion or education, and the promotion of social welfare.

The statute also includes two other specific purposes. An organization can be formed to foster national or international amateur sports competition, but it is explicitly prohibited from providing athletic facilities or equipment as its primary activity. The final qualifying purpose is the prevention of cruelty to children or animals. An organization must align its mission and its day-to-day operations with one or more of these sanctioned goals.

Financial and Political Activity Limitations

Beyond its core mission, an organization qualifying under Section 170(c)(2) must adhere to limitations on its financial and political conduct. A primary rule is the prohibition against private inurement. This standard dictates that “no part of the net earnings… inures to the benefit of any private shareholder or individual.” This means an organization’s income and assets cannot be used to excessively benefit individuals who have a personal or private interest in the organization, such as its founders or officers.

Private inurement can take many forms, and the IRS examines the substance of transactions rather than their form. Examples of prohibited inurement include paying unreasonable compensation for services, making loans to insiders on terms that are more favorable than what is available to the public, or purchasing assets from an officer for more than fair market value. Any transaction that results in an insider receiving benefits beyond what is considered reasonable can jeopardize its tax-exempt status and the deductibility of donations.

The code also places firm restrictions on an organization’s political activities. An entity is disqualified if a “substantial part” of its activities consists of attempting to influence legislation, commonly known as lobbying. The term “substantial” is not defined by a specific percentage in the code; instead, it is determined by the IRS based on a “facts and circumstances” test, which weighs all relevant factors, including the time and money spent on lobbying.

An even stricter rule applies to campaign activities. There is an absolute prohibition on participating or intervening in any political campaign on behalf of, or in opposition to, any candidate for public office. Unlike the “substantial part” test for lobbying, there is no tolerance for campaign intervention. Even a single instance of such activity, like making a public statement of endorsement or contributing funds to a political campaign, can lead to the revocation of the organization’s eligible status.

Confirming an Organization’s Eligibility

For a donor, confirming that an organization meets the criteria of Section 170(c)(2) is a straightforward process. Organizations that satisfy these requirements are the same entities that typically seek and receive tax-exempt status from the IRS under Section 501(c)(3). The two sections are closely linked, with Section 501(c)(3) defining the requirements for tax exemption and Section 170(c)(2) confirming that contributions to most of these organizations are deductible.

The most reliable method for a donor to verify an organization’s status is by using the IRS’s online tool, the Tax Exempt Organization Search. This public database allows users to search for an organization by its legal name or its Employer Identification Number (EIN). The search results provide key details about the organization, including whether it is currently eligible to receive tax-deductible charitable contributions. The search result includes the “deductibility code,” which confirms its status.

This tool provides assurance to donors that the organization is in good standing with the IRS. The database is regularly updated to reflect any changes in an organization’s status, such as a revocation of its tax-exempt status. This makes it a dependable resource for due diligence before making a donation.

Another resource for verification is IRS Publication 78, the Cumulative List of Organizations described in Section 170(c). While historically a printed document, this data is now integrated into the online search tool, providing a comprehensive list of qualified entities. By using these official IRS resources, a donor can confirm that a contribution to a specific organization will be recognized as a deductible charitable donation.