Q&A #84 – Can a charitable assistance program be limited to people in a single neighborhood?
Question: I lead a 501(c)(3) organization that will be launching an assistance program for financially distressed residents in a specific neighborhood that has been hit hard by economic troubles. However, I have heard that charitable assistance programs need to be open to a wide base of people. Is it proper to limit the program to people in a single neighborhood, or does the program have to be more widely open?
Answer: It is a long-recognized principle that individuals who receive assistance from a 501(c)(3) charitable organization must be part of a “charitable class” that is sufficiently large or indefinite, such that the assistance program benefits the community as a whole, rather than small, pre-selected group of people. See IRS Pub. 3833. Limiting benefits to residents of a single neighborhood would probably satisfy this requirement so long as this restriction doesn’t function to benefit a blatantly small or self-interested group of people, although the line can be difficult to discern.
This principle stems from the rule prohibiting excessive “private benefit.” This rule generally provides that 501(c)(3) assets cannot be used for the benefit a private individual, business, or non-charitable entity, except to the extent such benefit is incidental to an activity that properly furthers the organization’s 501(c)(3) purposes. Providing assistance to a group that constitutes a “charitable class” (for example, financially distressed people, students, the elderly, the disabled, victims of natural disasters) is one way to be on the right side of the private benefit rule. Serving these groups is generally considered inherent to an organization’s proper 501(c)(3) purposes, and the personal benefit the recipients receive is therefore incidental to these charitable purposes.
However, a 501(c)(3) organization cannot limit assistance to small, pre-selected group of people, as this would not confer sufficient benefit to the community as a whole, even if these people are otherwise deserving of the assistance. In other words, a 501(c)(3) organization’s purposes must be broader than helping a specific person, family, or the current employees of a particular company.
This does not mean a large number of people have to receive assistance. Helping a small number is acceptable so long as the potential pool is sufficiently large or indefinite. Nor does it prohibit charitable programs from having appropriate limits on eligibility so long as these limits are not overly narrow. An illustrative example is found in IRS Revenue Ruling 56-403, in which the IRS approved of a scholarship program that was limited to the members of all chapters of a particular fraternity who are in their senior year at a college or university, and was granted based on academic performance, character, and service to the institution. This limitation was deemed acceptable because there was “no specific designation of persons” eligible for the scholarship, and its purposes were “not so personal, private, or selfish in nature as to lack the elements of public usefulness.”
Planning Tip – One of the most important documents in any charitable assistance program (including scholarships, benevolence funds, and other forms of assistance) is the recipient application form. The questions asked on the application form will provide the strongest evidence of the program’s purpose. Think carefully about eligibility and other criteria set forth in the application form, keeping private benefit and “charitable class” principles in mind.
In your case, the residents of a specific neighborhood would probably constitute a sufficiently large or indefinite class, provided the facts are not egregious. For example, if the “neighborhood” comprised a very small number of households (such that these residents could be deemed pre-selected or specifically designated) or if the neighborhood were made up mostly of friends, neighbors, or family members of Board members, there is a strong possibility that the IRS would have a problem with this limitation.
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