Most often individuals and organizations seeking to develop an international radiology project elect to establish a nonprofit organization that qualifies as a public charity described in section 501(c)(3) of the Internal Revenue Code. Section 501(c)(3) provides for the exemption from federal income tax of an organization organized and operated exclusively for charitable purposes, which include the advancement of education and the promotion of health. An organization that satisfies the requirements of section 501(c)(3) enjoys exemption from federal income tax, and may also be exempt from state and local income taxes, real and personal property taxes, and sales and use taxes. Most importantly, perhaps, a 501(c)(3) organization is also eligible to receive tax-deductible contributions from donors.

Along with these advantages come a variety of hurdles an organization must clear to gain, and retain, tax-exempt status as a public charity. In particular, a 501(c)(3) organization must be operated exclusively for exempt purposes and not for the benefit of any private shareholders. This means, for example, it may have its tax-exempt status revoked if it has a substantial purpose of benefiting a private party or operating a commercial business. The organization may pay its leaders reasonable compensation, but it can put its tax-exempt status in jeopardy if any of its income or assets inure to the benefit of shareholders, officers, directors, or others with control over the organization. Other restrictions also apply. For instance, a section 501(c)(3) organization is limited in the amount of lobbying it can conduct, and it cannot directly or indirectly participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. A section 501(c)(3) organization is also subject to various reporting obligations, including an extensive annual public filing on IRS Form 990 and various state filings depending on where it operates or solicits contributions.

To qualify as a 501(c)(3) organization, a public charity must file an initial exemption application on IRS Form 1023. Completing the Form 1023 can be time consuming and relatively costly—the initial IRS filing fee is currently $850 for most organizations. A new organization can begin its operations before the IRS has approved its exemption application, but it should not represent to donors that their contributions are tax deductible until the IRS has granted the organization a determination letter recognizing it as a 501(c)(3) organization. Unfortunately, the IRS often takes many months to process exemption applications and it is not uncommon for organizations to wait for 6 months or more before receiving the necessary IRS approval. As a result, many new nonprofit organizations use fiscal sponsors (described below) to help them raise funds until they receive their IRS determination letter.

Once the organization receives its IRS determination letter, it may begin soliciting tax-deductible contributions from donors. If the organization succeeds in raising funds, it may use those funds to support its activities overseas or it may regrant those funds to foreign organizations that will use the funds in furtherance of the organization’s charitable purposes. It is important to note, however, that the organization may treat donations as tax-deductible gifts only if the organization exercises dominion and control over the donated funds. It cannot act as mere pass-through entity transferring earmarked funds from donors to designated foreign organizations. Instead, it must retain the authority to withhold funds from its foreign partners and use the funds for other charitable purposes if those foreign partners are unable or unwilling to use the funds in furtherance of the organization’s charitable purposes. Additional restrictions on the organization’s ability to transfer funds international are described in Part II below.

Instead of creating a charitable organization, individuals and organizations seeking to conduct an international radiology project may want to consider creating a tax-exempt social welfare organization described in section 501(c)(4) of the Internal Revenue Code. To qualify for exemption from federal income tax, a 501(c)(4) organization must not be organized or operated for profit and must be operated exclusively for the promotion of social welfare. An organization is considered to be operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. A nonprofit organization that conducts programs that promote health or education, or that provides medical services to underserved or low-income communities, will likely qualify as a social welfare organization within the meaning of section 501(c)(4).

Unlike a charitable organization, a section 501(c)(4) organization is permitted to engage in unlimited amounts of lobbying at the federal, state, and local level. In addition, a section 501(c)(4) organization is permitted to engage in partisan political campaign activity provided that such campaign activity is not its “primary” activity. Whether an activity is primary depends on all of the relevant facts and circumstances, but generally an activity will be a treated as a secondary activity if expenditures for it are 35 % or less of the organization’s total annual expenditures. In some cases, organizations take the position that an activity will constitute a secondary activity if expenditures for it are as high as 49 % but less than 50 % of the organization’s total expenditures. The IRS is reviewing this issue, however, so it is advisable to consult with an attorney before using a social welfare organization to engage in any substantial amount of partisan political campaign activity.

To qualify as tax-exempt organization, a section 501(c)(4) organization may file an application for exemption on IRS Form 1024. A section 501(c)(4) organization is not technically required to file the Form 1024 with the IRS in order to operate as a tax-exempt social welfare organization, but many organizations choose to file the application in order to have written confirmation from the IRS of the organization’s tax-exempt status. Recently, the IRS has issued guidance indicating that any organization that wants an IRS determination letter recognizing it as a tax-exempt social welfare organization retroactive to the date of the organization’s formation must submit the application for exemption within 27 months of the date of its formation. Any social welfare organization that applies for exemption after this 27-month window has lapsed will generally receive an IRS determination letter recognizing its tax-exempt status back to the postmark date of the application. The IRS will no longer be issuing retroactive recognition of exemption for organizations that have not filed within 27 months of formation. This does not mean that a 501(c)(4) organization that filed after the 27-month window has lapsed was not tax exempt during the first 27 months of its existing; it merely has failed to obtain IRS assurance that it qualified as a tax-exempt organization during the first months of its existence.

Although the social welfare organization has many advantages, there are at least two major drawbacks to operating as a tax-exempt 501(c)(4) organization. First, a social welfare organization is not eligible to receive tax-deductible contributions, which can severely limit its ability to raise money from donors. As a result, a 501(c)(4) organization should be established to conduct an international radiology project only if it is confident that it will not need tax-deductible gifts from individual donors in order to sustain its operations. Second, a social welfare organization may have less favorable tax treatment than a 501(c)(3) organization under the laws of various US states. In some cases, state laws do not grant a social welfare organization exemption from sales taxes, personal property taxes, or real property taxes to the same extent as a 501(c)(3) organization. Accordingly, if the organization intends to conduct significant activities or purchases medical equipment or other valuable items in the United States, it should check its state and local tax rules before seeking to qualify as a section 501(c)(4) organization.

As described above, a public charity should not represent to donors that it is eligible to receive tax-deductible contributions until it has received its IRS determination letter recognizing it as a 501(c)(3) organization. Before the organization receives its IRS determination letter, the organization may need to begin raising funds and receiving donations. In many cases, a section 501(c)(3) organization seeking donations during its start-up phase will rely on a “fiscal sponsor” to accept and administer donations on its behalf. In general, a fiscal sponsor is a nonprofit organization that has received an IRS determination letter recognizing it as a public charity and has agreed to accept and administer charitable contributions on behalf of the new section 501(c)(3) organization until it receives its own IRS determination letter. The fiscal sponsor will receive donations, issue charitable contribution receipts to donors, and then distribute the funds to the nonprofit organization in accordance with the terms of any fiscal sponsorship agreement between the sponsor and the organization. Most fiscal sponsors charge nonprofit organizations a small administrative fee to provide these services.

Once the organization has received its IRS determination letter recognizing it as a 501(c)(3) organization, it will no longer need a fiscal sponsor to accept and administer charitable contributions on its behalf and can begin receiving tax-deductible gifts directly. Once a section 501(c)(3) organization begins receiving tax-deductible gifts from donors, it must provide its donors with a contemporaneous written acknowledgement of any donation of $250 or more, including contributions of cash or property. The acknowledgement must indicate the amount of any cash and a description of any property contributed, and must state whether the organization provided any goods or services in exchange for the gift and, if so, a description and a good faith estimate of the value of those goods or services.