By: Lisa W. Heller, CPA, Tax Senior Manager

Charities exist to help people in need. For purposes of Section 501(c)(3), the term “charitable” is defined to include “relief of the poor and distressed or of the underprivileged…” In order to further charitable purposes, this relief must be directed to a charitable class of beneficiaries, rather than to specific individuals or families.


Charitable organizations must not violate the Section 501(c)(3) prohibition

on private inurement; that is, they must not use their funds to benefit private individuals or entities at the expense of the overall charitable mission. They also must establish that they are not organized or operated to any substantial degree for the benefit of private interests. Therefore, organizations that are organized and operated for the benefit of specific individuals are not considered charitable under Section 501(c)(3), even if the facts show that those specific individuals qualify for assistance.

A charitable class is a group of individuals that may properly receive assistance from a tax-exempt charitable organization. A charitable class must be either large enough that the potential beneficiaries cannot be individually identified, or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. For example, a charitable class could consist of all individuals located in a city, county, or state. This charitable class is large, and benefits to it would benefit the entire community.

A charitable class could also be fairly small, provided the class is open and the identities of the individuals who stand to benefit remain indefinite. Examples include (but are not limited to) victims of natural disasters, patients suffering from a particular illness, or students enrolled at a certain school. In this case, the general charitable class to which the beneficiaries belong should be sufficiently defined to evidence a large or indefinite class, and not simply a group of preselected individuals.

For example, an employer may wish to set up a charity to provide assistance to its employees following a specific natural disaster. Financial assistance to employees is not in itself a charitable activity, because employees are not necessarily “poor and distressed.” However, employees may become needy or distressed in times of natural disaster, civil disorder, or personal tragedy or illness. In this case, the employer must take care to insure that the group of individuals eligible for assistance is indefinite. Otherwise, the charitable class would consist of a preselected group of people, which is prohibited. To benefit an indefinite charitable class, the relief program must be open-ended and include employees affected by the current disaster as well as those who may be affected by a future disaster. In this situation, the total number of potential members making up the charitable class cannot be counted or identified. Thus, while it is possible to identify the employees who were victims of a present disaster (which is prohibited as preselection), it is not possible to identify employees who could be affected by future disasters. Accordingly, if a charity follows a policy of assisting employees who are victims of all disasters, present and future, it would be providing assistance to an indefinite charitable class. See IRS Publication 3833 for additional details.

In addition, contributors to qualified charities may not earmark funds for the benefit of a particular individual or family. These funds may be earmarked for such charitable purposes as disaster relief, medical care, scholarships, and the like. The charity must have complete control and authority over the use of the donated funds, and therefore, it must be able to select its aid recipients. While donated funds ultimately may be used to help a specific person whom a donor wishes to assist, the charity should communicate to the donor that the contributions might well be used to help others with similar needs instead. This way, the charity can help keep its exemption intact while continuing to assist an overall charitable class of beneficiaries.

Please consult any member of the Tate & Tryon tax team if you have any questions regarding this matter. 

Lisa Heller, CPA
Tax Senior Manager
[email protected]



Tips on Improving Your Nonprofit’s Charity Watchdog Ratings

Posted on , updated on


Nonprofit Accounting-Tax-Technology10/02/2019


In this podcast, we discuss how charity watchdog organizations such as Charity Navigator, BBB Wise Giving Alliance, and GuideStar typically monitor and rate charitable organizations and what nonprofit leaders should be thinking about with respect to their organization’s ratings.

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