On the Threshold of Compliance: Public Charities and the Public Support Test

SYNOPSIS: This study investigates how public charities respond to the public support test-an IRS requirement that at least one-third of a public charity's financial support is derived from public sources. Using a large sample of 836,920 charity-year observations during 2009-2018, I find that a disproportionately large number of charities exceed the 33-1/3 percent public support threshold by a small margin. This result holds only for public charities actually subject to the test (six years of age or older) and not young charities that automatically retain public charity status. Further, I find that charities that unexpectedly just meet public support test are more likely to understate fundraising expenses. This evidence implies that the public support levels of charities that just surpass the 33-1/3 percent threshold are likely misrepresented. Overall, my findings provide new insights into a vitally important regulatory threshold that has been largely neglected in existing research.