This page provides general info on entity options for currency projects, with a specific focus on seeking tax exemption under 501(c)(3) and 501(c)(4), and links to further resources on cooperatives. Also see our pages on Governance Structures and Participatory Governance Models. Also visit Co-opLaw.org, SELC’s e-resource library dedicated to cooperative law and supporting cooperative formation.

Tax Exemption for Organizations That Administer Time Banks, Barter Networks, or Currencies

If the organization administering a time bank, barter network, or currency is organized as a nonprofit, on what basis might it be granted tax exemption?  And should it seek exemption under 501c3, 501c4, 501c6, or something else?

Choice and structure of entity are major considerations for groups operating a local currency, barter network, or time bank.  Many such groups may consider their mission to be non-profitable, and will often choose to form a nonprofit and seek tax exemption.  Unfortunately, tax exemption under 501(c)(3) will be available only under limited circumstances, as described below.  Many such organizations may, however, wish to explore the possibility of obtaining tax exemption under 501(c)(4).

 

501(c)(3) Tax Exemption

The IRS has weighed in a few times on the question of whether a time bank or barter network may be tax exempt under 501(c)(3).  The IRS has also granted 501(c)(3) tax exemption to the Baltimore Green Currency Association. The most helpful IRS letters and rulings are unpublished, which means they cannot be cited as precedent.  They do, however, give us important clues about what the IRS considers to be charitable and educational.

The IRS has recognized some time banks as tax exempt, but I believe it would be difficult to obtain exemption for a barter network or local currency.  Time banks are unique, in that the services people provide to one another are more like gifts, and the services aren’t bargained for in a typical marketplace.  The “time dollars” or “points” that people earn can be seen more like an incentive system that encourages people to help one another and be of service in their community.  By contrast, with barter networks and local currencies, people may be motivated to exchange in order to be paid in something of more defined value.  Thus, the IRS is far more likely to recognize time banks as a platform for charitable or educational activities, and is more likely to look at barter networks and local currencies as platforms for private benefit.

In 2010, the IRS denied tax exemption to a “community barter organization,”1 which operated very much like a time bank.  This demonstrates that being a time bank, alone, does not enable an organization to obtain tax exemption under 501(c)(3).  The time bank in that case was determined not to be operating for 501(c)(3) tax exempt purposes because it was “a bartering exchange that coordinates the bartering services of [its] membership,” was therefore “operated for the private benefits of [its] members only.” 2  In that case, the organization was not focused specifically on serving a charitable class of people or on serving educational purposes.

There are two primary grounds on which time banks have been able to obtain tax exemption under 501(c)(3):

Focusing on Relief of the “Poor, Distressed, and Underprivileged”

An organization that operates a time bank may be able to obtain tax exemption if it is designed solely to provide needed services to members of a charitable class of people, and/or to provide such individuals opportunities and incentives to do work to for their own educational or therapeutic benefit.  A charitable class of people includes those that are recognized by the IRS as “poor, distressed, or underprivileged.”  In 1985, the IRS wrote a letter to an organization operating a program very similar to a time bank, and the letter concluded (emphasis added):

“Based upon the information provided, we conclude that your exempt status under section 501(c)(3) of the Code will not be adversely affected by the operation of this computerized services exchange system, provided, however, that those persons receiving services are or can be considered members of a charitable class of individuals which your general programs are designed to assist, or your program itself is, or has been considered to be, a charitable activity.”3

Thus, an exchange platform that is designed for use of the broader community, and not specifically for a charitable class, may not be considered a tax-exempt activity for a 501(c)(3) organization.  As discussed by Dr. Edgar Cahn in his contributed section in this chapter, time banks have been established all over the country to serve underprivileged groups – focusing, for example, on at-risk youth, the homeless, seniors, and residents of high-violence neighborhoods.  Such time banks, quite likely, could be recognized by the IRS as tax exempt.

Note, however, that if, instead of a time bank, an organization operates a local currency or barter network, such an organization may be deemed to be operating for the private benefit of individuals, even if those individuals are members of a charitable class.  This is because the nature of exchanges in a local currency or barter network may be driven more by the market and by a desire to earn a profit, and not necessarily by the desire to be of service to others.

Focusing on Educational Purposes

Some time banks have obtained 501(c)(3) tax exemption on the grounds that their primary purpose is education.4  Such time banks provide an experiential learning opportunity for people, helping them learn how to trade and exchange without money.  In other words, time banks provide people with a laboratory for learning about and adopting new economic practices, which may otherwise be difficult to learn and practice.  In theory, if a time bank could obtain exemption on these grounds, so, too, could a local currency or barter network, perhaps.  However, this approach to obtaining tax exemption has many limitations, and it limits the scale and scope of a time bank or exchange platform.  In theory, if the time bank grew to provide for a lot of people on a regular basis, then the time bank could be deemed, by the IRS, to be larger than necessary to carrying out its educational purposes.

Sample Language from a 1023 Application

In 2013, SELC submitted a 501(c)(3) tax exemption application on behalf of Arroyo Sustainable Economies Community Organization (ASECO), a regional time bank in Los Angeles, California. Based on that successful application, the following are sample arguments that a time bank might include (in the narrative attachment to Form 1023) to demonstrate the educational and charitable purposes of the time bank. Based on the research described above, SELC framed the activities of the time bank in terms of three important distinctions the IRS may consider:

1. ASECO’s activities are specifically designed to serve a charitable class of people, rather than the broader community;
2. ASECO manages an online system of “time credits” to promote community service, rather than to facilitate economic exchange:
   1. To distinguish the charitable purpose of “time credits” from other currencies and exchange systems designed primarily to facilitate economic exchange, SELC noted that users may accrue an unlimited negative balance of “time credits” (meaning there is no contractual obligation to pay back “time credits”), and that users who earn “time credits” in exchange for service have no legal expectation that their credits will be accepted by others.
3. ASECO’s activities provide education about self-sufficiency and mutual aid in times of economic instability, which are subjects “useful to individuals and beneficial to the community.” ⁵

Activity #1: Community Educational Events

Description and Exempt Purpose of Activity:

A primary purpose of Arroyo Sustainable Economies Community Organization (ASECO) is to educate communities about sustainable economies, co-production, and the sharing economy. ASECO’s monthly community events include speakers across disciplines relating to our purpose. Speakers have included:

• Diane Carroll, of the Maverick Center, discussing ways to increase interpersonal connections within a community;
• Mud Baron, presenting on the Muir Ranch, a local learning garden and community-supported agriculture program;
• Dr. Edgar Cahn, founder of Time Banks USA, discussing the origins and applications of time banking;
• Erik Knutzen, of Root Simple, describing his experience as a sustainable urban farmer and homesteader; and
• Michelle Weiner, of Transition Town Culver City, explaining how it is a model for sustainable community development.

In addition, ASECO has hosted classes on a variety of topics aimed at empowering communities with skills to support economic self-reliance. Class topics include:

• Disaster preparedness;
• Conflict resolution for kids;
• Container gardening;
• Time banking and the sharing economy;
• Community gardening;
• Repair Cafes, where participants repair household items and share skills with one another;
• Spanish for beginners;
• Yoga, Tai chi, and Qi Gong
• Diet and Nutrition

In the last two years, ASECO has actively sought to build an engaged learning community by hosting talks and information booths at local events such as the Pasadena Earth and Arts Festival, The Los Angeles Green Festival, The Eco Maya Festival, The Living Economy Salon, The Leadership Academy, Watts Community Festival, California Time Bank Conference, Mindshare, Time Banks USA Conference, Day One Parent Conference, Earthflow Permaculture Class, Southern California Permaculture Convergence, and GOOD Pop Up Community Center.

To demonstrate the range of educational events offered by ASECO, we have attached a copy of the March-August 2013 ASECO calendar of events.

Where, When, and By Whom this Activity is Conducted: All events are taught by volunteers, open to the public, and take place in a variety of accessible locations throughout the Los Angeles area. ASECO’s regular community education events began in mid-2011 and have been offered consistently at a rate of between one and six events per month since that time.

How this Activity is Funded: The costs associated with these programs are minimal and supported primarily by individual donations and grants, volunteer time, or in kind donations of venue and food.

Percentage of Total Organization Time Devoted to this Activity: 30%

 

Activity #2: Administration of Online Networks to Promote Community Service

Description and Exempt Purpose of Activity:

To further both educational and charitable purpose, ASECO administers an online community network designed to promote volunteerism, community service and mutual aid for community members in need, and training on alternative forms of exchange. This system, known as “time bank,” is modeled after the work of numerous similar organizations that have been granted tax exemption by the IRS under 501(c)(3). We refer to this activity as the Arroyo S.E.C.O. Network of Time Banks.

Time banks are primarily a tool for alleviating poverty, economic distress, community deterioration, and neighborhood tensions. In Los Angeles County, as of early 2013, 16.3% of households are below the poverty line (Source: U.S. Census Quick Facts for Los Angeles County), and the unemployment rate is 10.2% (Source: California Employment Development Department). ASECO has created a time bank in response to the high levels of poverty and unemployment in our communities, providing a source of economic stability and support for community members. The time bank also combats community deterioration by motivating community service through increased volunteering at more than 25 local community organizations. In addition, the time bank lessens neighborhood tensions and crime by strengthening social ties in neighborhoods; over 50% of 109 surveyed participants report that they joined the time bank to improve their sense of community, among other reasons.

A time bank is an online community network that builds in a pay-it-forward system of motivation: When one network member provides one hour of assistance to another member, the first member is given a point or “time credit” in the online system, and the second member debits one “time credit” to the other. Each time credit is given or received based on one hour of service, regardless of whether it is a skilled or unskilled service. This creates a heightened sense of empowerment and self worth among participants, whose time might otherwise be unvalued or undervalued. Significantly, members may accrue an unlimited negative balance of “time credits,” which means that someone in need of assistance – such as a person with an illness or disability – may get the help they need, without the obligation to earn back the credits they spend. Likewise, someone who provides many hours of service through the time bank does so with the understanding that he or she has .

In the above respects, a time bank is distinguished from a barter network, and could be more accurately described as a community-building tool with a system that motivates and enables community service. The accumulation of points or “time credits” gives members incentives to help those in need, and in turn, people in need receive support that they might otherwise not have been able to afford. Members of the time bank commonly provide services such as childcare, elder care, tutoring, pet care, gardening, food preparation, acupuncture, housecleaning, home maintenance, music lessons, or other personal services. Members may also donate time credits to other members.

In sum, the ASECO time bank alleviates poverty, economic distress, community deterioration, and lessens neighborhood tensions in a five primary ways:

1)     Reducing isolation for distressed and disadvantaged community members: The time bank creates a visible and supportive community of people who are unemployed, underemployed, or in need of important services they cannot afford or otherwise access. This reduces isolation for poor, disadvantaged, and distressed members of the community. The social connections and opportunities available in a time bank help to enhance individual’s self worth and sense of belonging. Over 75% of ASECO time bank members report building new relationships through their time banking experiences (Source: Arroyo SECO Network of Time Banks Survey 2013).

Reducing isolation and building community connections has also been found to reduce crime. A multi-year study by the Harvard School of Public Health (published in the August 1997 issue of Science) concluded that poverty and joblessness could not account for the differences in crime they found in largely black neighborhoods. The study examined 343 neighborhoods in Chicago and interviewed 8,872 residents, and concluded: By far the largest predictor of the violent crime rate was ‘collective efficacy’ – a qualitative measurement of community cohesion supported by trust and the role of neighbors in monitoring the neighborhood (Source: The Co-Production Principle and Time Dollars, David Boyle). Similarly, a three-year study by Gallop and Knight Foundation found that communities with the highest levels of community attachment, as measured by factors such as opportunities for social interaction and citizen caring, had the highest rates of economic growth (Source: John S. and James L. Knight Foundation).

2)     Experiential learning and skill practice: The time bank offers an experiential learning environment in which members can offer and practice a variety of skills and services, and in which members can learn about and practice strategies for meeting needs without money. Learning new skills and building self-reliance increase personal well-being and health, and can also lead to increased economic stability as low-income people learn to meet basic needs in different ways. These skills will be critical for every community member to have during times of economic downturn. 75% of ASECO time bank members report improved general well-being and 30% have seen improved economic stability as a result of their participation in the time bank (Source: Arroyo SECO Network of Time Banks Survey 2013).

3)     Opportunities for unemployed, underemployed and low-income individuals: According to an online survey of ASECO members, 25% are eligible for government assistance and 57% are not employed full-time for wages (Source: Arroyo SECO Network of Time Banks Survey 2013). The time bank provides a forum where unemployed and underemployed participants can learn about channels for offering and using their skills, becoming productive, and receiving help to meet their needs. The social interactions facilitated by the time bank can also lead to a stronger sense of community and improved personal wellbeing, which is particularly important for people struggling to find work in times of high unemployment.

4)     Meeting special needs: People with special needs – such as the elderly or people with disabilities – are able to seek help through the network of assistance offered by volunteers through a time bank. The recent survey of members revealed that 7.34% of ASECO’s time bank users report that they live with a partially-debilitating health condition, and 12.04% report that they suffer from chronic health problems. As one ASECO time bank member wrote in the survey, “[I was] recovering from a debilitating injury sustained right when I moved to LA, [time banking] became a way to heal [with acupuncture and massage], improve my professional abilities [illustrator classes] and build my sense of community.”

5) Motivating community service: In communities at risk of deterioration, a time bank motivates community service in a variety of forms. In particular, by partnering with a diverse array of community organizations, the ASECO time bank helps organizations to meet their volunteer needs, and creates more opportunities for time bank members to do meaningful work that benefits the community. Time bank members can currently earn time credits for volunteering with the following partnering organizations:

• 826 LA East
• Acorn Works
• Altadena Heritage
• Armory Center For the Arts
• ACLA (Art. Community. Land. Activism!)
• Bresee Foundation Community Center
• Coalition for Clean Air
• Cornerstone Theater
• Cooperative Resources & Services Project
• Echo Park Film Center
• Friends Western School Pasadena
• Micheltorena Elementary School Community Garden
• Pasadena Child Development Associates, Inc.
• Survivor’s Truths

Other exempt purposes served by ASECO time bank depend partially on the nature of the particular services members provide and receive through the Time Bank. For example:

• Promotion of Health: The time bank creates a forum through which any member may seek and receive free health care or participate in preventative activities. In this respect, the time bank promotes health for the community. Time bank participants have received blood tests, well-woman exams and post partum doula services, as well as organized support groups, nutrition advice, and an exercise group for preventative health.

• Combating Juvenile Delinquency: The time bank also creates a forum in which youth may volunteer their time and receive needed services, such as conflict mediation training, which empowers youth to resolve conflicts in positive ways. This training combats juvenile delinquency by providing youth with a positive skill, sense of belonging, and opportunity for meaningful participation in the community.

Membership in the time bank is open to all. Community members may join the ASECO time bank by filling out a brief online application form and attending an orientation. No one has been denied membership to date. A group of current members reviews applications and invites applicants to an orientation. The purpose of orientation is to help new members get acquainted with our mission, core values, and software. Because we have a web-based interface, members without computer access are paired with a partner who can be their liaison; we recognize that community members have varying levels of computer skills and we aim to foster a welcoming culture of inclusivity and tolerance.

The primary roles of ASECO in operating the time bank include:

1. Maintaining and updating the website, social media, event information, software upgrades, and overall online public communications.
2. Conducting outreach by attending community events and providing community members with information about the time bank. Our educational activities, described in Activity #1, dovetail with our time bank in many important ways. The efficacy of the time bank relies heavily on community members’ understanding of the purpose and spirit of a time bank and of the value of community building.
3. Orienting new members every month.
4. Helping people make connections with one another and connecting untapped resources with unmet needs. We have a team of “matchmakers,” members who are available to introduce people to each other in case they cannot find what they need.
5. Hosting many projects and events – such as potlucks and gardening days – to build community trust and encourage mutual support.
6. Providing community members an incentive to be active in community service by offering discount public transportation (metro) passes. To qualify for the discount metro pass, members are required to conduct 12 exchanges per year. This encourages participation and builds local resiliency. Members pay a year up front to ASECO and ASECO pays Metro. ASECO does not charge for this service. This project is unfunded and managed by time bank members.

Where, When, and By Whom this Activity is Conducted: Volunteer time bank members manage these services on a consistent basis. With adequate funding, ASECO may hire staff to manage some of the administrative tasks involved with the time bank. Activities are conducted at local community centers, libraries, private homes, churches, or other donated facilities.

How this Activity is Funded: Members donate their time to help manage these services and are given time credits for their assistance. We provide these services without charge. ASECO requests donations but no one is turned away for lack of funds. ASECO will be seeking grants to sustain the administration of the time bank as it grows.

Percentage of Total Organization Time Devoted to this Activity: 25%

501(c)(4) Tax Exemption

Time banks, local currencies, and barter networks may want to consider obtaining tax exemption under 501(c)(4), especially if it is unlikely that the organization can confine its activities to those which qualify as charitable or educational under 501(c)(3).  Davis Empowerment and Community Organization (DECO) is an example of an organization that administers a local currency, Davis Dollars, and which has obtained tax exemption under 501(c)(4).  To obtain tax exemption as a 501(c)(4) social welfare organization, a time bank, barter network, or local currency must be designed to provide a broad benefit to a community, and not just to a limited group of members. The organization should demonstrate how the operation of the program promotes social welfare and demonstrate that is not designed to confer private benefit to a limited group of people. Tax-exemption under 501(c)(4) is sometimes thought of as a “catch-all” exemption for organizations that do not quite fit into 501(c)(3) exemption. Organizations that are exempt under 501(c)(4) have a lot more latitude in their activities.  However, donations to 501(c)(4)s are not tax deductible to their donors. Click here for more information about 501(c)(4)s.

Sample Language from a 1024 Application

Here is the portion of DECO’s tax exemption application (narrative attachment to Form 1024), which described the administration of a local currency:

Activity #1: Administering Davis “Dollars” Local Exchange Certificates

Description: We administer a system of local exchange certificates known as the Davis “Dollars.” We print the certificates and sell each one to community members for $1.00. When people have certificates that they no longer want to use, we redeem them for $0.95 each.

Purpose: The Davis “Dollars” local exchange certificates provide a medium for community members to exchange, and they also create an incentive for people to support local businesses. Further, they help people visualize the way value is exchanged within a single community.

How it furthers our exempt purpose: The Davis “Dollars” local exchange certificates promote educational and social welfare purposes, because they give community members an experiential learning opportunity for using alternative forms of exchange and they also creative incentives for people to connect with and provide for one another locally. The local exchange certificates are a critical educational tool, because most people have a very hazy understanding of how money actually works, and the local exchange certificates will help people understand the way money moves around and grows a healthy local economy.  The certificates also promote social welfare because they incentivize local exchange, which grows the wealth that is circulating in the local community.  By redeeming them at less than their original purchase price, we give people a small extra incentive to keep the Davis “Dollars” circulating in the local community.

When activity was initiated: September 2010.

Where and by whom the activity is operated: The officers of the organization administer the Davis “Dollars” local exchange certificates system in Davis, CA.

Percentage of Time Devoted to This Activity:  30%

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