What Is 501(c)?

501(c) is a designation under the United States Internal Revenue Code (IRC) that confers tax-exempt status on nonprofit organizations. Specifically, it identifies which nonprofit organizations are exempt from paying federal income tax.

The government offers this tax break to promote the presence of organizations that exist purely for the public good and help them stay afloat. Common tax-exempt organizations include charities, government entities, advocacy groups, educational and artistic groups, and religious entities. 

Types of 501(c) Organizations

Under subsection 501(c), there are multiple sections that delineate the different types of tax-exempt organizations, according to their purpose and operations.

The most common include:

• 501(c)(1): Any corporation that is organized under an act of Congress that is exempt from federal income tax
• 501(c)(2): Corporations that hold a title of property for exempt organizations
• 501(c)(3): Corporations, funds, or foundations that operate for religious, charitable, scientific, literary, or educational purposes
• 501(c)(4): Nonprofit organizations that promote social welfare
• 501(c)(5): Labor, agricultural, or horticultural associations
• 501(c)(6): Business leagues, chambers of commerce, etc., that are not organized for profit
• 501(c)(7): Recreational organizations

501(c)(3) Organizations

The 501(c)(3) organization is probably the most familiar tax category outlined in Section 501(c)(3) of the IRC. It covers the sort of nonprofits that people commonly come into contact with, and donate money to (see Special Considerations, below).

In general, there are three types of entities that are eligible for 501(c)(3) status: charitable organizations, churches/religious entities, and private foundations. 

Other Types of 501(c) Organizations

The 501(c) designation has expanded over time to encompass more types of organizations.

Other organizations that qualify for listing under this designation can potentially include:

• Fraternal beneficiary societies that operate under the lodge system and provide for the payment of life, illness, and other benefits for their members and dependents
• Teacher’s retirement fund associations, so long as they are local in nature and none of their net earnings grow for the benefit of a private shareholder
• Benevolent life insurance associations that are local
• Certain mutual cooperative electric and telephone companies
• Nonprofit, co-op health insurers
• Cemetery companies that are owned and operated for the exclusive benefit of their members or are not operated for profit
• Credit unions that do not have capital stock organized
• Insurers—aside from life insurance companies—with gross receipts that are less than $600,000
• A variety of trusts for such purposes as providing supplement unemployment benefits and pensions
• Organizations whose membership is made up of current and former members of the armed forces of the United States or their spouses, widows, descendants, and auxiliary units in their support

Tax-Deductible Donations to 501(c) Organizations

In addition to being tax-exempt themselves, 501(c) organizations offer a tax advantage to others: A portion of donations they receive may be deductible from a taxpayer’s adjusted gross income (AGI). Organizations falling under section 501(c)(3)—which are primarily charities and educational or social-welfare-orientated nonprofits—are often qualified to offer this benefit to donors.

In general, an individual who itemizes deductions on their tax return may deduct contributions to most charitable organizations up to 50% (60% for cash contributions) of their AGI computed without regard to net operating loss carrybacks. Individuals generally may deduct charitable contributions to other organizations up to 30% of their AGI.

A charity or nonprofit must have 501(c)3 status if you plan to deduct your donation to it on your federal tax return. The organization itself can often tell you which sorts of donations are deductible, and to what extent—for example, if you buy a one-year museum membership for $100, $50 might be deductible.

The Bottom Line

Organizations that are formed strictly to help the public and not primarily to make a profit, as is the case with most businesses, are an important presence in society. The U.S. government rewards these entities with a 501(c) designation and tax-exempt status because they reduce the burden on the state and improve the lives of the population.

We aren’t just talking about charities here, either. The IRS recognizes dozens of different types of nonprofit organizations as 501(c)s, including some credit unions and insurers.

What Is an Affiliate?

Affiliate is used primarily to describe a business relationship wherein one company owns less than a majority stake in the other company’s stock. Affiliations can also describe a type of relationship in which at least two different companies are subsidiaries of the same larger parent company.

Affiliate is also commonly used in the retail sector. In this case, one company becomes affiliated with another in order to sell its products or services, earning a commission for doing so. This term is now used widely in partnerships among online companies in which the affiliate supports another company by channeling internet traffic and e-sales.

Understanding Affiliates

There are several definitions of the term affiliate in the corporate, securities, and capital markets.

Corporate Affiliates

In the first, an affiliate is a company that is related to another. The affiliate is generally subordinate to the other and has a minority stake (i.e. less than 50%) in the affiliate. In some cases, an affiliate may be owned by a third company. An affiliate is thus determined by the degree of ownership a parent company holds in another.

For example, if BIG Corporation owns 40% of MID Corporation’s common stock and 75% of TINY Corporation, then MID and BIG are affiliates, while TINY is a subsidiary of BIG. MID and TINY may also refer to one another as affiliates.

Note that for the purposes of filing consolidated tax returns, IRS regulations state a parent company must possess at least 80% of a company’s voting stock to be considered affiliated.

Retail Affiliates

In retail, and particularly in e-commerce, a company that sells other merchants’ products for a commission is an affiliate company. Merchandise is ordered from the primary company, but the sale is transacted at the affiliate’s site. Amazon and eBay are examples of e-commerce affiliates.

International Affiliates

A multinational company may set up affiliates to break into international markets while protecting the parent company’s name in case the affiliate fails or the parent company is not viewed favorably due to its foreign origin. Understanding the differences between affiliates and other company arrangements is important in covering debts and other legal obligations.

Other Types of Affiliates

Affiliates can be found all around the business world. In the corporate securities and capital markets, executive officers, directors, large stockholders, subsidiaries, parent entities, and sister companies are affiliates of other companies. Two entities may be affiliates if one owns less than a majority of voting stock in the other. For instance, Bank of America has a number of different affiliates around the world including Merrill Lynch.

Affiliation is defined in finance in a loan agreement as an entity other than a subsidiary directly or indirectly controlling, being controlled by or under common control with an entity.

In commerce, two parties are affiliated if either can control the other, or if a third party controls both. Affiliates have more legal requirements and prohibitions than other company arrangements to safeguard against insider trading.

An affiliate network is a group of associated companies that offer compatible or complementary products and will often pass leads to each other. They may offer cross-promotional deals, encouraging clients who have utilized their services to look into the services offered by an affiliate.

In banking, affiliate banks are popular for underwriting securities and entering foreign markets where other banks do not have direct access.

Affiliates vs. Subsidiaries

Unlike an affiliate, a subsidiary’s majority shareholder is the parent company. As the majority shareholder, the parent company owns more than 50% of the subsidiary and has a controlling stake. The parent thus has a great deal of control over the subsidiary and is allowed to make important decisions such as the hiring and firing of executives, and the appointment of directors on the board.

What Is Autocorrelation?

Autocorrelation is a mathematical representation of the degree of similarity between a given time series and a lagged version of itself over successive time intervals. It’s conceptually similar to the correlation between two different time series, but autocorrelation uses the same time series twice: once in its original form and once lagged one or more time periods. 

For example, if it’s rainy today, the data suggests that it’s more likely to rain tomorrow than if it’s clear today. When it comes to investing, a stock might have a strong positive autocorrelation of returns, suggesting that if it’s “up” today, it’s more likely to be up tomorrow, too.

Naturally, autocorrelation can be a useful tool for traders to utilize; particularly for technical analysts.

Understanding Autocorrelation

Autocorrelation can also be referred to as lagged correlation or serial correlation, as it measures the relationship between a variable’s current value and its past values.

As a very simple example, take a look at the five percentage values in the chart below. We are comparing them to the column on the right, which contains the same set of values, just moved up one row.

What Is an Asset Swapped Convertible Option Transaction (ASCOT)?

An asset swapped convertible option transaction (ASCOT) is a structured investment strategy in which an option on a convertible bond is used to separate a convertible bond into its two components: a fixed income piece and an equity piece. More specifically, the components being separated are the corporate bond with its regular coupon payments and the equity option that functions as a call option.

The ASCOT structure allows an investor to gain exposure to the option within the convertible without taking on the credit risk represented by the bond part of the asset. It is also used by convertible arbitrage traders seeking to profit from apparent mis-pricings between these two components.

Understanding Asset Swapped Convertible Option Transactions

ASCOTs are complex instruments that allow parties to take the role of equity investor and credit risk buyer/bond investor in what was initially sold as a combined instrument — the convertible bond itself.

An asset swapped convertible option transaction is done by writing (selling) an American option on the convertible bond. This essentially creates a compound option, as the convertible bond already comes with an embedded equity call option itself due to the conversion feature. The American option can be exercised by the holder at any time, but the strike price paid must include all the costs of unwinding the asset swap.

How an ASCOT Works

Convertible bond traders are exposed to two types of risk. One is the credit risk inherent in the bond portion of the investment. The other is the market volatility on the share price of the underlying, as it impacts whether or not the conversion option has any value.

For our purposes, let’s assume the convertible bond trader wants to focus on the equity angle of their convertible bond portfolio. To do this, the trader sells the convertible bond to an investment bank, which will be the intermediary in the transaction.

The investment bank structures the ASCOT by writing a call option on the convertible portion of the bond and selling it back to the convertible bond trader. The bond portion of the convertible bond with its payments is then sold to a different party who is prepared to take on the credit risk in return for the fixed returns. The bond component may be broken down into smaller denomination bonds and sold to multiple investors.

ACOTS and Convertible Arbitrage

When a convertible bond is stripped of its credit risk through an asset swap, the option holder is left with a volatile — but potentially very valuable — option. ASCOTs, specifically the equity portion, are bought and sold by hedge funds employing convertible arbitrage strategies. Hedge funds are able to easily increase their portfolios’ leverage because of the nature of the compound option within an ASCOT, leaving the less lucrative bond side and its credit risk out of the equation.