Thursday April 25, 2024

7.1.6 Supporting Organizations

Supporting Organizations

Defining Supporting Organizations:  A supporting organization (SO) is a uniquely structured type of public charity that provides assistance to other exempt Sec. 501(c)(3) organizations.

Supporting Organizations vs. Private Foundations:  Although SOs often operate in a fashion similar to private foundations, they are granted public charity status because they provide support to public charities.

Tests for Supporting Organizations:  All SOs must pass the organizational, operational, control and relationship tests.

Organizational Test:  An SO must be organized exclusively for the benefit of one or more specified public charities.

Operational Test:  An SO must be operated for the sole benefit of one or more supported organizations by only engaging in activities that benefit the supported organizations.

Control Test:  An SO may not be controlled directly or indirectly by one or more disqualified persons.

Relationship Test:  Whether an SO is Type I, II or III will depend on the relationship and degree of control between the SO and its supported organization(s).

Type I - Direct Control, The Parent-Subsidiary Relationship:  A Type I SO is established where the supported organization exercises a substantial degree of control over the SO.

Type II - Common Control, The Brother-Sister Relationship:  The governing bodies of a Type II SO and its supported organization must share some degree of common supervision or control.

Type III - Operated in Connection With:  A Type III SO is not directly controlled by the supported organization and must satisfy additional requirements to qualify as a SO.

The Responsiveness Test:  A Type III SO must be responsive to the needs and demands of its supported organizations.

The Integral Part Test:  There are two different categories of Type III SOs under the integral part test: (1) functionally integrated and (2) non-functionally integrated.

Functionally Integrated:  An SO will be deemed functionally integrated if it satisfies either: (1) The Activities/But for Test; (2) Parent-Like Activities Test; or (3) Support of Government Entity Test.

Non-Functionally Integrated:  If an SO does not meet one of the functionally integrated tests, it may still be considered a Type III non-functionally integrated SO if it meets both (1) the minimum payout requirement and (2) the attentiveness requirement.

Notification:  Type III SOs must annually provide specific documents to the organizations they support.

Form 990 Disclosures:  All SOs must file a Form 990 annually, regardless of gross receipts.

Supporting Organization Issues:  In order to ensure that SOs serve the public interest, they must satisfy a number of requirements.

Excess Benefit Transactions in General:  An excess benefit transaction is a transfer of an economic benefit by a public charity directly or indirectly to a disqualified person where the economic benefit exceeds the value of the consideration or services received.

Excess Benefit Rules for Supporting Organizations:  The PPA created special rules that apply to SOs that are involved in excess benefit transactions.

Excess Business Holdings:  Type III SOs that are not functionally integrated are subject to Sec. 4943 excess business holdings rules.

Distributions to an SO:  SOs should exercise caution to avoid making distributions that could create more than an "incidental benefit" for any disqualified persons.

Defining Supporting Organizations
A supporting organization (SO) is a uniquely structured type of public charity that provides assistance to other exempt Sec. 501(c)(3) organizations. Sec. 509(a)(3)(A). An SO allows donors to make significant gifts and remain involved with the use or investment of the gifted funds, all while providing the donor with the tax advantages of donating to a public charity rather than a private foundation. The key feature of an SO is its strong relationship with the organization it supports (sometimes referred to as a "supported organization" or "supported charity"). This relationship enables the supported organization to supervise the activities of the SO. Such activities include distributing money to, performing the functions of, or carrying out the purposes of one or more public charities. Therefore, it is the SO's link to its supported organization that enables the SO to maintain its status as a public charity.

In order to qualify as a Sec. 509(a)(3) SO, the organization must meet certain requirements. In addition, an SO must be classified as either a Type I, Type II or Type III SO. Sec. 509(a)(3)(B). Type I SOs share the closest relationship with their supported charities, while Type III SOs are the least controlled by their supported charities. As such, additional rules apply to Type III SOs.

CategoryTestDescription
Type I, II, III Organizational Test The SO must: (1) be organized exclusively for the benefit of one or more specified public charities; (2) Avoid expressly engaging in any activities that do not further its stated purpose; and (3) Identify the supported organization(s).
Type I, II, III Operational Test The SO must be operated for the sole benefit of its supported organizations by only engaging in activities that support or benefit its supported organizations.
Type I, II, III Control Test The SO is prohibited from accepting contributions from persons who, alone or together with certain related persons, directly or indirectly control the governing body of its supported organization.
Type III Responsiveness Test First, the SO must have a specified relationship with the supported organization. Second, the SO's officers, directors, or trustees, by reason of this relationship, must have a significant voice in the grant activities, income allocation and investment policies of the SO.
Type III Integral Part Test The SO must maintain significant involvement in the operations of its supported organizations and provide support on which the supported organizations are dependent by either being a Functionally-Integrated or Non-Functionally Integrated Type III SO.
Type III Notification Test The SO must annually provide its supported organization(s) a written description of the type and amount of support provided by the SO, a copy of the SO's Form 990 and a copy of the SO's most recently amended governing documents.

Type III Functionally Integrated (FI):
Must pass either: (1) Activity (2) Parent or (3) Government Entity Test

Type III FI Activity Test Substantially all of the SO's activities must: (1) be in direct furtherance of the supported organization's exempt purpose; and (2) be activities that, but for the involvement of the SO, would normally be performed by the supported charity.
Type III FI Parent Test The SO and its supported organizations must be part of an integrated system and the SO must engage in typical parent-like activities (ex: electing the officers, directors, trustees of the supported organization; or directing the supported organization's policies, programs or activities).
Type III FI Government Entity Test The SO is responsive to the needs of at least one governmental entity and engages in activities for, or carries out the purposes of, that governmental supported organization, which, but for the SO would normally be carried out by the government supported organization itself.

Type III Non-Functionally Integrated (NFI):
Fails FI tests and must pass both: (1) Minimum Payout and (2) Attentiveness Test

Type III NFI Minimum Payout Test The SO must distribute either 85% of its adjusted net income for the preceding taxable year or 3.5% of the value of its non-charitable assets for the preceding taxable year.
Type III NFI Attentiveness Test The distributions made by the SO must be substantial enough that the supported organization has sufficient reason to pay attention to the SO's role in its operations.

Supporting Organizations vs. Private Foundations

 By virtue of the fact that an SO is organized and operated exclusively to support a public charity, the major advantage of an SO over a private foundation is that it is classified as a public charity. SOs might seem similar to private foundations, especially when making payments to multiple charities. However, when comparing SOs to private foundations, there are important distinctions that must be understood.

In contrast to public charities, which receive a majority of their support from the public, private foundations are often formed by one individual or a family who invest funds and use those assets to make grants to other charities. Private foundations may be attractive to high net worth individuals who want control over their gifted assets. By creating a private foundation, donors can exercise control over the management and investment of the funds and make contributions to targeted programs of public charities. However, it is typically more advantageous to structure an organization as a public charity rather than a private foundation due to the restrictions and income tax deduction limitations placed on private foundations. See Giftlaw Pro 1.1.3.

Although SOs often operate in a fashion similar to private foundations, they are granted public charity status because they provide support to public charities. Sec. 509(a)(3)(A). Thus, even though many (if not most) SOs are funded by one individual or family, SOs will still receive the more favorable tax treatment enjoyed by public charities. SOs enjoy higher deduction limits (60% for cash contributions and 30% for appreciated assets), do not have to pay tax on investment income and are not subject to the stringent regulatory requirements placed on private foundations. Additionally, SOs (particularly Type III SOs) offer donors substantial involvement in the use and investment of their contributions.

It should be noted that SO donors still have less control than they would with a private foundation. The main difference is that the supported charities of an SO must be designated upon formation, whereas private foundations can change grant recipients year by year. Reg. 1.509(a)-4(d). Donors should be aware that Type I and Type II SOs offer a lower level of control and involvement with the donated assets, since the majority of the directors on the boards of Type I and Type II SOs must be designated by, or overlap with, the supported charity. Reg. 1.509(a)-4(g)-(h). For a more in-depth analysis comparing supporting organizations to private foundations see Chapter 7.1.9.

 Supporting OrganizationPrivate Foundation
Cash Deduction Limit Up to 60% of AGI Up to 30% of AGI
Appreciated Property Deduction Limit Up to 30% of AGI Up to 20% of AGI
Value of Appreciated Property for Deduction Appreciated property deduction based on fair market value Appreciated property deduction limited to cost basis. Exception for publicly traded securities
Excise Tax on Investment Income Not required to pay excise tax on net investment income Must pay an excise tax on net investment income
Minimum Distribution Not required, except Type III non-functionally integrated SOs, which must distribute greater of 85% of income or 3.5% of the value of their non-charitable assets Must make minimum distributions annually. Generally 5% of assets, with expenses included as part of minimum distribution
Excess Business Holdings Type III non-functionally integrated SOs are subject to Sec. 4943 excess business holdings rules (Type I, II are only subject to rules if donor effectively controls the SO) Must follow Sec. 4943 excess business holdings rules which restrict the percentage of for-profit businesses that private foundations (and their insiders) may own
Charity Designation Must designate supported public charity upon formation Not required to designate public charity upon formation
Donor Control Donor must, at a minimum, operate the SO in connection with its supported organizations and must designate charitable recipients upon formation Donor retains control over charitable donations, can manage investments and can choose multiple charitable recipients

Tests for Supporting Organizations
To be classified as an SO, every organization (Type I, Type II and Type III) must pass four tests - the organizational, operational, control and relationship tests. Reg. 1.509(a)-4.

Organizational Test
Under the organizational test, an SO's articles of incorporation must:
  1. Limit the SO to be organized exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified 509(a)(1) or 509(a)(2) organizations;
  2. Avoid expressly empowering the SO to engage in any activities that do not further its stated purpose; and
  3. Identify the supported organization.

For the third requirement, if the SO is classified as Type III, then the SO must name its supported organizations in its articles. Type I and Type II SOs can either name their supported charities or designate them by class or purpose. In addition, Type I and Type II SOs can support charities outside the United States. Conversely, Type III SOs cannot. Reg. 1.509(a)-4(b)-(d).

Operational Test
The operational test requires the SO to be operated for the sole benefit of its supported organizations. To meet this test, an SO must engage solely in activities that support or benefit its supported organizations. For example, an SO may make direct grant payments to one of its supported charities or it could provide services to individuals who are part of the charitable class benefited by the supported charity. However, the regulations make it clear that any grants, services or facilities provided must benefit the supported charity, not just the direct recipients. Reg. 1.509(a)-4(e).

Control Test
An SO may not be "controlled directly or indirectly by one or more disqualified persons other than foundation managers and other than [the supported organization(s)]." Sec. 509(a)(3)(C). A disqualified person in this context includes:

  1. Substantial contributors to the supported organization. This includes those who have given more than $5,000 to the supported charity (if this amount is more than 2% of the supported charity's total annual contributions).
  2. An owner of more than 20% of the combined voting power of a corporation, profits interest of a partnership, or beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to an SO.
  3. A creator of a trust who is a substantial contributor to an SO.
  4. A family member of a person listed above.
  5. A corporation, partnership or trust in which one of the above persons owns more than 35% of the combined voting power, profits interest, or beneficial interest, respectively.

IRC Sec. 4946.

Control in this context is defined by the IRS as the "practical ability to require the organization to perform any act which significantly affects its operations, or to prevent any such act." Sec. 1.509(a)-4(j). As a general rule, control will be found where disqualified persons have either 50% of the voting power or a veto power over the SO's activities. Foundation managers who are considered disqualified persons only as a result of being foundation managers (and not for other reasons) are not treated as disqualified persons for purposes of the control test. IRM Sec. 4.76.3.8.5.

In addition, a Type I or Type III SO may not accept gifts from a donor who directly or indirectly controls the governing body of the SO. Acceptance of such a gift by a controlling donor will lead to loss of SO status. Sec. 509(f)(2). The organization could then file for public charity Sec. 509(a)(1) status or revert to private foundation status.

Relationship Test: Three Types of Supporting Organizations
There are three types of SOs. The Pension Protection Act (PPA) requires an SO to indicate which type of SO it is when it files its annual Form 990. Reg. 1.509(a)-4(i)(2). Whether an SO is Type I, II or III will depend on the relationship and degree of control between the SO and its supported organization(s). Type I affords the supported organization the most control over the SO, while Type III offers the least. As such, Type III SOs are more heavily regulated.

A Type I SO is under the direct control of the supported organization, creating a "parent-subsidiary" type relationship. A Type II SO is under common control with the supported organization, creating a "brother-sister" type organization. A Type III SO is not necessarily controlled by the supported organization; rather it is operated "in connection with" the parent charity. It must meet the responsiveness test, the integral part test and satisfy a notification requirement. Reg. 1.509(a)-4(f).

Type I - Direct Control, The Parent-Subsidiary Relationship
A Type I SO has a "parent/subsidiary" relationship with the charity it supports. This relationship is established where the supported organization exercises a substantial degree of direction and control over the policies, programs and activities of the SO. Generally, this occurs where the supported organization elects or appoints the majority of the SO's officers, directors or trustees. Reg. 1.509(a)-4(g). The supported organization in a Type I SO can be designated by name, purpose or class.

Example 7.1.6A:

Charity is supported by the Thomas Trust. The trustee of Thomas Trust was selected by Charity. The Thomas Trust manages the fundraising and investments of Charity, allowing it to focus on its core charitable mission of providing support, education and care to youth in the community. As such, the Thomas Trust is a Type I SO.

Type II - Common Control, The Brother-Sister Relationship
A Type II SO is supervised or controlled in connection with its supported organization. This effectively creates a "brother-sister" relationship between the SO and the charity it supports. There must be some degree of common supervision or control among the governing bodies of the organizations. This may be established by showing that the SO's officers, directors or trustees overlap with those of the supported charity. Type II SOs are often created by public charities that would like to establish another charitable organization to help carry out certain activities. Reg. 1.509(a)-4(h).

Example 7.1.6B:

The Golightly Trust manages the fundraising and investments of the charity. Holly, Paul and Doc sit on Charity's board of directors and also manage the trust. As such, the trust is a Type II SO that is "supervised or controlled in connection with" the charity.


Type III - Operated in Connection With
A Type III SO is operated "in connection with" one or more publicly supported organizations. A Type III SO is not directly controlled by the supported organization and has the loosest relationship with the charity it supports. For this reason, a Type III SO is the most flexible, but has more technical requirements that it must meet in order to qualify as an SO. Specifically, a Type III SO must meet the responsiveness test, the integral part test and satisfy a notification requirement. Reg. 1.509(a)-4(i)(1).

1. Responsiveness Test
The responsiveness test ensures that a Type III SO is responsive to the needs and demands of its supported organization(s). There are two parts to this test.

Part one of this test will be satisfied if one of three requirements is met:

  1. At least one officer, director or trustee of the SO is appointed by the supported organization;
  2. At least one member of the governing body of the supported organization also serves as an officer, director or trustee of the SO; or
  3. The governing body of the SO maintains a close working relationship with the governing body of the supported organization.

Part two of this test will be met if the supported organization has a significant voice in how the SO manages and uses its assets. In other words, based on the relationship found in part one, the supported organization has a say in the SO's investment policies, grant timing, grant making or selection of recipients, or is able to direct the use of income or assets. Reg. 1.509(a)-4(i)(3).

2. Integral Part Test
The integral part test focuses on the level of involvement of the SO in the supported organization's activities. The PPA created two different categories of Type III SOs under this test: (1) functionally integrated and (2) non-functionally integrated. The distinction is important because non-functionally integrated SOs are treated less favorably. Specifically, if a private foundation makes a distribution to a non-functionally integrated SO, it will not be considered a qualifying distribution for purposes of fulfilling the private foundation's required annual distributions and may be considered a taxable expenditure. Additionally, non-functionally integrated SOs are subject to excess business holding rules and must meet annual payout requirements. Reg. 1.509(a)-4(i)(4)-(5).

Whether a Type III SO will be considered functionally integrated or non-functionally integrated will depend on how it meets the integral part test. A functionally integrated SO will meet the test due to the activities of the organization (i.e., performing the function of, or carrying out the purpose of, the supported organization). In contrast, a non-functionally integrated SO will pass the test based on the distribution of funds it makes to the supported organization.

2(a). Functionally Integrated (FI)
An SO will be deemed functionally integrated if it satisfies one of the three following tests: (1) The Activities/But for Test; (2) Parent-Like Activities Test; or (3) Support of Government Entity Test. Reg. 1.509(a)-4(i)(4).

2(a)(i). Activities/But for Test

To be considered a functionally integrated Type III SO under this test, the SO must meet two requirements:

  1. Substantially all of the SO's activities must be in direct furtherance of the supported organization's exempt purpose (this does not include fundraising or grant making); and
  2. Substantially all of the SO's activities must be activities that, but for the involvement of the SO, would normally be performed by the supported charity.

Reg. 1.509(a)-4(i)(4)(ii)(2).

Example:

SO holds title to building used by Charity for community programs. The SO's main activities involve holding and maintaining the building. This allows Charity to focus on furthering its exempt purpose. The SO is functionally integrated because, but for the SO, the charity itself would have to hold and maintain the building.

2(a)(ii). Parent-Like Activities

To be considered a functionally integrated Type III SO under this test, the SO must meet two requirements:
  1. The SO must have the power to appoint a majority of the officers, directors or trustees of the supporting organization; and
  2. The activities performed by the SO should create a substantial degree of direction over the policies, programs and activities of the supported organization. In this sense, the activities of the SO can be considered "parent-like."
Reg. 1.509(a)-4(i)(4)(iii).

Example:

SO acts as a parent organization to a healthcare system. The SO supervises and coordinates the operations of the system's hospitals and appoints the hospital's board members. Since the SO has a substantial degree of direction over the policies, programs and activities of the hospital, the activities of the SO can be considered "parent-like" and, therefore, the SO is functionally integrated.

2(a)(iii). Support of a Governmental Entity

The third way that a Type III SO can be considered functionally integrated is by supporting a government entity. Reg. 1.509(a)-4(i)(4)(iv). The PPA reserved this section pending further guidance. Notice 2014-4 provided interim guidance and was further developed by the proposed regulations released in February of 2016. Notice 2014-4 provided a two-part test:
  1. At least one supported organization must be a governmental entity to which the SO is responsive; and
  2. The SO must engage in activities for, or on behalf of, the governmental supported organization. The SO performs the functions of, or carries out the purposes of, that governmental supported organization, which, but for the SO would normally be carried out by the government supported organization itself. Notice 2014-4 Sec. 3(1)-(2).

2(b). Non-functionally integrated (NFI)
If an SO does not meet one of the functionally integrated tests, it may still be considered a Type III non-functionally integrated SO if it distributes a certain amount each year to one or more charitable organizations. For example, this could be a situation where a donor sets up a trust as an SO and that trust makes distributions to various charities. Here, there are two requirements that must be met: (1) the minimum payout requirement and (2) the attentiveness requirement. Reg. 1.509(a)-4(i)(5)(i).

2(b)(i). Minimum Payout Requirement

Under the minimum payout requirement, a non-functionally integrated Type III SO must distribute either 85% of its adjusted net income for the prior taxable year or its minimum asset amount for the preceding taxable year (3.5% of the aggregate fair market value of the organization's non-exempt use assets with certain adjustments). Reg. 1.509(a)-4(i)(5)(ii).

2(b)(ii). Attentiveness Requirement

Under the attentiveness requirement, the distributions made by the SO must be substantial enough (at least 1/3 of the SO's distributable amount) that the supported organization has "sufficient reason to pay attention to the SO's role in its operations." Reg. 1.509(a)-4(i)(5)(iii). The IRS provides three ways that this may be accomplished:

  1. The distributions from the SO equal at least 10% of the supported organization's total support for the year;
  2. The distribution from the SO was necessary in order to avoid interruption to a substantial function or activity of the supported organization; or
  3. Based on all facts and circumstances (including actual evidence of attentiveness) the SO's distribution to the supported organization was sufficient to ensure attentiveness.

3. Notification


In addition to the responsiveness test and the integral part test, Type III SOs must annually provide the following documents to the organizations they support:

  1. A written notice describing the type and amount of support provided by the SO during the preceding taxable year;
  2. A copy of the SO's most recently filed Form 990 or 990-EZ; and
  3. A copy of the SO's most recently amended governing documents.

Reg. 1.509(a)-4(i)(2).

Form 990 Disclosures
All SOs must file Form 990, regardless of gross receipts. The Form 990 must distinguish the SO as either Type I, Type II or Type III and certify that the SO is not controlled directly or indirectly by disqualified persons. Sec. 509(a)(3)(B). The governing body listed on Form 990 should be selected based on their special knowledge or expertise, or to reflect a particular community served by the SO.

Supporting Organization Issues
SOs are public charities and therefore must serve the public interest. However, professional advisors may inaccurately market Type III SOs as private foundations with public charity deduction benefits. That is, aggressive advisors may claim that the donor can effectively control a Type III SO, even though it qualifies for public charity status. As a result, there are a number of specific requirements that apply particularly to Type III SOs. However, some of these requirements can also affect Type I and II SOs.

Excess Benefit Transactions in General
An excess benefit transaction is a transfer of an economic benefit by a public charity directly or indirectly to a disqualified person where the economic benefit exceeds the value of the consideration or services received. A disqualified person is anyone able to exercise substantial influence over the public charity, which includes officers and directors.

Where an excess benefit transaction is found, an excess benefit tax is imposed on the disqualified person and may be levied on the organization manager. For public charities, the initial tax is equal to 25% of the excess benefit amount and is imposed on the disqualified person who receives the excess benefit. If the violation is not corrected, then the disqualified person may be faced with an additional tax equal to 200% of the excess benefit amount. A tax of 10% of the excess benefit (not to exceed $10,000 with respect to any excess benefit transaction) is imposed on an organization manager who knowingly participated in the excess benefit transaction.

Excess Benefit Rules for Supporting Organizations


The PPA created special rules that apply to SOs that are involved in excess benefit transactions. The PPA effectively expanded SOs' exposure to intermediate sanctions. First, the definition of disqualified person was broadened to include substantial contributors and related persons. A substantial contributor is someone who gives the greater of $5,000 or 2% of total support to the organization. A related person is a member of the family determined under Sec. 4958(f)(4), or a controlled entity in which a substantial contributor or family member owns more than 35%.

Second, where an SO makes a grant, loan, payment of compensation, or other similar payment to a substantial contributor or related person, there will be an automatic Sec. 4958 excess benefit for the entire payment (recall that with other public charities, the excise tax is only imposed on the amount of the benefit that exceeds the value of the consideration or services received). Sec. 4958(c)(3)(A)(i)(I). The recipient of the benefit is subject to an initial tax of 25% of the amount of the payment under Sec. 4958(a)(1). In addition, an organization manager who participated in the making of the payment, knowing that the payment was a being made to a substantial contributor, is subject to a tax of 10%. Sec. 4958(a)(2). Second tier taxes of Sec. 4958 may also apply to the entire payments, not just the excess value.

However, there is an exception for a bona fide sale or lease of property. These payments to a substantial contributor or family member remain subject to the general rules of Sec. 4958. Therefore, a purchase of assets at fair market value by a family member is permitted.

Excess Business Holdings
Type III SOs that are not functionally integrated are subject to Sec. 4943 excess business holdings rules. Gifts from disqualified persons who together with attributed family and entities hold 20% (or 35% with outside control) of an entity will trigger application of Sec. 4943. In addition, if a Type I or Type II SO is effectively controlled by the donor, then the excess business holdings rules will apply.

For the Type III SO that receives a gift of a business interest, generally the property must be sold within five years, or potentially ten years with Treasury approval. This provision is designed to remove the ability of family members to maintain control of the family business through a Type III supporting organization.

The Secretary has the authority not to impose the excess business holdings rules if the SO can demonstrate that the excess holdings are consistent with the SO's exempt purpose. The Secretary will consider findings of the State Attorney General and a commitment of the SO to distribute 5% or more of assets annually.

Distributions from an SO to a Public Charity


Most SOs make grants to public charities. Other than Type III non-functionally integrated SOs, there is no mandatory minimum payout requirement for SOs (such as the 5% payout generally applicable for private foundations). SOs should exercise caution to avoid making distributions that could create more than an "incidental benefit" to any disqualified persons.

Distributions to an SO
Notice 2006-109 provided guidelines for determining if the SO is a Type I, Type II or Type III functionally integrated charity that qualifies for a gift from a donor. A donor may rely on a written representation that the organization is a Type I or Type II SO, provided that the representation describes how the SO's officers and directors are selected and references governing document provisions that establish a Type I or Type II SO.

For a functionally integrated Type III SO, donors may rely on a written representation from the SO, provided that the SO identifies the one or more supported organizations with which it is functionally integrated and the donor collects and reviews the SO's governing documents. This review usually will include review of written representations of the supported organization that set forth the qualifying relationship (i.e., statements from the supported organization that show that, but for the involvement of the SO in performing functions of the supported organization, it would carry out those activities itself). Alternatively, a donor may rely on a reasoned written opinion of counsel of either the donor or the SO concluding that the SO is a Type I, Type II or Type III SO.

A private foundation considering a grant to a Type I, Type II, or Type III SO may need to obtain a list of the SO's supported organizations to determine whether they are controlled by disqualified persons of the private foundation. If such control exists, the private foundation will be required to exercise expenditure responsibility. Control by a disqualified person is defined in Reg. 53.4942(a)-3(a)(3). An SO is controlled by disqualified persons if they may aggregate votes and require the SO to make an expenditure or collectively prevent an expenditure. In addition, private foundations must be aware that distributions from a private foundation to Type III non-functionally integrated SO are not qualifying distributions for purposes of satisfying a private foundation's required annual distributions under section 4942, and may be taxable expenditures under section 4945.

Case Studies on Supporting Organizations

Lucky Lucy Lindstrom's "Wheeler-Dealer Charity LLC":   Lucky Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor and began advising clients.

Green Supporting Organization For Children?:   George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and was determined to become a successful business owner.

Green Supporting Organization Bailout?:   George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and was determined to become a successful business owner.

Green SO Bailout, Part II:   George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and was determined to become a successful business owner.

Private Letter Rulings

PLR 200045033 Supporting Organization Passes "Substantially All" Test:   A Supporting Organization (SO) was created under Sections 501(c)(3) and 509(a)(3). This SO was permitted to make grants to several named public charities, including a tax-exempt private school.

PLR 200137061 Supporting Organization Allowed to Commingle Assets with Supported 501(c)(3):   M is a supporting organization as described in Sec. 509(a)(3). M conducts research, instruction, and publication in the cultures of several countries. Specifically, M supports a specific university by funding studies, supporting a specialized library, and publishing journals and books for the university. M has nine trustees whom are selected by several different groups, which include N and O, both which are 501(c)(3) organizations and supported by M. M currently makes grants directly to O, but plans to make future grants directly to N instead.

PLR 200316043 Supporting Organization Consolidates Its Operations to Improve Efficiency:   Supporting Organization (SO), a Sec. 509(a)(3) organization, owned a 365-bed general acute care hospital in State Y. Non-Profit Corporation (NPO), a Sec. 501(c)(3) organization, also owned a hospital in State Y. In order to improve efficiency of both hospitals, SO and NPO agreed to consolidate both hospitals' operations into New Hospital, a Sec. 501(c)(3) and Sec. 509(a)(1) organization. The consolidation and creation of New Hospital created a hospital network that better served the community and financially benefited SO and NPO's operations. While controlled by New Hospital, both hospitals maintained their own identities after the consolidation.

PLR 200622049 No UBIT With SO Reorganization:   A, a hospital, is a Sec. 501(c)(3) organization. A's board of directors is appointed by B. B is a Sec. 501(c)(3) organization and is classified as a supporting organization (SO), described in Sec. 509(a)(3) of the Code.

PLR 200717019 Interest and Rent Collected by a Supporting Organization is Not UBTI:   B is a supporting organization under Sec. 509(a)(3). B owns land on a hospital campus. B leases its parcel of land to G. G is a limited partnership owned by B. G borrowed money to build a medical office building on, and to make improvements to, B's parcel. G leases substantially all of the office building to several affiliates and subsidiaries of B.

PLR 200843037 Termination and Transfer of Assets to SO will Not Jeopardize Exempt Status :   A and B are public charities described in Secs. 509(a)(1) and 170(b)(1)(A)(vi) of the Code. C is classified as a supporting organization under Sec. 509(a)(3). As part of a reorganization, A and B agreed to terminate their operations and transfer all funds to C.

PLR 200949056 Supporting Organization Reclassified as Private Foundation:   ORG was created by a declaration of trust. The founder is also the trustee. ORG was awarded tax-exempt status under Sec. 501(c)(3) and classified as a supporting organization (SO) under Sec. 509(a)(3). However, information submitted in ORG's Form 1023 made the IRS reassess the correct classification of ORG.

PLR 201108038 Exempt Status Revoked For Inactivity:   Org. is a Type 1 supporting organization under Sec. 509(a)(3). A Type 1 supporting organization is operated, supervised or controlled by one or more publicly supported organizations.

PLR 201117034 Amendments Will Not Affect Status:   W was originally formed as a public charity under Sec. 501(c)(3) and as a supporting organization under Sec. 509(a)(3). W's organizational documents state that it was formed for the exclusive purpose of supporting and assisting X and Y: Two other charities formed to support those with neurological impairments.

PLR 201250025 Organization's Income From Clinical Database Won't Generate UBIT:   Taxpayer is classified as a tax-exempt organization under Sec. 501(c)(3) and a Type I supporting organization under Sec. 509(a)(3). Taxpayer was formed to benefit, perform the functions of, and carry out the public purposes of twelve supported organizations.

PLR 201328034 ORG Granted More Time to Dispose of Stock:   Supporting ORG is a private foundation that furthers the charitable interests of Founder by making grants and contributing to charities. ORG acquired stock of Corporation upon the death of Founder.

Related Topics on Supporting Organizations

1.1.3  Deduction Limits - 60%, 50%, 30%, 20%:    There are several limits on deducting charitable gifts. Generally, cash gifts and appreciated gifts to public charities are deducted first. Then, cash and appreciated gifts to private foundations are deducted. If there are carry-forwards in either category, those are deducted next if the current gifts have not reached the applicable deduction limits.

Polm:    In Polm Foundation, Inc. v. United States et al.; No. 09-5401 (5 May 2011), the DC Circuit of the Court of Appeals determined that a private foundation failed to qualify under the public charity supporting organization test.

Lapham Foundation:    One of the goals of some donors is to retain the maximum level of control, but still benefit from the favorable charitable deductions of a public charity. A potential method for achieving this objective is to create a supporting organization that distributes grants to a donor advised fund maintained by a public charity. If this method is successful, then the donor receives deductions under the public charity rules, but still has maximum control.

Cuddeback:    Lucille M. Cuddeback signed a will that transferred one-half of her estate to a testamentary charitable remainder unitrust for her niece. Ms. Cuddeback passed away in 1992. The niece-beneficiary passed away in 1993 and the trust continued, with 10% of income payable to Bedford Presbyterian Church, New York, NY, 10% payable to Parklane Baptist Church, Baltimore, MD and 80% of income payable to Keswick Multi-Care Center, Baltimore, MD.

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