[24] In the case of a SO that was supporting or benefiting a supported organization before November 20, 1970, additional facts and circumstances, such as a historic and continuing relationship between the organizations, may be also taken into account to establish compliance with the responsiveness test. [33]   The regulations provide that holding title to or managing tax exempt-use assets are activities that directly further the exempt purposes of a supported organization. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com. An organization wishing to change its public charity classification in IRS records, including a supporting organization requesting a determination as to whether it is a Type I, II or III supporting organization, must file Form 8940, Request for Miscellaneous Determination. Contributions of cash to a public charity may be deducted up to 50% of the donor's adjusted gross income (with certain modifications), while contributions of cash to a private foundation may only be deducted up to 30%.

[67] A principal officer includes, but is not limited to, a person who, regardless of title, has ultimate responsibility for implementing the decisions of the governing body of a supported organization; supervising the management, administration, or operation of the supported organization; or managing the finances of the supported organization. Mitchell, Silberberg & Knupp LLP. Charitable Gifts of Non Cash Assets continues with a review of closely held C Corporation stock donations. For Supporting Organizations Grants to Supporting Organizations. Name recognition simply refers to the fact that by creating an ongoing philanthropic entity bearing the name of a philanthropist's family, that name will be identified with the good works of that family in the community, perhaps for generations to come. Regs. Prior to the PPA, the control exercised over a supported organization by a contributor to a Type III SO was not relevant to the determination of SO status under Section 509(a)(3). G also engages in activities to beautify and maintain local parks. ), then ranking Democratic member, which stated that they planned to propose reforms “to stop the use of supporting organizations for generous tax breaks rather than charitable purposes.”  In a written statement to the Senate Finance Committee dated April 5, 2005 regarding SOs, then IRS Commissioner, Mark W. Everson, stated that “[s]ome promoters in this area have encouraged individuals to establish and operate supporting organizations purportedly described in 509(a)(3) that they can control for their own benefit. Direct furtherance prong. In the absence of regular communication and interaction between an SO and its supported organization, the responsiveness test will not be met, as illustrated by the following example in the regulations:[30].

Notwithstanding the added complexity, the rules for qualification as a Type III SO in a post-PPA tax regime have been clarified and those organizations seeking to achieve or maintain such status must understand and comply with these rules in order to be treated as public charities, rather than private foundations.

These advantages are generally grouped in three areas: (i) timing of tax benefits; (ii) control of assets; and (iii) name recognition. Substantial degree of direction. The legislation requires Fidelity Charitable and other charities with donor-advised fund programs to perform "expenditure responsibility" on grants to non-functionally integrated Type III supporting organizations. Substantial statutory and regulatory changes have made meeting the requirements of a Type III supporting organization even more challenging and complex than ever. A very useful way to build flexibility into the seemingly rigid structure of public charities designated in SO documents is to name one or more community foundations as supported public charities. Y supports charities P, Q, and R, each an organization described in section 509(a)(1). Many donors would like to maintain the flexibility (available with a private foundation) to change their minds about which philanthropic endeavors to support. O is a local nonprofit food pantry described in Section 501(c)(3). [1] As discussed hereinafter, there are three types of SOs depending upon the relationship of the SO with the one or more publicly supported organizations it supports. The 2009 proposed regulations provided a governmental entity exception under which a Type III SO that supports one (and only one) supported organization whose assets are subject to the appropriations process of a federal, state, local, or Indian tribal government may treat making grants to the supported organization and investing and managing non-exempt-use assets on behalf of the supported organization as direct furtherance activities, as long as a substantial part of the SO's total activities are otherwise direct furtherance activities. The regulations provide for two other types of functionally integrated Type III SOs. One of the few drawbacks of a SO is the need to identify in advance the public charities that will be supported. Further, the commentators stated that an SO maintains a governance relationship with its supported organizations in a way that a private foundation does not. specifically identify the supported organization(s) if qualifying as a Type III SO, or identify a class of supporting organizations if qualifying as a Type I or II SO. To pass this test, an SO’s Articles of Incorporation must: Operational Test

This means that neither the SO nor its contributors are subject to the rules and restrictions that are applicable to private foundations. 1 above. The SO and the supported charity will need to earmark the contributions to be used only for the supported project or program.

2. [55] Id. The organization’s articles must state the specified publicly supported organization(s) on whose behalf the supporting organization is to be operated. See Congressional Records of December 6, 1969 (page S 15982).

[66] The Joint Committee on Taxation Technical Explanation provides that “it is intended that indirect control includes the ability to exercise effective control. Size. 1.509(a)-4(i)(5)(i)(A) and 1.509(a)-4(i)(5)(ii). This article was originally posted on June 8, 2015 and the information may no longer be current. [43], Minimum Payout Requirement for Non-Functionally Integrated Type III SOs. 1.509(a)-4(j)(2).

A non-functionally integrated Type III SO meets the integral part test by virtue of distributing funds to a supported organization, not by conducting activities. Instituting regular meetings with their supported organizations, whether face-to-face or telephonically; Having regular discussions regarding the needs of the supported organizations; and. [45] The PPA directed the IRS to promulgate new regulations on a payout requirement for non-functionally integrated Type III SOs to ensure that these SOs pay a significant amount to their supported organizations. Reg. A supporting organization must be further classified as a Type I, Type II or Type III organization (Type III has a further classification between “functionally integrated” or “not functionally integrated”). Reg. A Type III supporting organization must provide the following documents annually to each of its supported organizations: This information must be postmarked or electronically transmitted by the last day of the fifth month following the close of the taxable year to which the information pertains.

[29] The example in the final regulations clarify that face-to-face meetings are not a requirement, as opposed to the example in the proposed regulations that made no indication that such meetings could be held telephonically. The organization will meet this test if the organization is adequately represented in the governing body of the supporting organization. However, sometimes, use of these provisions is the only viable option for maintaining public charity status. The relationship between the supported organization(s) and the supporting organization is sometimes described as similar to a brother-sister relationship. The regulations also make significant changes to the historical requirements for Type III SO status and add complexity to an already complicated tax regime, presenting substantial challenges to organizations seeking to achieve or maintain such status. [20]  An Advanced Notice of Proposed Rulemaking (“ANPRM”) issued by the IRS on August 2, 2007, which described the regulations that the IRS anticipated issuing to implement the PPA changes to Type III SOs, proposed a limitation on the number of supported organizations a non-functionally integrated Type III SO could support, generally limiting the supported organizations to no more than five.

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