part7-36
- 7.20.7.1
Supporting Organizations Guide Sheet Explanation — Type I
and Type II - 7.20.7.2
Specific Explanations Keyed to Guide Sheet Questions — Type
I and Type II - 7.20.7.3
Supporting Organizations Guide Sheet Explanation — Type III
- 7.20.7.4
Specific Explanations Keyed to Guide Sheet Questions — Type
III - Exhibit 7.20.7-1
IRC 509(a)(3) Supporting Organizations Guide Sheet — Type
I and Type II - Exhibit 7.20.7-2
IRC 509(a)(3) Supporting Organizations Guide Sheet — Type
III
-
This Guide Sheet Explanation is designed to provide an overview of exempt
organization tax law rules applicable to supporting organizations and to assist
in preparation of the IRC 509(a)(3) Supporting Organizations Guide Sheet Type
I and Type II. A separate explanation and guide sheet is available for Type
III supporting organizations.
-
Every organization described in IRC 501(c)(3) is further classified
under IRC 509(a) as either 1) a private foundation, or 2) other than a private
foundation if it qualifies under IRC 509(a)(1), (2), (3), or (4). -
Private foundations typically have a single major source of funding
(usually gifts from one family or corporation rather than funding from many
sources). Organizations that are qualified under IRC 509(a)(1) include churches,
hospitals, qualified medical research organizations affiliated with hospitals,
schools, colleges and universities, and organizations that have an active
program of fundraising and receive contributions from many sources, including
the general public, governmental agencies, corporations, private foundations
or other public charities. Organizations qualified under IRC 509(a)(2) receive
income from the conduct of activities in furtherance of the organization’s
exempt purposes. Organizations qualified under IRC 509(a)(3) actively function
in a supporting relationship to one or more IRC 509(a)(1) or (2) organizations. -
An organization may request IRC 509(a)(3) status either 1) when it initially
files a Form 1023 application for IRC 501(c)(3) exemption, or 2) subsequently,
by requesting a determination letter that changes its existing foundation
status. A nonexempt charitable trust described in IRC 4947(a)(1) may also
request a determination that it is described in IRC 509(a)(3), even though
it is has not been recognized as an IRC 501(c)(3) organization, pursuant to
Revenue Procedure 72-50, 1972-2 I.R.B. 830. For information about Rev. Proc.
72-50, see FY 1980 Continuing Professional Education text entitled General
Explanation of Trusts Subject to Section 4947 of the Internal Revenue Code. -
The Pension Protection Act of 2006 (PPA of 2006) modified the statutory
scheme applicable to supporting organizations to address concerns that some
supporting organizations were being used to inappropriately benefit private
interests. This guide sheet inquires about supporting organization arrangements
that lend themselves to private benefit abuses, including situations where
a supporting organization makes loans, grants, or compensation payments to
or for the benefit of donors or donors’ families and businesses. The
guide sheet also inquires about situations where the supporting organization
is a recipient of closely held stock, personal residences, partnership interests,
sole proprietorships, or insurance policies, as these asset types may be manipulated
for the benefit of donors or donors’ families and businesses. In these
circumstances, one needs to consider possible denial of IRC 501(c)(3) exemption,
or possible denial of IRC 509(a)(3) supporting organization status.
-
In general, supporting organizations have been identified by the type
of relationship they have with their supported IRC 509(a)(1) or (2) organizations.
Under the PPA of 2006, supporting organizations are classified into Type I,
Type II, or Type III supporting organizations. The names are new, but they
merely reflect the existing three relationships with supported organizations
described in the current regulations. Type I supporting organizations are
operated, supervised, or controlled by one or more IRC 509(a)(1) or (2) organizations.
Type II supporting organizations are supervised or controlled in connection
with one or more IRC 509(a)(1) or (2) organizations. Type III supporting organizations
are operated in connection with one or more IRC 509(a)(1) or (2) organizations.
The PPA of 2006 classifies Type III supporting organizations into the following
two categories: Type III supporting organizations that are not functionally
integrated or functionally integrated Type III supporting organizations. -
Type III supporting organizations that are not functionally integrated
are subject to excess business holding rules under IRC 4943 and must meet
annual payout requirements. Further, private foundations are prohibited from
treating grants made to Type III supporting organizations that are not functionally
integrated as qualifying distributions under IRC 4942. -
Functionally integrated Type III supporting organizations are not subject
to excess business holding rules of IRC 4943, are not subject to annual payout
requirements, and private foundations may treat grants to functionally integrated
Type III supporting organizations as qualifying distributions under IRC 4942. -
Until final guidance is issued that defines functionally integrated
Type III supporting organizations as described in IRC 509(d) and 4943(f)(5)(B),
the IRS is generally suspending the issuance of determination letters to this
category of Type III organizations other than organizations that choose to
meet the advance notice of proposed rulemaking. [See Advance Notice of Proposed
Rulemaking (ANPRM), 72 Fed. Reg. 42335 (Aug. 2, 2007). This ANPRM is available
from the IRS website at www.irs.gov under Charities and Nonprofits.]-
The ANPRM sets forth criteria for qualifying as a functionally integrated
Type III supporting organization. If a Type III supporting organization chooses
to meet the ANPRM, IRS may issue a determination letter that classifies it
as a functionally integrated Type III supporting organization. Of course,
the organization would have to comply with the regulations that define functionally
integrated Type III supporting organizations when they are finalized. If an
organization chooses not to agree to comply with the ANPRM, it can qualify
for a determination letter that classifies it as a Type III supporting organization
without determining whether it is or is not functionally integrated. In this
case, Notice 2006-109, 2006-51 I.R.B. 1121, provides rules on which private
foundations can rely to ensure they are not making grants to Type III supporting
organizations that are not functionally integrated. Finally, Announcement
2006-93, 2006-48 I.R.B.1017, provides for an expedited process whereby organizations
that are classified as IRC 509(a)(3) supporting organizations may, if they
qualify for the status, obtain a determination letter that modifies their
foundation classification to IRC 509(a)(1) or (2).
-
-
A supporting organization must meet an organizational test that requires
it to contain provisions in its organizational document (e.g. articles of
incorporation, trust instrument, articles of association, or articles of organization)
that limit its purposes to operate exclusively for the benefit of, to perform
the functions of, or to carry out the purposes of one or more IRC 509(a)(1)
or (2) organizations. A supporting organization must also meet an operational
test that requires it to engage solely in activities that support one or more
publicly supported organizations. A supporting organization may not be controlled
directly or indirectly by a disqualified person. Effective August 17, 2006,
the PPA of 2006 provides that neither a Type I nor Type III supporting organization
qualifies as a supporting organization if it accepts gifts from a person (other
than a IRC 509(a)(1), (2), or (4) organization) that directly or indirectly
controls (alone, or together with family members and 35 percent controlled
organizations) the governing body of a supported organization. -
A Type I supporting organization must be operated, supervised, or controlled
by one or more publicly supported organizations. The relationship between
the supported organization and the supporting organization is like a parent-subsidiary
relationship. This relationship exists where one or more supported organizations
(by their governing bodies, members of the governing bodies, officers acting
in their official capacities, or their membership) elect or appoint a majority
of the organization’s officers, directors, or trustees. -
A Type II supporting organization must be supervised or controlled in
connection with one or more publicly supported organizations. A Type II relationship
is like a brother sister relationship. In a Type II relationship, the same
persons control or manage both the supporting organization and the supported
organization.
-
The guide sheet at Ex. 7.20.7-1 sets forth criteria for reviewing applications
for recognition of exempt status under IRC 501(c)(3) involving IRC 509(a)(3)
Type I and Type II supporting organizations. The following specific explanations
are keyed to the corresponding questions in the guide sheet.
-
An organization must meet the organizational test to qualify under IRC
509(a)(3). If a supporting organization does not meet the Organizational Test,
it is not qualified under IRC 509(a)(3). Special organizational test rules
pertain to supporting organization that support IRC 501(c)(4), (5) or (6)
organizations. Therefore, complete Section II below instead of Section I to
demonstrate that an organization meets the organizational test where it seeks
to qualify under 509(a)(3) because it is supporting an IRC 501(c)(4), (5)
or (6) organization.
-
Organizational Test for an organization supporting IRC 509(a)(1) or
509(a)(2) public charities:
A. Is the supporting organization
requesting classification as a Type I or II supporting organization? If “No,”
refer case to 509(a)(3) Type III reserved inventory. If “Yes,”
to satisfy the organizational test there must be a “Yes”
answer to one of the questions B, C or D below. In addition,
all three components of question E must be met.-
A Type I or II supporting organization’s organizing document must
limit its purposes to supporting one or more IRC 509(a)(1) or (2) organizations.
Although the organizing document may accomplish this limitation in a variety
of ways, the organizing document may not contain any provisions that are inconsistent
with its stated purpose of supporting the specified organization(s). For purposes
of this guide sheet, the term “organizing document”
means
a trust instrument, corporate charter, articles of incorporation, articles
of association, or other written instrument by which the organization is created
under state law.
B. through D. — A supporting organization
seeking to qualify as a Type I supporting organization (operated, supervised
or controlled by relationship), or Type II supporting organization (supervised
or controlled in connection with relationship) has three methods by which
it may specify the publicly supported organization on whose behalf the organization
is to be operated.-
One method is to designate the supported organization by name in its organizing
document. For example, X is an organization described in section 501(c)(3)
which operates for the benefit of Y, an institution of higher learning that
controls X and is a section 509(a)(1) organization. X’s articles will
meet the organizational test if they provide for the giving of scholarships
to enable students to attend Y. -
Another method is to designate the supported organization by class or
purpose instead of by name. For example, M is an organization described in
section 501(c)(3) which was organized and operated by representatives of N
church to run a home for the aged. M is controlled by N church, a section
509(a)(1) organization. Care of the sick and aged are long-standing temporal
functions and purposes of organized religion. By operating a home for the
aged, M is operating to support or benefit N church in carrying out one of
its temporal purposes. Thus M’s articles will meet the organizational
test if they require M to care for the aged since M is operating to support
one of N church’s purposes (without designating N church by name). See
section 1.509(a)-4(d) of the Income Tax Regulations. -
The third method is by showing the existence of a historic and continuing
relationship and, by reason of such relationship, there has developed a substantial
identity of interests between such organizations. A disqualified person cannot
have authority or discretion to designate beneficiaries other than those specified
by name, class, or purpose in the organizing document. See
Quarrie v. Commissioner, 70 T.C. 182 (1978).
B. Does the supporting organization’s
organizing document specify by name the IRC 509(a)(1) or (2) organization(s)
it supports? If “Yes,”
skip to E below.
C. Does the supporting organization’s organizing document identify
the IRC 509(a)(1) or (2) organization(s) it supports by class or purpose?
If “Yes,”
skip to E below.
D.
Do the supporting organization and the supported organization(s) have a historic
and continuing relationship such that there is a substantial identity of interests
between the two organizations?
E. To meet the organizational test, there
must be a “Yes”
answer to E (1) and a ”
No”
answer to E(2) and E(3).
E(1) through E(3)
– A Type I (operated, supervised or controlled by) or Type II (supervised
or controlled in connection with) supporting organization must contain provisions
in its organizing document that limit its purposes to one or more purposes
that are similar to, but no broader than, the purposes set forth in the governing
instruments of its controlling IRC 509(a)(1) or (a)(2) organizations. In addition,
the organizing document may not contain provisions that expressly empower
it to (1) engage in activities that do not support its supported organizations,
or (2) support organizations that are not specified by name, purpose, or class.-
E(1) Does the organization’s organizing document
limit its purposes to provide that it is organized, and at all times thereafter
is operated 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 (a)(2) organizations?
-
E(2) Does the organization’s organizing document
expressly empower it to engage in activities which are not in furtherance
of the purposes stated in (E)(1) above? -
E(3) Does the organization’s organizing document
expressly empower it to operate to support or benefit any organization not
specified by name, purpose, or class in its organizing document?
-
-
Organizations Operating in Conjunction With Certain IRC
501(c)(4), (5) or (6) Organizations.
Special organizational test
rules pertain to supporting organizations that support IRC 501(c)(4), (5)
or (6) organizations. Therefore, complete this Section II rather than Section
I to demonstrate that an organization meets the organizational test where
it seeks to qualify under IRC 509(a)(3) because it is supporting an IRC 501(c)(4),
(5) or (6) organization. For purposes of this guide sheet, the term “organizing document”
means a trust instrument, corporate charter,
articles of incorporation, articles of association, or other written instrument
by which the organization is created under state law.
A.
Does the supporting organization claim to support an IRC 501(c)(4), (5) or
(6) organization? If “Yes,”
proceed to questions B through
E.-
Questions A. through D. are directed to whether the supporting organization
meets the IRC 509(a)(3) requirements where its supported organization is an
IRC 501(c)(4), (5) or (6) organization. See Reg. 1.509(a)-4(c)(1).
B. Does the IRC 501(c)(4), (5) or (6) organization
meet the public support tests of IRC 509(a)(2)?-
A supporting organization may support an IRC 501(c)(4), (5) or (6) organization
if such organization would be classified as an IRC 509(a)(2) public charity.
In other words, if the IRC 501(c)(4), (5) or (6) organization was uprooted
and transplanted in IRC 501(c)(3) soil, would it qualify under IRC 509(a)(2).
Therefore, the IRC 501(c)(4), (5) or (6) organization must meet the support
tests of 509(a)(2), namely that (1) more than one third of its support is
derived from gifts, grants, contributions, or membership fees, or gross receipts
from permitted sources, and (2) not more that one-third of its support is
derived from the sum of its gross investment income and unrelated business
taxable income less IRC 511 income taxes.
C. Does the supporting organization meet the
organizational test by stating in its organizing document that it will carry
on exclusively charitable purposes, which can include religious, charitable,
scientific, literary, educational, or for the prevention of cruelty to children
or animals within the meaning of IRC 170(c)(2)?-
A supporting organization can not state in its organizing document that
it is organized and operated exclusively to support a named IRC 501(c)(4),
(5) or (6) organization because this would fail the 501(c)(3) organizational
test. In this circumstance, the supporting organization will meet the IRC
509(a)(3) organizational test by stating in its organizing document that it
will carry on exclusively charitable purposes. These purposes can include
one or more of the following purposes: religious, charitable, scientific,
literary, educational, or for the prevention of cruelty to children or animals
within the meaning of section 170(c)(2). This rule is further explained in
Rev. Rul. 76-401, 1976-2 C. B. 175.
D. Does the supporting organization meet the
Type I or II relationship requirement?-
Because a supporting organization that is supporting an IRC 501(c)(4),
(5) or (6) organization can not name the organization that it is supporting
in its organizing document, it cannot qualify as a Type III under the “operated in connection with”
relationship. Therefore, the supporting
organization must meet the Type I or Type II relationships by demonstrating
either that the members of its governing board are appointed by the IRC 501(c)(4),
(5) or (6) organization (Type I), or that a majority of its board are also
members of the IRC 501(c)(4), (5) or (6) organization (Type II). This rule
is also further explained in Rev. Rul. 76-401.
E. Does the supporting organization have sufficient
safeguards to ensure its support is used exclusively for charitable purposes?
-
Question E. is directed to whether the supporting organization meets the
IRC 501(c)(3) requirement that it retain control and discretion over the use
of its funds for its exempt purposes. Rev. Rul. 68-489, 1968-2 C.B. 210 discusses
the control and discretion requirement when a charity distributes funds to
an organization that is not qualified under IRC 501(c)(3).
Example:
Does the supporting have safeguards in
place to ensure that any payments made to an IRC 501(c)(4), (5) or (6) organization
are used exclusively in furtherance of the supporting organization’s
charitable purposes? IRC 501(c)(4), (5) or (6) organizations, by their very
nature, are not organized and operated for purposes that are exclusively charitable.
Therefore, it is incumbent upon the supporting organization to ensure that
payments given to IRC 501(c)(4), (5) or (6) organizations are used in furtherance
of the supporting organization’s charitable purposes.
• The
payment cannot be used for political intervention and any payment made to
the supported organization for lobbying expenditures must be attributed to
the supporting organization’s lobbying limitation.
• A supporting
organization can help to ensure that payments made to an IRC 501(c)(4), (5)
or (6) organization are used exclusively for charitable purposes by, for example,
making restricted use grants limited to charitable purposes when distributing
funds directly to an organization that does not qualify under IRC 501(c)(3).
•
Therefore, it would be appropriate to inquire about what restrictions are
placed on funds expended by an IRC 509(a)(3) organization that is organized
and operated to support an IRC 501(c)(4), (5) or (6) organization, including
(1) restrictions on the use of grants for exclusively charitable purposes,
(2) reports regarding the use of grants, and (3) conditions on the use of
funds that are not expended for the stated charitable purposes for which the
grant was made. -
-
An organization must meet the operational test to qualify
under IRC 509(a)(3). If an organization does not meet requirements of either
A or B below or a combination of A and B below, it does not meet the operational
test.
A. Does the organization make payments to or
for the use of the specified IRC 509(a)(1) or (2) organization(s)? T meet
the operational test under this section, there must be a “Yes
”
answer to A(1), A(2), A(3), or A(4) below. If “No,”
the
organization must meet B below to meet the operational test.Note:
The specified IRC 509(a)(1) or (2) organizations are those organizations that
the supporting organization is organized and operated to support.-
A(1) Does the organization make payments only to or for
the use of one or more specified IRC 509(a)(1) or (2) organizations? -
A(2) Does the organization make payments to or for the
use of individual members of the charitable class benefited by the specified
IRC 509(a)(1) or (2) organization(s)? -
A(3) Does the organization make payments indirectly through
another unrelated organization to or for the use of a member of a charitable
class benefited by the specified IRC 509(a)(1) or (2) organization(s), but
only if the payment constitutes a grant to an individual rather than a grant
to an organization? -
A(4) Does the organization make payments to or for the
use of another supporting organization that also supports or benefits the
specified IRC 509(a)(1) or (2) organization(s)?Note:
The organization may also make payments to or for the use of a college
or university described in IRC 511(a)(2)(B).
B. Does the organization provide services or facilities to or for the use
of the specified IRC 509(a)(1) or (2) organization(s)? To meet the operational
test under this section, there must be a “Yes”
answer
to B(1), B(2), or B(3) below. If “No,”
the organization
must meet A above to meet the operational test.-
B(1) Does the organization provide services or facilities
only to or for the use of one or more specified IRC 509(a)(1) or (2) organizations?
-
B(2) Does the organization provide services or facilities
to or for the use of individual members of the charitable class benefited
by the specified IRC 509(a)(1) or (2) organization(s)? -
B(3) Does the organization provide services or facilities
to or for the use of another supporting organization that also supports or
benefits the specified IRC 509(a)(1) or (2) organization(s)?Note:
The organization may also provide services or facilities to or for the use
of a college or university described in IRC 511(a)(2)(B).
-
-
An IRC 509(a)(3) organization cannot be controlled by disqualified persons
(other than foundation managers). Questions A through F require
a “No”
answer. Questions G through L are facts
and circumstances questions that require additional scrutiny if answered “Yes.” -
Persons who are in a position of serving on the governing board of the
supported organization may also be directors, trustees or officers of the
supporting organization in order to improve the supporting organization’s
operations and exercise appropriate supervision and control. -
Disqualified persons may also serve on the governing board of the supporting
organization. Disqualified persons consist of all the disqualified persons
defined in IRC 4946, except foundation managers who are disqualified persons
solely because of their status as foundation managers. Disqualified persons
include (1) a substantial contributor; (2) foundation managers (officers,
directors, trustees, and persons with similar powers); (3) an individual with
20% or more voting power of a corporation (or profits interest in a partnership
or beneficial interest in a trust) that is a substantial contributor; (4)
a lineal descendent or ancestor of a family member of the individuals above;
or (5) a corporation, partnership, or trust in which persons described in
1-4 above own more than 35% of the profit interests. IRC 509(a)(1) or (2)
organizations and foundation managers who are disqualified persons only as
a result of being foundation managers are not treated as disqualified persons. -
The presence of any disqualified persons (with the exceptions noted
above) on a supporting organization’s governing body is cause for close
examination of whether prohibited control is present. Although control is
generally present where a disqualified person can aggregate a majority of
the voting power, veto power also constitutes control. In addition, control
by disqualified persons may be present even in the absence of a majority of
the voting power or veto power if disqualified persons control decisions based
on all of the facts and circumstances. See Reg. 1.509(a)-4(j) for rules regarding
control by disqualified persons.
A. Is the organization
controlled directly or indirectly by disqualified persons because disqualified
persons on the governing board can potentially aggregate their votes together
to control the operations of the supporting organization?Example:
One example of impermissible control is where the board of directors consists
of five directors, two are disqualified persons, two are appointed by the
supported charity, and the final director is a so-called “independent
”
director appointed by the disqualified persons. Appointment of the
fifth director by disqualified persons represents “indirect
”
control by disqualified persons.
B. Is the
organization controlled directly or indirectly by disqualified persons because
disqualified persons on the governing board can potentially aggregate their
votes together with other board members who provide personal services to the
disqualified persons, such as legal, accounting, or investment advice, to
control the operations of the supporting organization?Example:
1. An example of indirect control described in Rev. Rul. 80-207, 1980-2 C.B.
113 involves an IRC 501(c)(3) organization whose purpose is to make distributions
to a university described in IRC 509(a)(1) and 170(b)(1)(A)(ii). The organization
is controlled by a four member board of directors. One of these directors
is a substantial contributor to the organization. Two other directors are
employees of a business corporation of which more than 35 percent of the voting
power is owned by the substantial contributor. The remaining director is chosen
by the university. None of the directors has a veto power over the organization’s
actions. Reg. 1.509(a)-4(j) provides that all pertinent facts and circumstances
will be taken into consideration in determining whether a disqualified person
does in fact indirectly control an organization. One circumstance to be considered
is whether a disqualified person is in a position to influence the decisions
of members of the organization’s governing body who are not themselves
disqualified persons. In this example, employees of a disqualified person
are considered to be subject to the influence of a disqualified person in
determining whether one or more disqualified persons control 50 percent or
more of the voting power of an organization’s governing body. Since
the organization was controlled by a disqualified person and the employees
of a disqualified person, it was determined not to qualify as a supporting
organization.Example:
2. An analogous example of control
is a four person board of directors made up of one disqualified person, two
persons appointed by the supported charity, and a fifth director who is paid
by the disqualified persons for accounting, legal, or investment advice apart
from the affairs of the supporting organization. Since the disqualified person
is in a position to influence the decisions of the fifth director, this factor
would need to be taken into consideration as evidence of indirect control
by the disqualified person.
C. Do disqualified persons
have the right to appoint the nominating committee or successor governing
board members?-
Another way that control may be exercised indirectly by disqualified persons
is where two disqualified persons on a five member board of directors are
authorized to select all nominees for the fifth so-called ”
independent”
director position. Even if the two charity appointed directors
then appoint the fifth director from among the list of selected nominees,
control over the board resides with the disqualified persons.
D. Is the organization controlled directly by
disqualified persons because the disqualified persons either have 50% of the
voting power on the governing board or a veto power over the supporting organization’s
activities?-
Voting power may also be maintained through voting rights. For example,
a publicly supported organization may be entitled to appoint four out of five
of the members of the board of directors. The fifth director must be a disqualified
person. If the disqualified person has an 80 percent vote on all major decisions
of the organization, voting power is retained through voting rights regardless
of representation on the board of directors.
E. Is the organization controlled directly or
indirectly by disqualified persons because disqualified persons have veto
power over the supporting organization’s activities?-
Reg. 1.509(a)-4(j) provides that a supporting organization will be considered
to be controlled by one or more disqualified persons if a disqualified person
has the right to exercise veto power over the action of the organization.
A veto situation is also deemed to exist where a two member board of directors
of a supporting organization is made up of one disqualified person board member
and one appointed by the supported organization.
F. Is the organization controlled directly because
the disqualified persons control the primary assets of the supporting organization?
-
If a disqualified person does not control the board but continues to control
the supporting organization’s assets after the assets are transferred
to the supporting organization, the disqualified person virtually controls
the organization by control of the assets. This position is suggested in Reg.
1.509(a)-4(j). The following items G through K relate to various forms of
control of the supporting organization’s assets by a disqualified person.
G. Does a disqualified person own a general
partnership interest in a limited partnership in which the supporting organization
owns an interest?-
The general partner of a limited partnership generally is responsible
for the management of the partnership and usually the general partner makes
most or all important decisions for the partnership, including the distribution
of income to partners. If a disqualified person holds a 1 percent general
partnership interest and the supported organization holds a 99 percent limited
partnership interest (in most cases received from the disqualified person),
the disqualified person is able to control the partnership and thus control
the supporting organization’s only or primary asset.
H. Does a disqualified person own an interest
of 51% or more of the voting stock of a corporation in which the supporting
organization is a stockholder?-
If a disqualified person holds 85 percent of the stock of a closely-held
corporation and transfers 5 percent of such stock to the supporting organization
which constitutes the supporting organization’s only or primary asset,
the 80 percent ownership of the corporation allows the disqualified person
to effectively influence the economic rights associated with ownership of
a minority interest in the corporation such as the five percent stock held
by the supporting organization.
I. Does a disqualified person hold 51% or more
control of a corporation through a voting trust or other voting arrangement
in which the supporting organization is a stockholder?-
Control of a closely held corporation may also be maintained through a
voting trust or voting rights. Thus, if the supporting organization owns 90
percent of the stock of a closely held corporation and the disqualified person
holds only five percent of the stock, the disqualified person may still be
entitled to maintain voting control of such corporation through a voting trust
arrangement or other voting rights.
J. Does a disqualified person have a controlling
interest in a limited liability corporation (LLC) in which the supporting
organization has an interest?-
Control of a limited liability company may be maintained by a disqualified
person in a manner similar to the corporate and partnership examples described
above.
K. Does a disqualified person have an ownership
interest in assets such as real estate, insurance, art work, collectibles,
intellectual property, promissory notes, or other assets in which the supporting
organization also has an interest?-
A disqualified person may also maintain control of real property or tangible
or intangible personal property through joint ownership arrangements. For
real or tangible personal property, the control may also be facilitated by
the possession of the property by the disqualified person through lease or
custody arrangements. The real or personal property may also be used in the
business of the disqualified person. -
Also, consider a situation where the disqualified person donated a valuable
collection of antique automobiles to a supporting organization, the collection
is maintained in a warehouse at the country residence of the disqualified
person, and the warehouse is leased to the supporting organization. In this
situation, the disqualified person still controls the collection by controlling
access.
L. Do donors or their family members have the
right to provide advice to the supporting organization regarding investments
or grant making?-
Consider what safeguards are in place to ensure that disqualified persons
are not in control of investment or grant making decisions of the supporting
organization. -
For example, determine if there is an “advisory committee
”
or similar arrangement created in the trust agreement or other organizing
documents conferring on the donor or members of the family the right to select
grant recipients which must be accepted by the supporting organization.
M. Taking into account all of the facts and
circumstances, including information described in questions G through L, are
disqualified persons in a position to directly or indirectly control the decisions
made by the supporting organization?-
Consider any number of ways that the disqualified person may control the
use or enjoyment of assets transferred to and held by the supporting organization.
-
-
An organization must meet either Section I below to qualify as a Type
I Supporting Organization or Section II below to qualify as a Type II Supporting
Organization. The specific requirement for a Type I Supporting organization
is contained in Reg. 1.509(a)-4(g). The specific requirement for a Type II
Supporting Organization is contained in Reg. 1.509(a)-4(h).
-
Type I “Operated, Supervised or Controlled
By”
—
A. Is the supporting organization
seeking to meet the “operated, supervised or controlled by”
relationship
test with respect to one or more IRC 509(a)(1) or (2) organizations? If “No,”
see Section II below or refer the case to 509(a)(3) Type
III reserve inventory.-
A Type I supporting organization is operated, supervised, or controlled
by one or more public charities (supported organizations) described in IRC
509(a)(1) or (2). IRC 509(a)(3)(B)(i).
B. Are a majority of the supporting organization’s
officers, directors, or trustees appointed or elected by a supported organization’s
officers, directors, trustees or membership?-
A supporting organization is operated, supervised, or controlled by an
IRC 509(a)(1) or (2) organization if a majority of the supporting organization’s
officers, directors or trustees are appointed or elected by a supported organization’s
officers, directors, trustees or membership. This is similar to a parent/subsidiary
relationship. IRC 509(a)(3)(B)(i) and Reg. 1.509(a)-4(g). These persons who
are in a position of serving on the governing board of the supporting organization
may also be directors, trustees or officers of the supported organization
in order to improve the supporting organization’s operations and exercise
appropriate supervision and control.
C. Does the supporting organization accept gifts
or contributions from any person (other than a public charity described in
IRC 509(a)(1), (2), or (4)) who directly or indirectly controls the governing
body of a supported organization (alone, or together with family members or
a 35% controlled organization )? If “No,”
proceed to the
next question. If “Yes,”
the organization does not meet
this requirement.-
A supporting organization will fail to qualify as a Type I supporting
organization if a donor to the supporting organization controls directly or
indirectly an IRC 509(a)(1) or (2) supported organization that the Type I
supporting organization supports. It will also fail to qualify if the organization
accepts a gift or contribution from a member of that donor’s family
(as defined in IRC 4958(f)(4)) or from the donor’s 35% controlled entity.
Direct or indirect control of a supported organization is determined through
any combination of the donor, the donor’s family members, and the donor’s
35% controlled entity. See IRC 509(f)(2)(A)(i) and (f)(2)(B). This rule does
not apply to donors that are themselves IRC 509(a)(1), (2) or (4) organizations.
D. Does the supporting organization support
organizations that are not organized in the United States? If ”
No,”
skip D(1), D(2), and D(3). If “Yes,”
proceed
to these questions. There must be a “Yes”
answer to either
D(1) or D(2), and a “Yes”
to D3 for the organization to
qualify under IRC 509(a)(3).-
D(1) Is the foreign supported organization recognized by
the IRS as exempt under IRC 501(c)(3) and a public charity under section 509(a)(1)
or (2)? OR -
D(2) Is the foreign supported organization described in
IRC 501(c)(3) and a public charity described under IRC 509(a)(1) or (2)? -
D(3) Does the organization retain control and discretion
over the funds distributed to the foreign organization? See Rev. Ruls. 74-229
and 66-79 for more information regarding qualification and deductibility.
A Type I or Type II supporting organization is not specifically
precluded from supporting a foreign charity unlike the way in which section
509(f)(1)(B) prohibits a Type III supporting organization from supporting
foreign charities. However, all supporting organizations are limited to supporting
only section 509(a)(1) or (2) public charities. If the foreign supported charity
has received exemption from the Service under section 501(c)(3) as a 509(a)(1)
or (2) public charity then such charity may be supported by a Type I or Type
II supporting organization. Similarly, Rev. Rul. 74-229, 1974-1 C.B. 142 provides
another avenue for a Type I or Type II supporting organization to support
a foreign charity. Under Rev. Rul. 74-229, a Type I or Type II supporting
organization may support a foreign charity if such charity is described in
(but not exempt under) section 501(c)(3) and would meet the requirements of
section 509(a)(1) or 509(a)(2) if it applied. In this circumstance, the supporting
organization should be asked for information sufficient to demonstrate that
the foreign charity would qualify under IRC 501(c)(3) and IRC 509(a)(1) or
(2). Rev. Rul. 66-79 provides information regarding charitable contribution
deductions when a domestic charitable organization is supporting a foreign
charity. Also, see PLR 9651031 for an example of this situation. -
-
Type II “Supervised or Controlled in Connection
With”
—
A. Is the organization seeking
to meet the “supervised or controlled in connection with”
relationship
test with respect to one or more IRC 509(a)(1) or (2) organizations? If “Yes,”
continue. If “No,”
see Section I
above or refer case to 509(a)(3) Type III reserve inventory.-
A Type II supporting organization is supervised or controlled in connection
with one or more public charities (supported organizations) described in IRC
509(a)(1) or (2). IRC 509(a)(3)(B)(ii).
B. Is control or management of the supporting
organization placed with the same persons that control or manage the supported
organization?-
A supporting organization is supervised or controlled in connection with
an IRC 509(a)(1) or (2) organization if control or management of the supporting
organization is placed with the same persons that control or manage the supported
organization. An example is the presence of the same directors seated on the
boards of both organizations. This is similar to a brother/sister relationship.
IRC 509(A)(3)(B)(ii) and Reg. 1.509(a)-4(h).
C. Does the supporting organization support
organizations that are not organized in the United States? If ”
No,”
skip C(1), C(2), and C(3). If “Yes,”
proceed
to these questions. There must be a “Yes”
answer to either
C(1) or C(2), and a “Yes”
to C(3) for the organization
to qualify under IRC 509(a)(3).-
C(1) Is the foreign supported organization recognized by
the IRS as exempt under IRC 501(c)(3) and a public charity under section 509(a)(1)
or (2)? OR -
C(2) Is the foreign supported organization described in
IRC 501(c)(3) and a public charity described under IRC 509(a)(1) or (2)? -
C(3) Does the organization retain control and discretion
over the funds distributed to the foreign organization? See Rev. Ruls. 74-229
and 66-79 for more information regarding qualification and deductibility.
A Type I or Type II supporting organization is not specifically
precluded from supporting a foreign charity unlike the way in which section
509(f)(1)(B) prohibits a Type III supporting organization from supporting
foreign charities. However, all supporting organizations are limited to supporting
only section 509(a)(1) or (2) public charities. If the foreign supported charity
has received exemption from the Service under section 501(c)(3) as a 509(a)(1)
or (2) public charity then such charity may be supported by a Type I or Type
II supporting organization. Similarly, Rev. Rul. 74-229, 1974-1 C.B. 142 provides
another avenue for a Type I or Type II supporting organization to support
a foreign charity. Under Rev. Rul. 74-229, a Type I or Type II supporting
organization may support a foreign charity if such charity is described in
(but not exempt under) section 501(c)(3) and would meet the requirements of
section 509(a)(1) or 509(a)(2) if it applied. In this circumstance, the supporting
organization should be asked for information sufficient to demonstrate that
the foreign charity would qualify under IRC 501(c)(3) and IRC 509(a)(1) or
(2). Rev. Rul. 66-79 provides information regarding charitable contribution
deductions when a domestic charitable organization is supporting a foreign
charity. Also, see PLR 9651031 for an example of this situation. -
-
This PART 5 is designed to identify transactions, assets, and other
situations that raise red flags because of concern that a supporting organization
may be used to overly benefit private interests. The presence of one or more
of the listed factors is not determinative. All facts and circumstances must
be considered in determining whether an organization meets the requirements
for tax exemption and/or supporting organization status.
-
The following examples illustrate the types of transactions requiring
heightened scrutiny.Example:
1. A donor contributes cash
to a supporting organization. The supporting organization ”
loans”
the money back to the donor’s for-profit business. The
supporting organization receives an unsecured promissory note for the loan
and the donor takes a deduction for a contribution to the supporting organization.
In
this example, there is no collateral on the loan other than a promise to pay
which places the supported organization’s assets at risk. In addition,
the donor is receiving impermissible private benefit that also amounts to
inurement since the donor is an insider and because the loan is made to a
for-profit business that is owned by the donor. Much of the
abuse in the supported organization area relates to unreasonable compensation
and loans to disqualified persons, their family members, and their businesses.
Control is an important factor in determining whether an organization
operates for the benefit of private interests. If disqualified persons have
some position of substantial influence over the supporting organization, unreasonable
compensation or loan activity may be present. See Best Lock
Corporation v. Commissioner, 31 T.C. 620 (1959); Orange
County Agricultural Society, Inc. v. Commissioner, 893 F.2d 529, 534
(2d Cir. 1990); and Lowry Hospital Association v. Commissioner
, 66 T.C. 850 (1976).Example:
2. A donor contributes
cash to the supporting organization. No payments are scheduled or made to
or on behalf of any publicly supported organizations.
In this situation,
the supporting organization has not demonstrated that it operates for IRC
501(c)(3) purposes or meets the IRC 509(a)(3) operational test. In addition,
the donor may be in a position to exercise control over the supporting organization
because after having taken a charitable contribution deduction, no distributions
have either been made or are scheduled to be made to any supported organizations.Example:
3. A donor contributes cash to the supporting
organization. The supporting organization uses its assets to pay college tuition
in the form of a “scholarship”
to the donor’s child.
In this situation, the donor receives a private benefit/inurement because
the supporting organization’s assets are used to pay the school tuition
of the donor’s child.Example:
4. The donor makes
a “contribution”
of a historic facade easement to a supporting
organization and takes a deduction.
In this situation, careful scrutiny
is required to ensure that an inappropriate contribution deduction was obtained
where local historic preservation laws already prohibit alteration of the
home’s facade. In this situation, the contributed easement is superfluous
to achieving a charitable purpose. Even if the facade could be altered, the
deduction claimed for the easement contribution may far exceed the easement’s
impact on the value of the property. (See IRM 7.20.6.2.1)Example:
5. A donor contributes an interest in a partnership, or limited liability
company, closely held business, real estate, intellectual property, art work,
or conservation easements to a supporting organization.
In this situation,
the assets may not be geared to generate significant income. Therefore, the
payout by the Type III supporting organization that is not functionally integrated
may not be sufficient to ensure attentiveness by the supported organization
to the operations of the supporting organization(s). Thus, the supporting
organization may fail the integral part test unless other facts and circumstances
evidence attentiveness by the supported organization.
Further, a situation
in which donor(s) contribute nonproductive assets to a Type III supporting
organization that is not functionally integrated may raise concerns under
IRC 501(3) regarding whether an organization is operated for a substantial
nonexempt purpose as well as an issue under IRC 509(a)(3) regarding whether
there is indirect control of the supporting organization by disqualified persons.
Most
supporting organizations further legitimate charitable purposes. However,
some taxpayers may seek to shield assets inappropriately through supporting
organizations. This has resulted in the need for heightened scrutiny of supporting
organizations generally to screen for those where there is a significant potential
for abuse. The typical Type I or II supporting organization that supports
a hospital, university, or other large charitable institution generally does
not raise the private benefit concerns that require heightened scrutiny. The
questions below are aimed at identifying situations that raise potential for
impermissible private benefit. Additional questions needed to develop an issue
should be tailored to the organization’s specific situation.
-
Section I — Potential Promoters
Note:
For purposes of completing this guide sheet, the term “promoter
”
refers to a person who organizes or assists in the organization of
a partnership, trust, investment plan, or any other entity or arrangement
that is to be sold to a third party. The concern is that the partnership,
trust, etc., is designed to be used or is actually used by that third party
to obtain tax benefits not allowable by the Internal Revenue Code.-
A. Are any promoters identified with the establishment
or operation of the supporting organization? -
B. Does the supporting organization benefit a list of more
than five supported organizations?
-
-
Section II — Unreasonable Compensation / Loans
-
A. Are goods, services, or cash provided to donors or their
family members or persons with whom they have business relationships? -
B. Are the goods, services, or cash provided to donors
or their family members or persons with whom they have business relationships
part of reasonable compensation arrangements? -
C. Are goods, services, or cash provided to officers, directors,
or trustees? -
D. Are the goods, services, or cash provided to officers,
directors, or trustees part of reasonable compensation arrangements? -
E. Are the goods, services or cash provided to the five
highest compensated employees or independent contractors part of reasonable
compensation arrangements? -
F. Is there evidence of any loan activity?
-
G. Are loans made to donors or their family members or
persons with whom they have a business relationship, to officers, directors,
or trustees, or to the five highest compensated employees or independent contractors?
-
H. Are the loans made to donors or their family members
or persons with whom they have a business relationship, to officers, directors,
or trustees, or to the five highest compensated employees or independent contractors
part of reasonable compensation arrangements?
-
-
Section III — Closely Held Stock/Non-Liquid Investments/Assets
That Do Not Produce Current Income-
A. Does the supporting organization hold closely held stock?
-
B. Does the supporting organization hold an interest in
a partnership or limited liability company in which the donor retains an interest
as a general partner or member? -
C. Does the supporting organization own significant other
investments ($100,000 or more) that are not explained in detail? -
D. Does the supporting organization own significant land
($100,000 or more). -
E. Does the supporting organization own significant other
property ($100,000 or more) that does not produce current income? -
F. Does the supporting organization own life insurance
on the donor’s life or the life of the donor’s family member?
-
G. Does the supporting organization own more than 20% of
the stock of a corporation, partnership interest, or beneficial interest of
an estate?
-
-
This Guide Sheet Explanation is designed to provide an overview of exempt
organization tax law rules applicable to Type III supporting organizations
and to assist in preparation of the IRC 509(a)(3) Supporting Organizations
Guide Sheet Type III. A separate explanation and guide sheet is available
for Type I and Type II supporting organizations.
-
Every organization described in IRC 501(c)(3) is further classified
under IRC 509(a) as either 1) a private foundation, or 2) other than a private
foundation if it qualifies under IRC 509(a)(1), (2), (3), or (4). -
Private foundations typically have a single major source of funding
(usually gifts from one family or corporation rather than funding from many
sources). Organizations that are qualified under IRC 509(a)(1) include churches,
hospitals, qualified medical research organizations affiliated with hospitals,
schools, colleges and universities, and organizations that have an active
program of fundraising and receive contributions from many sources, including
the general public, governmental agencies, corporations, private foundations
or other public charities. Organizations qualified under IRC 509(a)(2) receive
income from the conduct of activities in furtherance of the organization’s
exempt purposes. Organizations qualified under IRC 509(a)(3) actively function
in a supporting relationship to one or more IRC 509(a)(1) or (2) organizations. -
An organization may request IRC 509(a)(3) status either 1) when it initially
files a Form 1023 application for IRC 501(c)(3) exemption, or 2) subsequently,
by requesting a determination letter that changes its existing foundation
status. A nonexempt charitable trust described in IRC 4947(a)(1) may also
request a determination that it is described in IRC 509(a)(3), even though
it is has not been recognized as an IRC 501(c)(3) organization, pursuant to
Revenue Procedure 72-50, 1972-2 I.R.B. 830. For information about Rev. Proc.
72-50, see FY 1980 Continuing Professional Education text entitled
General Explanation of Trusts Subject to Section 4947 of the Internal Revenue
Code. -
The Pension Protection Act of 2006 (PPA of 2006) modified the statutory
scheme applicable to supporting organizations to address concerns that some
supporting organizations were being used to inappropriately benefit private
interests. This guide sheet inquires about supporting organization arrangements
that lend themselves to private benefit abuses, including situations where
a supporting organization makes loans, grants, or compensation payments to
or for the benefit of donors or donors’ families and businesses. The
guide sheet also inquires about situations where the supporting organization
is a recipient of closely held stock, personal residences, partnership interests,
sole proprietorships, or insurance policies, as these asset types may be manipulated
for the benefit of donors or donors’ families and businesses. In these
circumstances, one needs to consider possible denial of IRC 501(c)(3) exemption,
or possible denial of IRC 509(a)(3) supporting organization status.
-
In general, supporting organizations have been identified by the type
of relationship they have with their supported IRC 509(a)(1) or (2) organizations.
Under the PPA of 2006, supporting organizations are classified into Type I,
Type II, or Type III supporting organizations. The names are new, but they
merely reflect the existing three relationships with supported organizations
described in the current regulations. Type I supporting organizations are
operated, supervised, or controlled by one or more IRC 509(a)(1) or (2) organizations.
Type II supporting organizations are supervised or controlled in connection
with one or more IRC 509(a)(1) or (2) organizations. Type III supporting organizations
are operated in connection with one or more IRC 509(a)(1) or (2) organizations.
The PPA of 2006 classifies Type III supporting organizations into the following
two categories: Type III supporting organizations that are not functionally
integrated or functionally integrated Type III supporting organizations. -
Type III supporting organizations that are not functionally integrated
are subject to excess business holding rules under IRC 4943 and must meet
annual payout requirements. Further, private foundations are prohibited from
treating grants made to Type III supporting organizations that are not functionally
integrated as qualifying distributions under IRC 4942. -
Functionally integrated Type III supporting organizations are not subject
to excess business holding rules of IRC 4943, are not subject to annual payout
requirements, and private foundations may treat grants to functionally integrated
Type III supporting organizations as qualifying distributions under IRC 4942. -
Until final guidance is issued that defines functionally integrated
Type III supporting organizations as described in IRC 509(d) and 4943(f)(5)(B),
the IRS is generally suspending the issuance of determination letters to this
category of Type III organizations other than organizations that choose to
meet the advance notice of proposed rulemaking. [See Advance Notice of Proposed
Rulemaking (ANPRM), 72 Fed. Reg. 42335 (Aug. 2, 2007). This ANPRM is available
from the IRS website at www.irs.gov under Charities and Nonprofits.]-
The ANPRM sets forth criteria for qualifying as a functionally integrated
Type III supporting organization. If a Type III supporting organization chooses
to meet the ANPRM, IRS may issue a determination letter that classifies it
as a functionally integrated Type III supporting organization. Of course,
the organization would have to comply with the regulations that define functionally
integrated Type III supporting organizations when they are finalized. If an
organization chooses not to agree to comply with the ANPRM, it can qualify
for a determination letter that classifies it as a Type III supporting organization
without determining whether it is or is not functionally integrated. In this
case, Notice 2006-109, 2006-51 I.R.B. 1121, provides rules on which private
foundations can rely to ensure they are not making grants to Type III supporting
organizations that are not functionally integrated. Finally, Announcement
2006-93, 2006-48 I.R.B.1017, provides for an expedited process whereby organizations
that are classified as IRC 509(a)(3) supporting organizations may, if they
qualify for the status, obtain a determination letter that modifies their
foundation classification to IRC 509(a)(1) or (2).
-
-
A supporting organization must meet an organizational test that requires
it to contain provisions in its organizational document (e.g., articles of
incorporation, trust instrument, articles of association, or articles of organization)
that limit its purposes to operate exclusively for the benefit of, to perform
the functions of, or to carry out the purposes of one or more IRC 509(a)(1)
or (2) organizations. A supporting organization must also meet an operational
test that requires it to engage solely in activities that support one or more
publicly supported organizations. A supporting organization may not be controlled
directly or indirectly by a disqualified person. Effective August 17, 2006,
the PPA of 2006 provides that neither a Type I nor Type III supporting organization
qualifies as a supporting organization if it accepts gifts from a person (other
than a IRC 509(a)(1), (2), or (4) organization) that directly or indirectly
controls (alone, or together with family members and 35 percent controlled
organizations) the governing body of a supported organization. -
A Type I supporting organization must be operated, supervised, or controlled
by one or more publicly supported organizations. The relationship between
the supported organization and the supporting organization is like a parent-subsidiary
relationship. This relationship exists where one or more supported organizations
(by their governing bodies, members of the governing bodies, officers acting
in their official capacities, or their membership) elect or appoint a majority
of the organization’s officers, directors, or trustees. -
A Type II supporting organization must be supervised or controlled in
connection with one or more publicly supported organizations. A Type II relationship
is like a brother sister relationship. In a Type II relationship, the same
persons control or manage both the supporting organization and the supported
organization. -
A Type III supporting organization must be operated in connection with
one or more publicly supported organization. A Type III supporting organization
must meet a responsiveness test and an integral part test. Changes made to
the responsiveness test by the PPA of 2006 are incorporated into the guide
sheet and explained below. Changes made to the integral part test by the PPA
of 2006 are not incorporated into the guide sheet because they are not effective
until the issuance of final regulations; however, these changes are explained
below.
-
The responsiveness test requires that a supporting and its supported
organizations must have at least one officer, director or trustee in common
or such individual(s) must maintain a close and continuous working relationship
between the two organizations, such that the supported organizations have
a significant voice in the investment policies and operations of the supporting
organization, including in the timing and manner by which it makes grants
and selects grant recipients. -
Effective August 17, 2006, an alternative responsiveness test applicable
to charitable trusts has been eliminated by the PPA. The alternative responsiveness
test requires that (a) the supporting organization is a charitable trust,
(b) the supporting organization specifies each publicly supported organization
as a named beneficiary under the trust, and (c) the supported organization
has the power to enforce the trust and compel an accounting. However, charitable
trusts that met the operated in connection with test on August 17, 2006, can
continue to rely on the alternative responsiveness test until August 17, 2007.
After that date such trusts must meet the responsiveness test described above
to continue to qualify as Type III supporting organizations.
-
There are two alternative prongs of the integral part test, one of which
must be satisfied.-
One prong of the integral part test that may generally be described as
the “payout/responsiveness”
part requires that the supporting
organization make payments of substantially all its income to or for the use
of one or more publicly supported organizations and such support must be sufficiently
significant in relation to the supported organization’s programs to
insure its attentiveness to the supported organization. The PPA of 2006 will
change the payout requirement in a manner to be determined by the IRS and
Treasury in future guidance. Pending issuance of such guidance, these organizations
must meet the “payout/responsiveness”
requirements of
current regulations. -
Another prong of the integral part test that may generally be described
as the “but for”
part requires that the supporting organization
performs activities that carry out the purposes or functions of one or more
supported organizations. Such activities would normally be engaged in by the
supported organizations themselves if the supporting organization was not
doing so. Making cash distributions to a supported organization will not satisfy
this prong of the integral part test.
-
-
As explained in the ANPRM, it is expected that functionally integrated
Type III supporting organizations will be required to meet (1) the responsiveness
test, (2) the “but for”
test, (3) an expenditure test
that will resemble the qualifying distributions test for private operating
foundations, and (4) an assets test that will resemble the alternative assets
test for private operating foundations. -
The following rules added by the PPA of 2006 apply now to Type III supporting
organizations.-
A Type III supporting organization must provide each supported organization
information to ensure that the Type III supporting organization is responsive
to the needs of each of its supported organizations. This requirement must
await IRS and Treasury guidance before it can be implemented. -
A Type III supporting organization can only support organizations organized
in the United States. A transitional rule delays the effective date for Type
III supporting organizations that, on August 17, 2006, were operated in connection
with an organization that is not organized in the United States. The delayed
effective date for such organizations is the first day of the third taxable
year of the supporting organization beginning after August 17, 2006.
-
-
The guide sheet at Ex. 7.20.7-2 sets forth criteria for reviewing applications
for recognition of exempt status under IRC 501(c)(3) involving IRC 509(a)(3)
Type III supporting organizations. The following specific explanations are
keyed to the corresponding questions in the guide sheet.
-
An organization must meet the organizational test to qualify under IRC
509(a)(3). If a supporting organization does not meet the organizational test,
it is not qualified under IRC 509(a)(3).Note:
A Type III supporting organization
cannot qualify by supporting an IRC 501(c)(4), (5) or (6) organization. See
Reg. 1.509(a)-4(c)(2) and Rev. Rul. 76-401, 1976-2 C.B. 175.
-
Organizational Test for an organization supporting IRC
509(a)(1) or 509(a)(2) public charities
A. Is the
supporting organization requesting classification as a Type III supporting
organization? If “Yes,”
there must be a ”
Yes”
answer to either question B or C below. In addition, all three
components of question D must be met.-
A Type III supporting organization’s organizing document must limit
its purposes to supporting one or more IRC 509(a)(1) or (2) organizations
that are specified by name. Its organizational document may not contain any
provisions that are inconsistent with its stated purpose of supporting the
specified organization(s).
B. Does the supporting organization’s
organizing document specify by name the IRC 509(a)(1) or (a)(2) organization(s)
it supports?
C. Do the supporting organization and the supported organization(s)
have a historic and continuing relationship such that there is a substantial
identity of interests between the two organizations?
B. and C. — A Type III supporting organization must contain provisions
in its organizing document that specify the publicly supported organizations
it supports. However, in situations where there has been an historic relationship
between the supporting organization and the publicly supported organization
and where, by reason of such relationship, a substantial identity of interests
has been developed between the organizations, the identity of the supporting
organization need not be made specifically.
D. To meet the
organizational test, there must be a “Yes”
answer to D(1)
and “No”
answers to D(2) and D(3).-
D(1) Does the organization’s organizing document
limit its purposes to provide that it is formed for the benefit of, or to
perform the functions of, or to carry out the purposes of one or more specified
publicly supported organizations or provide some other statement committing
the supporting organization to support or benefit publicly supported organizations?
-
D(2) Does the organization’s organizing document
expressly empower it to engage in activities which are not in furtherance
of the purposes stated in D (1)? -
D(3) Does the organization’s organizing document
expressly empower it to operate to support or benefit any organization not
specified by name in its organizing document? -
D(1) through D(3) — If the supporting organization
designates the specified publicly supported organization by name, it will
not fail the organizational test merely because its organizing document permits
the substitution of another publicly supported organization, designated by
class or purpose rather than by name, as long as such substitution is conditioned
upon an event beyond the control of the supporting organization, such as loss
of exemption or dissolution of the publicly supported organization. Also,
an organization will not fail the organizational test merely because its organizing
document permits it to operate for the benefit of a non-publicly supported
organization that is designated by name or by class or purpose, but only if
(1) a publicly supported organization is currently being supported and (2)
the possibility of operating for the benefit of other than a publicly supported
organization is a remote contingency, conditioned on events outside the publicly
supported organization’s control.
-
-
An organization must meet the operational test to qualify under IRC
509(a)(3). If an organization does not meet the requirements of either A or
B below or a combination of A and B below, it does not meet the operational
test.
A. Does the organization make payments to or for the
use of the specified IRC 509(a)(1) or (2) organization(s)? To meet the operational
test under this section, there must be a “Yes”
answer
to A(1), A(2), A(3), or A(4) blow. If “No,”
the organization
must meet B below to meet the operational test.Note:
The specified
organization(s) must be named in the organization’s organizing document.
Alternatively, a specified IRC 509(a)(1) or (2) organization may include an
organization with which the supporting organization has an historic and continuing
relationship.-
A(1) Does the organization make payments only to or for
the use of one or more specified IRC 509(a)(1) or (2) organizations? -
A(2) Does the organization make payments to or for the
use of individual members of the charitable class benefited by the specified
IRC 509(a)(1) or (2) organization(s)? -
A(3) Does the organization make payments indirectly through
another unrelated organization to or for the use of a member of a charitable
class benefited by the specified IRC 509(a)(1) or (2) organization(s), but
only if the payment constitutes a grant to an individual rather than a grant
to an organization? -
A(4) Does the organization make payments to or for the
use of another supporting organization that also supports or benefits the
specified IRC 509(a)(1) or (2) organization(s)?Note:
The organization
may also make payments to or for the use of a college or university described
in IRC 511(a)(2)(B).
B. Does the organization provide services or
facilities to or for the use of the specified IRC 509(a)(1) or (2) organization(s)?
To meet the operational test under this section, there must be a ”
Yes”
answer to B(1), B(2),or B(3) below. If “No,”
the
organization must meet A above to meet the operational test.-
B(1) Does the organization provide services or facilities
only to or for the use of one or more specified IRC 509(a)(1) or (2) organizations?
-
B(2) Does the organization provide services or facilities
to or for the use of individual members of the charitable class benefited
by the specified IRC 509(a)(1) or (2) organization(s)? -
B(3) Does the organization provide services or facilities
to or for the use of another supporting organization that also supports or
benefits the specified IRC 509(a)(1) or (2) organization(s)?
Note:
The organization may also provide services or facilities
to or for the use of a college or university described in IRC 511(a)(2)(B). -
-
An IRC 509(a)(3) organization cannot be controlled by disqualified persons
(other than foundation managers). Questions A through F require
a “No”
answer. Questions G through L are facts
and circumstances questions that require additional scrutiny if answered “Yes.” -
Persons who are in a position of serving on the governing board of the
supported organization may also be directors, trustees or officers of the
supporting organization in order to improve the supporting organization’s
operations and exercise appropriate supervision and control. -
Disqualified persons may also serve on the governing board of the supporting
organization. Disqualified persons consist of all the disqualified persons
defined in IRC 4946, except foundation managers who are disqualified persons
solely because of their status as foundation managers. Disqualified persons
include (1) a substantial contributor; (2) foundation managers (officers,
directors, trustees, and persons with similar powers); (3) an individual with
20% or more voting power of a corporation (or profits interest in a partnership
or beneficial interest in a trust) that is a substantial contributor; (4)
a lineal descendent or ancestor of a family member of the individuals above;
or (5) a corporation, partnership, or trust in which persons described in
1-4 above own more than 35% of the profit interests. IRC 509(a)(1) or (2)
organizations and foundation managers who are disqualified persons only as
a result of being foundation managers are not treated as disqualified persons. -
The presence of any disqualified persons (with the exceptions noted
above) on a supporting organization’s governing body is cause for close
examination of whether prohibited control is present. Although control is
generally present where a disqualified person can aggregate a majority of
the voting power, veto power also constitutes control. In addition, control
by disqualified persons may be present even in the absence of a majority of
the voting power or veto power if disqualified persons control decisions based
on all of the facts and circumstances. See Reg. 1.509(a)-4(j) for rules regarding
control by disqualified persons.
A. Is the organization
controlled directly or indirectly by disqualified persons because disqualified
persons on the governing board can potentially aggregate their votes together
to control the operations of the supporting organization?-
One example of impermissible control is where the board of directors consists
of five directors, two are disqualified persons, two are appointed by the
supported charity, and the final director is a so-called “independent
”
director appointed by the disqualified persons. Appointment of the
fifth director by disqualified persons represents “indirect
”
control by disqualified persons.
B. Is the organization controlled directly or
indirectly by disqualified persons because disqualified persons on the governing
board can potentially aggregate their votes together with other board members
who provide personal services to the disqualified persons, such as legal,
accounting, or investment advice, to control the operations of the supporting
organization?Example:
1. An example of indirect control
described in Rev. Rul. 80-207, 1980-2 C.B. 113 involves an IRC 501(c)(3) organization
whose purpose is to make distributions to a university described in IRC 509(a)(1)
and 170(b)(1)(A)(ii). The organization is controlled by a four member board
of directors. One of these directors is a substantial contributor to the organization.
Two other directors are employees of a business corporation of which more
than 35 percent of the voting power is owned by the substantial contributor.
The remaining director is chosen by the university. None of the directors
has a veto power over the organization’s actions. Reg. 1.509(a)-4(j)
provides that all pertinent facts and circumstances will be taken into consideration
in determining whether a disqualified person does in fact indirectly control
an organization. One circumstance to be considered is whether a disqualified
person is in a position to influence the decisions of members of the organization’s
governing body who are not themselves disqualified persons. In this example,
employees of a disqualified person are considered to be subject to the influence
of a disqualified person in determining whether one or more disqualified persons
control 50 percent or more of the voting power of an organization’s
governing body. Since the organization was controlled by a disqualified person
and the employees of a disqualified person, it was determined not to qualify
as a supporting organization.Example:
2. An analogous
example of control is a four person board of directors made up of one disqualified
person, two persons appointed by the supported charity, and a fifth director
who is paid by the disqualified persons for accounting, legal, or investment
advice apart from the affairs of the supporting organization. Since the disqualified
person is in a position to influence the decisions of the fifth director,
this factor would need to be taken into consideration as evidence of indirect
control by the disqualified person.
C. Do disqualified
persons have the right to appoint the nominating committee or successor governing
board members?-
Another way that control may be exercised indirectly by disqualified persons
is where two disqualified persons on a five member board of directors are
authorized to select all nominees for the fifth so-called ”
independent”
director position. Even if the two charity appointed directors
then appoint the fifth director from among the list of selected nominees,
control over the board resides with the disqualified persons.
D. Is the organization controlled directly by
disqualified persons because the disqualified persons either have 50% of the
voting power on the governing board or a veto power over the supporting organization’s
activities?-
Voting power may also be maintained through voting rights. For example,
a publicly supported organization may be entitled to appoint four out of five
of the members of the board of directors. The fifth director must be a disqualified
person. If the disqualified person has an 80 percent vote on all major decisions
of the organization, voting power is retained through voting rights regardless
of representation on the board of directors.
E. Is the organization controlled directly or
indirectly by disqualified persons because disqualified persons have veto
power over the supporting organization’s activities?-
Reg. 1.509(a)-4(j) provides that a supporting organization will be considered
to be controlled by one or more disqualified persons if a disqualified person
has the right to exercise veto power over the action of the organization.
A veto situation is also deemed to exist where a two member board of directors
of a supporting organization is made up of one disqualified person board member
and one appointed by the supported organization.
F. Is the organization controlled directly because
the disqualified persons control the primary assets of the supporting organization?
-
If a disqualified person does not control the board but continues to control
the supporting organization’s assets after the assets are transferred
to the supporting organization, the disqualified person virtually controls
the organization by control of the assets. This position is suggested in Reg.
1.509(a)-4(j). The following items G through K relate to various forms of
control of the supporting organization’s assets by a disqualified person.
G. Does a disqualified person own a general
partnership interest in a limited partnership in which the supporting organization
owns an interest?-
The general partner of a limited partnership generally is responsible
for the management of the partnership and usually the general partner makes
most or all important decisions for the partnership, including the distribution
of income to partners. If a disqualified a person holds a 1 percent general
partnership interest and the supported organization holds a 99 percent limited
partnership interest (in most cases received from the disqualified person),
the disqualified person is able to control the partnership and thus control
the supporting organization’s only or primary asset.
H. Does a disqualified person own an interest
of 51% or more of the voting stock of a corporation in which the supporting
organization is a stockholder?-
If a disqualified person holds 85 percent of the stock of a closely-held
corporation and transfers 5 percent of such stock to the supporting organization
which constitutes the supporting organization’s only or primary asset,
the 80 percent ownership of the corporation allows the disqualified person
to effectively influence the economic rights associated with ownership of
a minority interest in the corporation such as the five percent stock held
by the supporting organization.
I. Does a disqualified person hold 51% or more
control of a corporation through a voting trust or other voting arrangement
in which the supporting organization is a stockholder?-
Control of a closely held corporation may also be maintained through a
voting trust or voting rights. Thus, if the supporting organization owns 90
percent of the stock of a closely held corporation and the disqualified person
holds only five percent of the stock, the disqualified person may still be
entitled to maintain voting control of such corporation through a voting trust
arrangement or other voting rights.
J. Does a disqualified person have a controlling
interest in a limited liability corporation (LLC) in which the supporting
organization has an interest?-
Control of a limited liability company may be maintained by a disqualified
person in a manner similar to the corporate and partnership examples described
above.
K. Does a disqualified person have an ownership
interest in assets such as real estate, insurance, art work, collectibles,
intellectual property, promissory notes, or other assets in which the supporting
organization also has an interest?-
A disqualified person may also maintain control of real property or tangible
or intangible personal property through joint ownership arrangements. For
real or tangible personal property, the control may also be facilitated by
the possession of the property by the disqualified person through lease or
custody arrangements. The real or personal property may also be used in the
business of the disqualified person. -
Also, consider a situation where the disqualified person donated a valuable
collection of antique automobiles to a supporting organization, the collection
is maintained in a warehouse at the country residence of the disqualified
person, and the warehouse is leased to the supporting organization. In this
situation, the disqualified person still controls the collection by controlling
access.
L. Do donors or their family members have the
right to provide advice to the supporting organization regarding investments
or grant making?-
Consider what safeguards are in place to ensure that disqualified persons
are not in control of investment or grant making decisions of the supporting
organization. -
For example, determine if there is an “advisory committee
”
or similar arrangement created in the trust agreement or other organizing
documents conferring on the donor or members of the family the right to select
grant recipients which must be accepted by the supporting organization.
M. Taking into account all of the facts and
circumstances, including information described in questions G through L, are
disqualified persons in a position to directly or indirectly control the decisions
made by the supporting organization?-
Consider any number of ways that the disqualified person may control the
use or enjoyment of assets transferred to and held by the supporting organization.
-
-
To meet the general rules and relationship requirement as a Type III
Supporting Organization, an organization must answer “Yes”
to
all three questions below.-
A. Does the organization meet Section I below (General
Rules)? -
B. Does the organization meet either Section II or Section
III below (Responsiveness Test)? -
C. Does the organization meet Section IV (Integral Part
Test) or Section V (Functionally Integrated Test) below?
-
-
A Type III supporting organization is operated in connection with one
or more public charities (supported organizations) described in IRC 509(a)(1)
or (2). IRC 509(a)(3)(B)(iii).
A. Does the supporting organization
accept gifts or contributions from any person (other than a public charity
described in IRC 509(a)(1), (2), or (4)) who directly or indirectly controls
the governing body of a supported organization (alone, or together with family
members or a 35% controlled organization)? If “No,”
proceed
to the next question. If “Yes,”
the organization does
not meet this requirement.-
A supporting organization will fail to qualify as a Type III supporting
organization if a donor to the supporting organization controls directly or
indirectly an IRC 509(a)(1) or (2) supported organization that the Type III
supporting organization supports. It will also fail to qualify if the organization
accepts a gift or contribution from a member of that donor’s family
(as defined in IRC 4958(f)(4)) or from the donor’s 35% controlled entity.
Direct or indirect control of a supported organization is determined through
any combination of the donor, the donor’s family members, and the donor’s
35% controlled entity. See IRC 509(f)(2)(A)(i) and (f)(2)(B). This rule does
not apply to donors that are themselves IRC 509(a)(1), (2) or (4) organizations.
B. Does the organization support organizations
that are not organized in the United States? If “No,”
proceed
to Section II. If “Yes,”
complete the questions below.
Questions B(1) through B(3) must be “Yes”
answers. There
must also be a “Yes”
answer to either B(4) or B(5).-
B(1) Was the organization formed on or before August 17,
2006? -
B(2) Was the organization operating in connection with
an organization not organized in the United States on or before August 17,
2006? -
B(3) Has the organization ceased its support to the organization
not organized in the United States as of the first day of its third taxable
year after August 17, 2006? -
B(4) Is the foreign supported organization recognized by
the IRS as exempt under IRC 501(c)(3) and a public charity under IRC 509(A0(1)
or (2)? OR -
B(5) Is the foreign supported organization described in
IRC 501(a)(3) and a public charity described under IRC 509(a)(1) or (2)?
Note:
A Type III supporting organization is specifically precluded
from supporting a foreign charity. However, there is a transitional rule provided
by IRC 509(f) that permits supporting organization to continue to support
foreign public charities for a three-year period after August 17, 2006.
C. Has the organization represented that it will provide information
when regulations are finalized under IRC 509(f) to inform its supported organizations
about how it can be responsive to its needs or demands?-
Until regulations are finalized that provide rules explaining how a supporting
organization will inform its supported organizations about how the supporting
organization must be responsive to the supporting organizations’ needs
or demands, this question is intended to alert supporting organizations to
this requirement.
-
-
To meet the responsiveness test, there must be a “Yes
”
answer to A, B or C as well as a “Yes”
answer
to D (significant voice test). Alternatively, to meet the responsiveness test,
there must be a “Yes”
answer to E (historic and continuing
relationship test).
A. Do the officers, directors, trustees,
or membership of the supported organization(s) elect or appoint one or more
of the supporting organization’s officers, directors, or trustees?
B.
Are one or more members of the governing bodies of the supporting organization
also officers, directors, or trustees or hold other important offices in the
supported organization(s)?
C. Do the officers, directors, or trustees of
the supporting organization maintain a close and continuous working relationship
with the officers, directors or trustees of the supported organization(s)?
D.
By reason of the relationship described above in (a), (b) or (c), does the
supported organization(s) have a significant voice in the supporting organization’s
investment policies, the timing of grants, the manner of making grants, and
the selection of recipients of grants?-
A supporting organization must meet the responsiveness test with respect
to at least one of its supported organizations. By meeting the requirements
of question 1(a), (b), or (c), and question 1(d), an organization will satisfy
the responsiveness test. For question 1(d), the supporting organization will
need to supply relevant documents, (e.g., correspondence, board meeting minutes)
or a detailed description to explain how the supporting organization and its
supported organization(s) interact, or have arranged to interact, to demonstrate
that the supported organization(s) has a significant voice in the operations
of the supporting organization. An annual report from the supporting organization
to the supported organization(s) would not satisfy the responsiveness test.Note:
The existing responsiveness test regulations remain valid except the
alternative responsiveness test applicable to certain trusts was eliminated
by the PPA of 2006. Thus, Reg. 1.509(a)-4(i)(2)(iii) is no longer effective.
Trusts in existence on August 17, 2006, can continue to rely on Reg. 1.509(a)-4((i)(2)(iii)
until August 17, 2007. See Notice 2008-6, 2008-3 I.R.B. 275.
E. Is the organization a trust that was (1)
in existence on November 20, 1970, (2) continuously supported an IRC 509(a)(1)
or (2) organization on November 20, 1970, and thereafter, and (3) has maintained
an historic and continuing relationship with the IRC 509(a)(1) or (2) organization?
-
-
For trusts in existence on August 17, 2006 —
A. Did the trust meet the alternative responsiveness test of Reg.
1.509(a)-4(i)(2)(iii) prior to August 17, 2006?-
A(1) Was the trust considered a charitable trust under
state law? -
A(2) Did the trust name each publicly supported organization
that it supports as a beneficiary under its governing instrument? -
A(3) Did each beneficiary have the power to enforce the
trust and compel an accounting under State law?
B. As of August 17, 2007, does the trust meet
the responsiveness test described in Section II above? If ”
No,”
the organization will be deemed to be a private foundation as of
August 17, 2007. However, the organization may file Form 990 rather than Form
990-PF for 2007 pursuant to Notice 2008-6, 2008-3 I.R.B. 275. If the organization
otherwise qualifies as a Type III Supporting Organization for the period prior
to August 17, 2006, its determination letter will include a caveat explaining
this aspect. -
-
Organizations that choose NOT to meet the guidelines
of the Advanced Notice of Proposed Rulemaking (ANPRM), 72 Fed. Reg. 42335
(August 2, 2007) for a Functionally Integrated Type III Supporting Organizations
—-
If an organization chooses not to meet the guidelines of the ANPRM, it
may qualify as a Type III supporting organization based on meeting the existing
integral part test. To meet the integral part test, an organization must meet
Item A or Item B below. If an organization meets the integral part test, its
determination letter will classify it as a Type III supporting organization
without further designating it as functionally integrated or non-functionally
integrated. Notice 2006-109, 2006-51 I.R.B. 1121, provides interim guidance
by which private foundations may obtain reliance that grants are made to functionally
integrated Type III supporting organizations.
-
-
Payout/Attentiveness Requirement
A. Is the organization seeking to be a Type III supporting organization
that meets the “payout/attentiveness”
part of the integral
part test of Reg. 1.509(a)- 4(i)(3)(iii)? If “Yes,”
there
must be yes answers to A(1) and A(2) below. If “No,”
skip
to question B below.-
A(1) The Payout Requirement —
Does the supporting organization pay substantially all (85%) of its adjusted
net income to or for the use of the supported organization(s)? If ”
Yes,”
proceed to Item A(2). If “No,”
the organization
does not meet the payout requirement.
A supporting organization
must meet the integral part test with respect to at least one of its supported
organizations. The requirement that substantially all the supported organization’s
income must be paid to or for the use of the supported organization is an
annual requirement. Revenue Ruling 76-208, 1976-1 C.B. 161, defines “substantially all”
for purpose of the integral part tests as
at least 85% of income distributed to or for the use of the supported organization(s)
and prohibits counting accumulated income even if it must be paid to the supported
organization(s). Relatively minor payout delays that can be explained in terms
of timing should not disqualify an otherwise qualified organization from meeting
the substantially all requirement.Note:
This is an area in which new guidance
may be issued as a result of the Pension Protection Act. The above requirement
remains in effect until the effective date of any new guidance. -
A(2) The Attentiveness Requirement —
Does the organization meet the Attentiveness Requirement by answering “Yes”
to Group 1, Group 2, Group 3, or Group 4 below?
This
is an area which may or may not be impacted by regulations on the payout requirement
for Type III organizations that are not functionally integrated. These requirements
remain in effect until final or temporary regulations are issued. The answer
here will depend on facts and circumstances. But the amount of the support
should be sufficient to ensure that the supported organization will have strong
reason to be attentive to the supporting organization either because a significant
part of its total support comes from the supporting organization, or because
a significant part of an important activity or department is funded by the
supporting organization. The percentage amounts listed in Group 1 and 2 are
provided as an administrative safe harbor.
-
-
To meet Group 1, the answers must be ”
Yes”
to A and B.
A. Is the payout to one or
more of the supported organizations large enough to ensure the attentiveness
of the organization(s) to the operations of the supporting organization (equals
10% or more of the supported organization’s (1) total support for the
year, or (2) support for the year received by a department where the supported
organization is a school, hospital, or church)?
B. Does a substantial amount of the supporting organization’s total
support (one third of the supporting organization’s income for the year)
go to those publicly supported organizations that meet the attentiveness requirement
described in (a) above?-
The percentages represent an administrative rule of thumb since a supporting
organization would be hard pressed to demonstrate attentiveness on the part
of a supported organization where a payment is not significant in terms of
a supported organization’s budget and the supporting organization’s
payout amount. In certain cases, the level of support can be measured against
the total amount of support received by a department of an organization rather
than the organization’s total support. These cases usually involve schools,
universities, hospitals and churches.
-
-
To meet Group 2, the answers must be ”
Yes”
to A through E below. Some applicants intend to qualify
by meeting this test for only a few years with the idea that they will meet
attentiveness in the future in some other way or with some other earmarked
program. To qualify, the applicant’s intentions to the earmarked program
should indicate a long term relationship.
A. Are the payments
sufficiently significant to ensure the attentiveness of the supported organization(s)
because they are earmarked for a particular substantial program or activity
of the supported organization(s) that would not exist or would be interrupted
without the payment?-
If the supported organization would fund an earmarked program no matter
what funding it receives from the supporting organization, the supporting
organization is not providing the support required to demonstrate attentiveness.
In this circumstance, the loss of the supported organization’s support
would not cause an interruption in the supported organization’s program.
B. Does the supporting organization provide
50% or more of the funding of the earmarked program or activity?-
The percentage represents an administrative safe harbor that helps demonstrate
that the supporting organization’s payout represents a significant part
of the total funding of an earmarked program.
C. Is the supporting organization funding the
same earmarked program continuously year after year?-
To qualify the applicant’s intentions to the earmarked program should
indicate a long term relationship.
D. Is the earmarked program a substantial program?
-
An earmarked program or activity does not have to be the supported organization’s
primary program provided that it represents a substantial program or activity
conducted by the supported organization.
E. Does a substantial amount of the supporting
organization’s total support (one third of the supporting organization’s
income for the year) go to those publicly supported organizations that meet
this earmarked attentiveness requirement?-
The percentages represent an administrative rule of thumb since a supporting
organization would be hard pressed to demonstrate attentiveness on the part
of a supported organization where a payment is not significant in terms of
a supported organization’s budget and the supporting organization’s
payout amount. In certain cases, the level of support can be measured against
the total amount of support received by a department of an organization rather
than the organization’s total support. These cases usually involve schools,
universities, hospitals and churches.
-
-
Tomeet Group 3, there must be a “Yes”
to
A below.
A. Is/are the supported organization(s)’
attentive to the supporting organization based on all the pertinent facts
and circumstances, including the length and nature of the relationship; the
number of other supported organizations the supporting organization supports;
the percentage of support contributed by the supporting organization to the
supported organization’s total support; evidence of actual attentiveness;
and a substantial identity of interests between the supporting organizations
and its supported organizations?-
This provision is intended for situations where there is an historic and
continuing relationship between the supporting and a supported organization
such that there is a substantial identity of interests between the two organizations.
-
-
To meet Group 4, the answers must be ”
Yes”
to A and B, “Yes”
to C, E and H, and “No”
to D, F and G below. -
The integral part test provides for a transitional rule applicable to
(1) charitable trusts created before November 20, 1970, and (2) split-interest
trusts described in IRC 4947(a)(2) that were irrevocable on November 20, 1970,
and that subsequently became charitable trusts described in IRC 4947(a)(1).
This transitional rule is provided at Reg. 1.509(a)-4(i)(4). It generally
has application to charitable trusts that seek supporting organization status
without having applied for exemption as provided by Rev. Proc. 72- 50.-
A. Was the supporting organization a trust whether or not
exempt from taxation under IRC 501(a) on November 20, 1970? -
B. Was the supporting organization an irrevocable split-interest
trust described in IRC 4947(a)(2) before November 20, 1970, and that subsequently
became a charitable trust described in IRC 4947(a)(1)? -
C. Are all of the unexpired interests in the trust devoted
to one or more charitable purposes for which a deduction was allowed with
respect to such interest under IRC 170, 545(b)(2), 556, 642(c), 2055, 2106(a)(2),
2522, or corresponding provisions of prior law? -
D. Did the trust receive any grant, contribution, bequest
or other transfer on or after November 20, 1970? -
E. Is all of the supporting organization’s net income
distributed to benefit the supported organization(s)? -
F. Do the supporting organization’s trustees have
a right to vary beneficiaries or amounts? -
G. Do disqualified persons described in IRC 4946 (other
than foundation managers) serve as trustees? -
H. Do the trustees of the supporting organization provide
annual written reports to the supported organization(s) describing the supporting
organization’s assets and income?
-
-
“But For”
Requirement
B. Is the organization seeking to be a Type
III supporting organization that meets the “but for”
part
of the integral part test of Reg. 1.509(a)-4(i)(3)(ii)? If ”
Yes,”
there must be “Yes”
answers to B(1) and B(2).
-
B(1) Does the supporting organization engage in activities,
not including grant making, for or on behalf of supported organization(s)
that perform the functions of or carry on the purposes or programs of the
supported organization(s)? If “Yes,”
proceed to question
B(2). -
B(2) Would the publicly supported organization(s) normally
undertake such activity but for the involvement of the supporting organization?
-
-
Current regulations for the “but for”
test remain
valid for Type III supporting organizations until superseded by new regulations
that will define functionally integrated organizations pursuant to IRC 4943(f)(5)
and 509(d) that were enacted by sections 1241 and 1243 of the PPA. -
The following discussion and questions may be helpful in determining
whether an organization satisfies the “but for”
test.-
Reg. 1.509(a)-4(i)(3) provides that a supporting organization will meet
the integral part test if it maintains a significant involvement in the operations
of one or more publicly supported organizations and such publicly supported
organizations are in turn dependent upon the supporting organization for the
type of support which it provides services or payments to or on behalf of,
one or more publicly supported organizations. -
Reg. 1.509(a)-4(i)(3)(ii) provides that the activities engaged in for
or on behalf of the publicly supported organizations are activities to perform
the functions of, or to carry out the purposes of, such organizations, and “but for”
the involvement of the supporting organizations, would
normally be engaged in by the publicly supported organizations themselves. -
Thus, this part of the “integral part test”
applies
in those situations in which the supporting organization actually engages
in activities which benefit the publicly supported organizations (e.g., performing
publishing and printing functions for a college), as opposed to simply making
grants to support the publicly supported organizations. The following examples
taken from Reg. 1.509(a)-4(i)(5) demonstrate application of the ”
but for”
test:
Example (1) states that N, a nonprofit publishing
organization, performs all the publishing and printing that would otherwise
be undertaken by churches of a particular denomination. Under these circumstances,
N satisfies the “but for”
requirement of the integral
part test because it provides services that would normally be engaged in by
the churches.
Example (2) states that O, an alumni association, provides
certain functions that would be performed by Y University, such as maintaining
alumni records and publishing a bulletin to keep alumni aware of the activities
of the university. Under these circumstances, O satisfies the ”
but for”
requirement of the integral part test because it provides services
that would normally be engaged in by the university. -
The following questions are intended to help determine whether an organization
satisfies the “but for”
test.
1. List all activities
in which you engage.
2. Explain how each activity listed above is related
to your supported organizations’ exempt purposes.
3. Were the supported
organizations undertaking this activity before you became engaged in the activity?
4.
Explain how each activity listed above performs the functions of, or carries
out the purposes of your supported organizations, and “but for
”
your involvement would normally be engaged in by the supported organizations
themselves.Note:
An activity is not considered to perform the functions
of, or carry out the purposes of, your supported organizations if you are
simply funding the supported organization with cash, cash equivalents, or
other property.
5. Explain how the supported organizations benefit
from the services, facilities or goods that you provide.
6. Are you an
organization that oversees or facilitates the operation of an integrated system
that includes one or more charities and that can not meet the expenditure
or assets tests, such as a supporting organization that oversees a hospital
system? If so, provide information to explain this circumstance.
-
-
If an organization chooses to meet the guidelines of the ANPRM, it may
qualify as a Functionally Integrated Type III Supporting Organization. To
meet the guidelines of the ANPRM, an organization must currently meet Question
A(1) and A(2) below and represent that it will meet Questions B and C below.
If an organization meets these guidelines, its determination letter will include
a caveat explaining that its continued classification as a Functionally Integrated
Type III Supporting Organization is dependent upon its meeting the requirements
of final guidance. Because organizations have not previously been afforded
an opportunity to satisfy the expenditure and asset tests part of qualifying
as a Functionally Integrated Type III Supporting Organization, a representation
from an organization that it will satisfy these tests as set forth in Section
V, Parts B and C, below, is acceptable. The functionally integrated determination
letter will then classify the organization as a Functionally Integrated Type
III Supporting Organization. An organization must currently meet the “But For”
test in Section V, Part A, below. An organization
may represent that it will meet the expenditure and asset tests for its first
tax year immediately succeeding the determination letter, at the end of its
first and second tax years in the aggregate, at the end of its first, second
and third tax years in the aggregate, and at the end of its first four tax
years and thereafter on a rolling basis either (1) in the aggregate based
on its most recently completed four tax years, or (2) for any three tax years
during its most recently completed four tax years.
A. “But For”
Test – Is the organization seeking to be classified
as a Functionally Integrated Type III supporting organization? If ”
Yes,”
there must be “Yes”
answers to A(1) and A(2).
-
A(1) Does the supporting organization engage in activities,
other than grant making, for or on behalf of supported organization(s) that
perform the functions of or carry on the purposes or programs of the supported
organization(s)? -
A(2) Would the supported organization(s) normally undertake
such activity but for the involvement of the supporting organization?
B. Expenditure Test – Does the organization
use substantially all of the lesser of (a) its adjusted net income or (b)
five percent of the aggregate fair market value of all its assets (other than
assets that are used, or held for use, directly in supporting the charitable
programs of the supported organizations) directly for the active conduct of
activities that directly further the exempt purposes of the organizations
it supports? If “No,”
does the organization meet the exception
to this requirement by answering “Yes”
to Items B(1),
B(2) and B(3) below?-
B(1) Does the organization oversee or facilitate the operation
of an integrated system that includes one or more charities (such as certain
hospital systems)? -
B(2) Is the organization unable to satisfy the ”
direct active conduct”
and “directly further”
requirements
of the expenditure test as a result? -
B(3) Does the organization still meet the ”
But For”
Test in Item A above?
C. Asset Test – Does the organization devote
at least 65% of the aggregate fair market value of all its assets directly
for the active conduct of activities that directly further the exempt purposes
of the organizations it supports? If “No,”
does the organization
meet the exception to this requirement by answering “Yes”
to
Items C(1), C(2) and C(3) below?-
C(1) Does the organization oversee or facilitate the operation
of an integrated system that includes one or more charities (such as certain
hospital systems)? -
C(2) Is the organization unable to satisfy the ”
direct active conduct”
and “directly further”
requirements
of the expenditure test as a result? -
C(3) Does the organization still meet the ”
But For”
Test in Item A above?
-
-
Most supporting organizations further legitimate charitable purposes.
However, some taxpayers may seek to shield assets inappropriately through
supporting organizations. This has resulted in the need for heightened scrutiny
of supporting organizations generally to screen for those where there is a
significant potential for abuse. The typical Type I or II supporting organization
that supports a hospital, university, or other large charitable institution
generally does not raise the private benefit concerns that require heightened
scrutiny. The questions below are aimed at identifying situations that raise
potential for impermissible private benefit. Additional questions needed to
develop an issue should be tailored to the organization’s specific situation.
-
The following examples illustrate the types of transactions requiring
heightened scrutiny.Example:
1. A donor contributes cash
to a supporting organization. The supporting organization ”
loans”
the money back to the donor’s for-profit business. The
supporting organization receives an unsecured promissory note for the loan
and the donor takes a deduction for a contribution to the supporting organization.
In
this example, there is no collateral on the loan other than a promise to pay
which places the supported organization’s assets at risk. In addition,
the donor is receiving impermissible private benefit that also amounts to
inurement since the donor is an insider and because the loan is made to a
for-profit business that is owned by the donor. Much of the
abuse in the supported organization area relates to unreasonable compensation
and loans to disqualified persons, their family members, and their businesses.
Control is an important factor in determining whether an organization
operates for the benefit of private interests. If disqualified persons have
some position of substantial influence over the supporting organization, unreasonable
compensation or loan activity may be present. See Best Lock
Corporation v. Commissioner, 31 T.C. 620 (1959); Orange
County Agricultural Society, Inc. v. Commissioner, 893 F.2d 529, 534
(2d Cir. 1990); and Lowry Hospital Association v. Commissioner
, 66 T.C. 850 (1976).Example:
2. A donor contributes
cash to the supporting organization. No payments are scheduled or made to
or on behalf of any publicly supported organizations.
In this situation,
the supporting organization has not demonstrated that it operates for IRC
501(c)(3) purposes or meets the IRC 509(a)(3) operational test. In addition,
the donor may be in a position to exercise control over the supporting organization
because after having taken a charitable contribution deduction, no distributions
have either been made or are scheduled to be made to any supported organizations.Example:
3. A donor contributes cash to the supporting
organization. The supporting organization uses its assets to pay college tuition
in the form of a “scholarship”
to the donor’s child.
In this situation, the donor receives a private benefit/inurement because
the supporting organization’s assets are used to pay the school tuition
of the donor’s child.Example:
4. The donor makes
a “contribution”
of a historic facade easement to a supporting
organization and takes a deduction.
In this situation, careful scrutiny
is required to ensure that an inappropriate contribution deduction was obtained
where local historic preservation laws already prohibit alteration of the
home’s facade. In this situation, the contributed easement is superfluous
to achieving a charitable purpose. Even if the facade could be altered, the
deduction claimed for the easement contribution may far exceed the easement’s
impact on the value of the property. (See IRM 7.20.6.2.1)Example:
5. A donor contributes an interest in a partnership, or limited liability
company, closely held business, real estate, intellectual property, art work,
or conservation easements to a supporting organization.
In this situation,
the assets may not be geared to generate significant income. Therefore, the
payout by the Type III supporting organization that is not functionally integrated
may not be sufficient to ensure attentiveness by the supported organization
to the operations of the supporting organization(s). Thus, the supporting
organization may fail the integral part test unless other facts and circumstances
evidence attentiveness by the supported organization.
Further, a situation
in which donor(s) contribute nonproductive assets to a Type III supporting
organization that is not functionally integrated may raise concerns under
IRC 501(3) regarding whether an organization is operated for a substantial
nonexempt purpose as well as an issue under IRC 509(a)(3) regarding whether
there is indirect control of the supporting organization by disqualified persons.
-
Section I – Potential Promoters
Note:
For
purposes of completing this guide sheet, the term “promoter
”
refers to a person who organizes or assists in the organization of
a partnership, trust, investment plan, or any other entity or arrangement
that is to be sold to a third party. The concern is that the partnership,
trust, etc., is designed to be used or is actually used by that third party
to obtain tax benefits not allowable by the Internal Revenue Code.-
A. Are any promoters identified with the establishment
or operation of the supporting organization? -
B. Does the supporting organization benefit a list of more
than five supported organizations?
-
-
Section II – Unreasonable Compensation / Loans
-
A. Are goods, services, or cash provided to donors or their
family members or persons with whom they have business relationships? -
B. Are the goods, services, or cash provided to donors
or their family members or persons with whom they have business relationships
part of reasonable compensation arrangements? -
C. Are goods, services, or cash provided to officers, directors,
or trustees? -
D. Are the goods, services, or cash provided to officers,
directors, or trustees part of reasonable compensation arrangements? -
E. Are the goods, services or cash provided to the five
highest compensated employees or independent contractors part of reasonable
compensation arrangements? -
F. Is there evidence of any loan activity?
-
G. Are loans made to donors or their family members or
persons with whom they have a business relationship, to officers, directors,
or trustees, or to the five highest compensated employees or independent contractors?
-
H. Are the loans made to donors or their family members
or persons with whom they have a business relationship, to officers, directors,
or trustees, or to the five highest compensated employees or independent contractors
part of reasonable compensation arrangements?
-
-
Section III – Closely Held Stock/Non-Liquid Investments/Assets
That Do Not Produce Current Income-
A. Does the supporting organization hold closely held stock?
-
B. Does the supporting organization hold an interest in
a partnership or limited liability company in which the donor retains an interest
as a general partner or member? -
C. Does the supporting organization own significant other
investments ($100,000 or more) that are not explained in detail? -
D. Does the supporting organization own significant land
($100,000 or more)? -
E. Does the supporting organization own significant other
property ($100,000 or more) that does not produce current income? -
F. Does the supporting organization own life insurance
on the donor’s life or the life of the donor’s family member?
-
G. Does the supporting organization own more than 20% of
the stock of a corporation, partnership interest, or beneficial interest of
an estate?
-
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