Supporting Organizations ("SO") are charities created under Section 501(c) (3) of the Internal Revenue Code. Donations are deductible as charitable contributions. SO’s have been utilized by wealthy individuals who otherwise would be limited by creating a private foundation. These well-advised individuals (or their advisors) mastered the arcane and complicated tax provisions authorizing SO’s, and thereby created SO’s to obtain greater tax advantages compared to private foundations. The advantages arise because SO’s are treated as public charities. (The February 25, 2008 Post discussed these advantages.)
As often the case in other areas of the tax law, creative but misguided taxpayers and advisors used SO’s to obtain tax benefits beyond those intended by Congress. Congress pushed back with substantial changes to SO’s. These changes affect primarily "Type III" SO’s, which are the type most often used by individuals seeking the greatest autonomy and control over their charity. In contrast to Type I and Type II SO’s, where the supported public charity effectively controls the SO, Type III SO’s resemble private foundations with greater control for the taxpayer. It is for this reason that Type III SO’s were targeted by Congress as requiring the greatest reform.
Congress addressed SO’s by passing the Pension Protection Act of 2006 ("Act"), on August 17, 2006. The Act, and subsequent IRS guidance, such as IRS Notice 2008-6, provides the current rules applying to SO’s. The good news is that, provided taxpayers comply with these rules, SO’s are alive and well and remain viable charitable planning tools. For existing SO’s, compliance is mandatory or, by default, they fall into private foundation status.
Among the changes affecting Type III SO’s are the following:
Type III SO’s created as charitable trusts must now satisfy the responsiveness test by meeting either the significant voice test for Type III SO’s under Treas. Reg. Section 1.509(a)-4(i) (2) (ii) or by establishing that it meets the requirements of a Type I or Type II supporting organization under Treas. Reg. Section 1.509(a)-4(g) or (h). As a practical matter, this means the primary supported charity shall elect or appoint one or more of the SO Trustees. Further, the Trustee elected or appointed by the supported charity must have a significant voice in the investment policies of the SO, the timing of grants, the manner of making them, and the distribution of the SO’s income or assets.
The SO is prohibited from receiving property from any donor who directly or indirectly controls a supported charity.
The SO must provide information to each supported charity to ensure that the SO is responsive to the needs or demands of each supported charity.
The SO shall not support any foreign charities.
The SO cannot make any grant, loan, compensation or other similar payment to a substantial contributor, a member of a substantial contributor’s family, or an entity directly or indirectly controlled by the substantial contributor or her family.
The SO Form 990 shall include information listing the supported organizations, the SO’s status as a Type III supporting organization, and a certification that it satisfies the control test under Section 509(a)(3).