Tax exempt entities, such as schools, churches and hospitals, own property that can subject them to tort liability for accidents, just as for-profit entities. To help segregate liability, the tax exempt entity should consider owning the property in a separate entity. The design tax exempt entities should consider to achieve this liability protection is a Type I Supporting Organization.
The Supporting Organization would be organized as a separate corporation (or trust) under state law. Type I Supporting Organizations are described in Section 509(a) (3) of the Internal Revenue Code and, more specifically, in Treas. Reg. §1.509(a)-4(g) (1). The newly created supporting organization ("SO") would be "operated, supervised, or controlled" by the tax exempt entity ("Charity"). This degree of operation, supervision and control would be shown by the Charity having the right to appoint a majority of the SO’s officers and directors. In fact, the Charity and the SO can have identical officers and directors if desired. Thus, the Charity would have 100% control over the SO with respect to all of the SO’s policies, programs and activities. All of the SO’s revenue can pass solely to the Charity. This relationship is equivalent to a corporate parent and its wholly owned subsidiary in a for-profit context.
This Type I Supporting Organization design can shield the Charity from liability resulting from the property and its facilities. If there is a lawsuit against the SO arising from a tort on the property, the Charity's assets would be protected. Further, although there may be identity of officers and directors, this factor would not help a plaintiff pierce the corporate veil and impose liability against the Charity. See, e.g., United States Fire Insurance Company v. Allied Towing Corp., 966 F.2d 820 (4th Cir.1992), where the Court held that, where "no other justification for piercing the veil appears in the record," the fact that the two corporations "effectively have identical officers and directors [is] alone insufficient to permit the piercing of the corporate veil."
Thus, a Charity can create a non profit corporation under state law to own property and seek IRS approval as a Type I Supporting Organization. Once IRS approval is granted, it would be retroactive to the SO’s organization date under state law. This can help protect the Charity's assets.