Supporting Organizations (Portfolio 459)

Part of Tax

Tax Management Portfolio, Supporting Organizations, No. 459, examines the supporting organization as defined in Internal Revenue Code §509(a)(3).

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Tax Management Portfolio, Supporting Organizations, No. 459, examines the supporting organization as defined in Internal Revenue Code .
A supporting organization is an exempt charitable organization that “supports” one or more publicly supported charitable organizations described in § or Because of its strategic link with the supported public charities, a supporting organization historically has generally been exempt from the private foundation taxes under §§– despite the fact that a supporting organization's sources of support may be limited to a single donor or members of a single family. Under 2006 legislation, however, supporting organizations are now subject to the private foundation tax on “excess business holdings” under § Contributions to supporting organizations qualify for the highest, public charity, deductibility thresholds. In light of concerns about potential abuse, the Pension Protection Act of 2006 enacted provisions designed to improve the accountability of supporting organizations and to subject certain supporting organizations, or distributions to certain supporting organizations, to excise taxes.
The supporting organization regulations have been described by a federal district court, justly, as “fantastically intricate and detailed.” This Portfolio reviews the “organizational,” “operational,” and “control” tests prescribed by those regulations, and discusses the nature of the supporting organization's required relationship with the supported public charities: Type I (“operated, supervised, or controlled by”), Type II (“supervised or controlled in connection with”), or Type III (“operated in connection with”). The Portfolio also summarizes the regulations and rulings relating to the life-cycle of a supporting organization, its relationship with private foundations and exempt noncharitable organizations, the § election, and related issues.
This Portfolio may be cited as Treacy, T.M., Supporting Organizations.


Gerald B. Treacy, Jr., Esq.

Gerald B. Treacy, Jr., B.A., Rider College (1973), summa cum laude; J.D., University of California at Los Angeles (1981), Order of the Coif; author, Washington Guardianship Law, Administration and Litigation (3d ed. 1998); author, Tax Management Portfolio No. 802-2nd, Community Property: General Considerations (2005); author, “Private Foundation Column: Rulings Go Beyond ‘Plain Vanilla’ Foundations,” Taxation of Exempts (Sept./Oct. 2007); author, “Surviving and Thriving in the Tax Patent Era,” Trusts & Estates (Sept. 2007); author, “Supporting Organizations After the Pension Protection Act,” Taxation of Exempts (Jan./Feb. 2007); author, “Cold Snap for DAFs,” Trusts & Estates (Jan. 2007); author, “What's Left of SOs,” Trusts & Estates (Oct. 2006); author, “Planning for Community Property: A Primer for the Other 401/2 States,” Leading Practitioner Commentary, Tax Management Estates, Gifts and Trusts Journal (Jan./Feb. 2005); author, “De-UBIT-izing the CRT,” think and code/Tax Management website article (Apr. 2004); author, “Alternative Corporate Giving Formats,” Digest of Tax Articles (July 2003); author, “A Wake-Up Call for Type III Supporting Organizations,” think and code/Tax Management website article (Apr. 2003); author, “Planning to Preserve the Advantages of Community Property,” Estate Planning (Jan. 1996); author, “Supporting Organizations,” Estate Planning (Jan. 1997); Fellow, American College of Trust and Estate Counsel; member of the Bars of the District of Columbia, California (inactive), and Washington; Editorial Advisory Board, Planned Giving Today; listed, Who's Who in America; Who's Who in the World.

Table of Contents

Detailed Analysis

I. Introduction

Introductory Material

A. Private Foundations

B. Private Operating Foundations

C. Private Foundation v. Public Charity

D. “Support Test” Public Charities (Including Community Foundations)

E. “Automatic” Public Charities

II. Overview

Introductory Material

A. The Private Foundation

1. Advantages

2. Disadvantages

B. The Supporting Organization

1. Summary

2. Discussion

a. Basic Requirements Applicable to All Supporting Organizations

(1) Section 509(a)(3)

(2) Organizational Test

(3) Operational Test

b. Three Sub–Classes of Supporting Organizations

(1) Relationship Type I - “Operated, Supervised, or Controlled By”

(2) Relationship Type II - “Supervised or Controlled in Connection With”

(3) Relationship Type III - “Operated in Connection With”

c. Control by Disqualified Persons

d. Rationale for “Supporting Organization” Status

e. Supporting Organization as “Parent”

f. Examples of Supporting Organizations

g. Supporting Organizations and Supported Community Foundations

III. Organizational and Operational Tests

Introductory Material

A. Organizational Test

1. General

2. Organizational Test: “Purposes” Prong

a. Required Governing Instrument Language

b. Looser Test for Types I and II Supporting Organizations

c. Stricter Test for Type III Supporting Organizations

d. Approved Purposes

(1) Broad “Purposes” Language

(2) Supporting Church Educational Institutions

(3) Fundraising and Endowment

(4) Grantmaking

(5) Strategic Planning and Implementation

(6) Other Hospital Support

(7) Support of Legal Research and Education

(8) Films and Lecture Series

(9) Funding Legal Defense for Supported Organization

(10) Providing Scholarships

(11) Low–Income Housing

(12) Educational Purposes Held in Special Favor

(13) Amended Purposes

(14) Promotion of Community Economic Development

(15) Licensing of Technical Innovations

(16) Operation of Cultural Center

e. Disapproved Purposes of Supporting Organizations

3. Organizational Test: “Specified Organizations” Prong

a. General

b. Nondesignated Publicly Supported Organizations

c. Examples

d. Rationale

e. Language Requirements

f. Designation by Name

g. Designation by Class or Purpose: Type I and II Supporting Organizations

h. Historic and Continuing Relationship: Type I and II Supporting Organizations

i. Designation by Name Only: Type III Supporting Organizations

j. Exception for “Historic and Continuing Relationships”: Type III Supporting Organizations

k. Substitution of Supported Organizations: Type I and II Supporting Organizations

l. Restricted Substitution of Supported Organizations: Type III Supporting Organizations

4. No Support to Other Organizations

B. Operational Test

1. Permissible Beneficiaries

2. Permissible Activities

3. Examples

a. Management and Administrative Services

b. Scholarships

c. Educational Magazine Publishing

d. Research for Private and Foreign Entities

e. Financial Assistance for Incapacitated Teachers

IV. Relationship Types

Introductory Material

A. Type I Relationships: “Operated, Supervised, or Controlled By”

1. Type I Requirements Met

2. Type I Requirements Not Met

3. Capital Stock

B. Type II Relationships: “Supervised or Controlled in Connection With”

1. Type II Relationship Requirements Met

2. Type II Relationship Requirements Not Met

C. Type III Relationships: “Operated in Connection With”

1. General

2. “Responsiveness” Test

a. Summary

b. First Alternative Prong

(1) Satisfied

(2) Not Satisfied

c. Second Alternative Prong

(1) Satisfied

(2) Not Satisfied

3. “Integral Part” Test

a. General

b. First Alternative Prong

(1) Satisfied

(2) Not Satisfied

c. Second Alternative Prong

(1) Elements

(a) Payments of “Substantially All” Income

(b) Sufficient Part of Total Support

(c) Factors

(d) No Dependence

(e) “Substantially All Income”

(f) Time of Payment

(g) Substantiality of Support

(h) Earmarking

(i) Reports

(2) Second Alternative Prong Satisfied

(3) Second Alternative Prong Not Satisfied

(4) Adjusted Net Income Includes Short-Term Capital Gain

(5) Distribution “Carryovers”

(6) Accumulation at Request of Supported Organization

4. Examples

V. Control Test

Introductory Material

A. Employees as Disqualified Persons

B. Flunking the Control Test

C. Other Control Test Issues

VI. Transitional Rules

Introductory Material

A. “Organizational” and “Operational” Tests

B. Type III Organizations: “Responsiveness” Test

C. Type III Organizations: “Integral Part” Test

1. Exclusively Charitable

2. Creation Before November 20, 1970

3. Current Income Distributions

4. No Discretion to Vary Beneficiaries

5. No Disqualified Persons as Trustees

6. Examples

7. Fallback to General Rules

D. Rev. Proc. 72–50

VII. Supported Organizations

A. Effect on “Support” Tests of Receipts from Supporting Organization

1. Section 509(a)(1) Organizations

a. One–Third Support Test

b. Alternate 10% “Facts and Circumstances” Test

c. Unusual Grants

d. Effect of Receipts from Supporting Organization

2. Section 509(a)(2) Organizations

a. One-Third Support Test

b. “Not More Than One-Third” Test

c. Special Attribution Rules: Receipts from Supporting Organizations

(1) Retained Character of Gross Investment Income

(2) Relationships Created for Avoidance Purposes

(3) Effect on Organizations Claiming Supporting Organization Status

3. Attribution to Community Foundation

B. Supporting Organizations Which Support Non–Charitable Exempt Organizations

1. Regulations

2. Rulings

C. Foreign Supported Organizations

VIII. Life-Cycle of a Supporting Organization

A. Applying for Supporting Organization Status

1. Activities and Operational Information

2. Technical Requirements

3. Schedule D

4. No Advance Ruling Period

5. Application for Supporting Organization Status Accompanying Private Letter Ruling Requests

6. Section 4947 Trusts

B. Reporting Requirements

1. Form 990

2. Other Forms

3. Exception for Churches and Their Integrated Auxiliaries

4. Form 8282

5. Section 4947 Charitable and Split–Interest Trusts

C. Termination

D. Switching from Private Foundation Status to Supporting Organization Status

1. 60–Month Period

2. Private Foundation's Transfer of All Assets to Supporting Organization

3. “Reverse” Termination - Supporting Organization to Private Foundation

4. Private Operating Foundation to Supporting Organization

E. Reclassification from Supporting Organization Status to Public Charity Status

IX. Other Supporting Organization Issues

A. Pooled Income Funds; Charitable Remainder Trusts

B. Supporting Organizations and Unrelated Business Taxable Income

C. Exemption from Acquisition Indebtedness Rules for Organizations Supporting Certain Educational Institutions

D. Section 501(h) Election

E. Health Care Groups

F. FICA Exception for Students Working for Supporting Organizations

G. “Supporting-Organization-Like” Private Foundations

H. Distributions by Private Foundations to Supporting Organizations

I. Supporting Organization Not Subject to Excise Taxes

J. For-Profits and Supporting Organizations

K. Voting Trusts

L. Qualified Scholarship Funding Corporations

M. Deductibility of Contributions Received During Advance Ruling Period

N. Issuance of Annuity and Insurance Contracts

Working Papers

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 House Report No. 91–413 (Part 1), 1st Sess., 40–1 (excerpt) TAX REFORM ACT OF 1969 August 2, 1969 1969–3 C.B. 200, 226–27; 343

Worksheet 2 Senate Report No. 91–552 (excerpt) 1st Session, 56–59 TAX REFORM ACT OF 1969 November 21, 1969 1969–3 C.B. 423, 460–62

Worksheet 3 Conference Report No. 91–782 (excerpt) 1st Session, 288 TAX REFORM ACT OF 1969 December 21, 1969 1969–3 C.B. 644, 652

Worksheet 4 Excerpt from Congressional Record of December 6, 1969 (page S15982) (Senate Debate)

Worksheet 5 Publication 557, Tax–Exempt Status for Your Organization (excerpt)

Worksheet 6 Rev. Rul. 81–43, 1981–1 C.B. 350

Worksheet 7 Rev. Rul. 80–207, 1980–2 C.B. 193

Worksheet 8 Rev. Rul. 76–208, 1976–1 C.B. 161

Worksheet 9 Rev. Rul. 76–32, 1976–1 C.B. 160

Worksheet 10 Rev. Rul. 75–436, 1975–2 C.B. 217

Worksheet 11 Rev. Rul. 75–437, 1975–2 C.B. 218

Worksheet 12 General Counsel Memorandum 36326 (June 30, 1975)



Statutes (and the regulations promulgated thereunder):

Treasury Rulings: