Supporting Organizations

At a Glance

Supporting organizations have attracted a lot of attention in the charitable giving world by both donors and charitable organizations. Donors are drawn to supporting organizations because they offer donors greater control over their contributions, without the imposition of the restrictions and penalties associated with private foundations. Likewise, charitable organizations are enticed to develop relationships with supporting organizations because the relationship is "locked-in," insuring future contributions for the charitable organization.

Definition

Supporting organizations are 501(c)(3) organizations created to "support" a public charity or charities. Although supporting organizations may be established by a single donor or family, supporting organizations are not classified as private foundations, but rather as public charities. The reasoning? Supporting organizations support public charities, and because of their close relationship with the public charities, provide a greater degree of supervision against possible improprieties than do private foundations. Because private foundations are not subject to public scrutiny and are more prone to potential abuses, they are subject to greater restrictions.

$image\button1.jpg$ Click here for a further discussion of public charities versus private foundations.

Three-Pronged Test

The Internal Revenue Code classifies an entity as a supporting organization upon the meeting of a three-pronged test.

I. Organizational and Operational Test

A supporting organization must be organized and operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of the supported public charity or charities [IRC Sec. 509(a)(3)(A)].

The organizational and operational test is composed of two subtests:

$image\bullet.jpg$ The Organizational Test
Generally, the organizational test is met if the supporting organization's purposes are as broad, but not broader, than the charitable purposes of the "supported" public charity or charities. The tax regulations list several specific requirements an organization must fulfill to meet this test.

$image\bullet.jpg$ The Operational Test
The operational test is met if the supporting organization operates exclusively to support or benefit the "supported" public charity or charities. Examples of such support include: extending services, making payments, offering facilities or creating grants for the advancement of the charitable purposes of the "supported" public charity.

II. Control Test

A supporting organization may not be controlled directly or indirectly by a disqualified person [IRC §509(a)(3)(C)].

To determine whether an organization meets this test, two questions must be asked:

$image\bullet.jpg$ Who is a disqualified person?

$image\bullet.jpg$ What does "controlled" mean?

Who is a Disqualified Person?

A disqualified person generally includes:

$image\bullet.jpg$ A substantial contributor, defined as an individual or entity that contributes more than the greater of $5,000 or 2% of the total contributions received by a supporting organization during its existence

$image\bullet.jpg$ A family member of a disqualified person

$image\bullet.jpg$ An owner of a 20% or greater voting interest in a corporation that is a substantial contributor

$image\bullet.jpg$ An owner of a 20% or greater profits interest in a partnership that is a substantial contributor

$image\bullet.jpg$ An owner of a 20% or greater beneficial interest in a trust or estate that is a substantial contributor

$image\bullet.jpg$ An individual who could be controlled or influenced by a disqualified person (for example, an employee)

A disqualified person does not include a foundation manager or a public charity.

What Does "Controlled" Mean?

Disqualified persons have control of a supporting organization if they hold one or more of the following:

$image\bullet.jpg$ The power to veto actions of the organization

$image\bullet.jpg$ The right to designate who receives the income or principal from contributions

$image\bullet.jpg$ A larger than 50% voting power on the supporting organization's governing body

III. Relationship Test

An organization must maintain one of three relationship tests, to be classified as a supporting organization.

"Operated, Supervised, or Controlled By"

In the first relationship test, the supporting organization must be "operated, supervised or controlled by" the supported public charity. Frequently, this relationship is compared to a parent company and its subsidiary, with the public charity holding a large degree of control over the policies and actions of its supporting organization. In this relationship, a majority of the governing body of the supporting organization is appointed or elected by the "supported" public charity.

"Supervised or Controlled in Connection With"

In this second relationship test, the supporting organization must be "supervised or controlled in connection with" the public charity or charities. In this case, the supporting organization and public charity are under common control and supervision. This means, the same person or persons will control both the supporting organization and the "supported" public charity.

"Operated in Connection With"

Finally, the last relationship is the most complex and difficult to explain, referred to by two courts as, "fantastically intricate and detailed." To establish this relationship, two subtests must be met:

1. Responsiveness Test

The responsiveness test requires the supporting organization to be responsive to the needs and demands of the "supported" public charity or charities [Reg. Sec. 1.509(a)-4(i)(2)(i)].

2. Integral Part Test

The integral part test is satisfied if the supporting organization maintains, "a significant involvement in the operations of one or more publicly supported organizations and such publicly supported organizations in turn depend on the supporting organization for the type of support which it provides" [Reg. Sec. 1.509(a)-4(i)(3)(i)].

Advantages to Donor

Creating a supporting organization offers many advantages to the donor over creation of a private foundation.

$image\bullet.jpg$ More generous limitations on the charitable deduction
Contributions to supporting organizations qualify for the more generous income tax percentage limitations that apply to public charities as opposed to the more restrictive rules for private foundations. Also, donors who itemize generally may deduct the full fair market value of long-term appreciated property contributed to supporting organizations. In comparison, charitable deductions for gifts of such property to private foundations are generally limited to the asset's basis (with the exception of gifts of qualified appreciated stock).

$image\bullet.jpg$ No excise taxes
Supporting organizations are not burdened with the excise taxes imposed on private foundations.

$image\bullet.jpg$ Greater economic efficiencies
By sharing staff and facilities with the "supported" public charity, supporting organizations often can achieve economic efficiencies not available with private foundations.

$image\bullet.jpg$ Maintaining donor's philanthropic wishes
The donor can be assured that the supporting organization will perpetuate in the donor's philanthropic wishes. Such continuity may be lacking in a private foundation, particularly when the philanthropic interests of younger family members are not in accord with those of the founder.

$image\bullet.jpg$ Less administrative hassles
Supporting organizations offer donors less administrative hassles in comparison to the oftentimes "administrative-burdened" private foundations.

$image\bullet.jpg$ Not subject to private foundation restrictions
Supporting organizations are not subject to the restrictions imposed on private foundations, such as restrictions on self-dealing, excess business holdings, etc.

Advantages to "Supported" Organization

Public charities often encourage the use of supporting organizations because the latter designate in advance which charities they will support, and the designations are usually permanent, greatly facilitating grant-making activities. Moreover, public charities do not have to comply with the various grant-making procedures and schedules of private foundations.

Supporting Organizations vs. Private Foundations

	Supporting Organizations	Private Foundations

Excise taxes	No excise taxes imposed	Excise taxes imposed

Cash contribution percentage limitation	60% of AGI	30% of AGI

Long-term appreciated property percentage limitation	30% of AGI	20% of AGI

Amount of contribution for long-term appreciated property	Fair market value	Generally basis, except FMV for qualified appreciated stock

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