Supporting Organizations

Determining Supporting Organization Status

council-webteam — Mon, 11 Nov 2013 22:54:43 +0000

Determining Supporting Organization Status council-webteam Mon, 11/11/2013 - 17:54

Determining Supporting Organization Status

Private foundations and donor advised funds must follow special rules when making grants to certain supporting organizations.

Why is it important to determine if a public charity grantee is a supporting organization?

Supporting organizations are a type of Section 501(c)(3) public charity. Supporting organizations are further broken down into several types under Section 509(a)(3) of the Internal Revenue Code. The rules for making grants to supporting organizations can vary depending on the supporting organization’s type, and the presence of control. For example, grants to Type III non-functionally integrated supporting organizations must be made following special expenditure responsibility requirements if made from a private foundation or a donor advised fund, and will not count toward a private foundation’s minimum distribution (payout) requirement.

What are the types of supporting organizations?
Supporting organizations are Section 501(c)(3) public charities. However, they are further classified under Section 509(a)(3) of the Internal Revenue Code. Generally, supporting organizations fall into three categories: Type I, Type II and Type III. The type indicates the nature of the relationship between the supporting organization and the public charity being supported.

Type I: By far the most common, this type is often described as indicating a parent-subsidiary relationship and generally involves the supported charity appointing a majority of the board of the supporting organization.
Type II: The least common of the three, this usually involves an overlapping board relationship where at least a majority of the members of the supporting organization’s board are also members of the supported charity’s board.
Type III: These operate with a greater degree of independence from the organization they support. Typically the supported organization appoints one member of the governing board of the supporting organization and institutes other procedures designed to ensure that the supporting organization is responsive to it. Type III supporting organizations may provide financial support to their supported organization or they may directly carry out a program or function for it. Type III supporting organizations are further broken down into functionally integrated and non-functionally integrated.

What are the legal requirements?

As a result of requirements imposed by the Pension Protection Act of 2006 (PPA), private foundations and donor advised funds must follow special rules when making grants to certain supporting organizations.

Private foundations must follow a process known as expenditure responsibility for grants to a Type III supporting organization that is not functionally integrated. Private foundations must also use expenditure responsibility for grants to any type of supporting organization if any of the private foundation’s disqualified persons (alone or together) control the supporting organization or an organization that the supporting organization supports. Further, private non-operating foundations may not count such grants toward their minimum distribution (payout) requirement.

Organizations that hold donor-advised funds are called sponsoring organizations. Sponsoring organizations must exercise expenditure responsibility for grants from donor-advised funds to Type III supporting organizations that are not functionally integrated. Similarly, expenditure responsibility is required for donor-advised fund grants to any type of supporting organization (Type I, II, or III) for which the donor advisor (or related parties) control an entity that the supporting organization supports.

How do I Determine a Supporting Organization’s Status and Type?

The IRS issued guidance to help foundations determine whether an organization is a supporting organization and, if so, how to determine its type and whether an issue of control is present.

Step 1: Obtain information from a reliable source to determine whether a public charity is a supporting organization.

According to IRS guidance, grantmakers may rely on any of the following sources:

Select Check, an online IRS tool using data from the IRS public charity list, known as IRS Publication 78,
IRS Business Master File (BMF)
Reliable third party such as Guidestar's Charity Check Service

Important: Grantmakers may not rely on these sources for information once the IRS publishes notice that the organization’s status has changed. In addition, a grantmaker that was responsible for, or aware of, the circumstances that result in the supporting organization’s change in status will not be able to rely on Publication 78 or the IRS BMF for these purposes.

Relying on a Third Party: IRS guidance provides that a grantmaker may use a third party to obtain information from the IRS BMF to determine whether or not a charity is a supporting organization, provided that the grantmaker obtains a report from the third party that includes all of the following:

the grantee’s name, Employer Identification Number, and public charity classification under Section 509(a)(1), (2), or (3)
a statement that the information is from the most currently available IRS monthly update to the BMF, along with the IRS BMF revision date
the date and time of the grantmaker’s search

The grantmaker must retain the report in electronic or hard-copy form.

Step 2: Determine the supporting organization’s type.

If the potential grantee is a supporting organization, the next step is to determine its type, and whether it is functionally integrated with the organization it supports. According to IRS guidance, grantmakers may rely on the sources described in Step 1 for information about the supporting organization’s type and whether or not it is functionally integrated.

Useful Tip: The Select Check tool is typically easier to search than the Business Master File and will state whether the potential grantee is a (1) Type I, Type II, or functionally integrated Type III supporting organization; (2) a non-functionally integrated Type III supporting organization; or (3) a supporting organization of an unspecified type.

Unfortunately, many supporting organizations will be listed as “unspecified type.” For those organizations listed as “unspecified” in Select Check, grantmakers must use one of the following alternative bases for determining supporting organization type:

Alternative 1:

To Determine Whether the Organization Is a Type I or II Supporting Organization, grantmakers may:

Obtain, review and rely on a written representation signed by an officer, director, or trustee of the grantee, if both of the following are true:
The representation describes the process used for selecting the grantee’s officers, directors, or trustees and references the pertinent provisions of the grantee’s organizing documents that establish the grantee’s relationship to its supported organizations.
The grantmaker collects and reviews copies of the grantee’s governing documents. If the grantee’s organizing documents are not sufficient to establish the relationship, the grantmaker must also collect organizing documents from the supported organization.

To Determine Whether the Organization is a Functionally Integrated Type III, grantmakers may obtain and review:

The grantee’s written representation identifying the organizations it supports.
The grantee’s organizing documents (and those of the supported organizations if necessary).
A written representation signed by an officer, director, or trustee of each supported organization stating that the supporting organization is functionally integrated and that but for the involvement of the supporting organization, the supported organization normally would engage in those activities itself.

Notice 2006-109 affirms that the IRS will apply the “but for” test from Treas. Reg.
1.509(a)-4(i)(3)(ii) in deciding whether a Type III supporting organization is functionally integrated. The IRS did not clarify the status of supporting organizations whose sole purpose is fundraising for the supported organization, a point on which several persons have requested guidance.

Alternative 2:
Grantmakers may also rely on a reasoned written opinion of counsel of either the grantee or the grantmaker in making the determination that a supporting organization is a Type I, Type II, or functionally integrated Type III supporting organization.

Step 3: Determine if there is a presence of control that would trigger expenditure responsibility.

After determining a supporting organization’s type, grantmakers must also consider whether control exists in such a way that would trigger the expenditure responsibility rules. The IRS uses the definition of control found in the regulations under Section 4942 in deciding whether a private foundation disqualified person or a donor advisor (or related parties) controls an organization that a supporting organization supports.

For private foundations, the same test must be used to determine if disqualified persons of the private foundation control the supporting organization itself. For easier compliance, IRS guidance suggests that grantmakers obtain lists of all supported organizations from potential supporting organization grantees.

How does the IRS define control for purposes of these rules?
The Section 4942 regulations provide that an organization is controlled if disqualified persons can, by aggregating their votes or positions of authority, require the supported organization to make, or refrain from making, an expenditure.

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FAQ: Supporting Organizations

council-webteam — Mon, 11 Nov 2013 22:32:44 +0000

FAQ: Supporting Organizations council-webteam Mon, 11/11/2013 - 17:32

FAQ: Supporting Organizations

Summary

A supporting organization qualifies as a public charity because it has a close relationship with another publicly supported section 501(c)(3) organization. Based on the relationship of the supporting organization to the public charity it supports, a supporting organization will be classified as a type I, II or III. Section 1241 of the Pension Protection Act of 2006 (PPA) modifies some of the requirements for how an organization can qualify as a supporting organization.

What is a supporting organization?

Put simply, a supporting organization is a section 501(c)(3) organization that qualifies as a public charity (and not a private foundation) because it has a close relationship with another publicly supported section 501(c)(3) organization. Usually, in order to qualify as a public charity, an organization must receive at least one-third (or in special cases as little as 10 percent) of its support each year from gifts, grants and contributions from a variety of sources. A supporting organization is not required to meet this public support test on its own if it provides meaningful support (financial, programmatic or both) and gives some degree of structural and operational control to another organization that is already classified as a public charity, rather than a private foundation. Based upon the relationship of the supporting organization to the public charity it supports, a supporting organization will be classified as a type I, II or III. A supporting organization may not be controlled by someone who is a disqualified person with respect to the supporting organization.

What are the different classifications of supporting organization?

Generally, supporting organizations fall into three categories: type I, type II and type III. The type indicates the nature of the relationship between the supporting organization and the charity being supported.

Type I: By far the most common, this type is often described as indicating a parent-subsidiary relationship and generally involves the charity appointing a majority of the board of the supporting organization.
Type II: The least common of the three, this usually involves an overlapping board relationship where at least a majority of the members of the supporting organization’s board are also members of the supported charity’s board.
Type III: These operate with a greater degree of independence from the organization they support. Typically the supported organization appoints one member of the governing board of the supporting organization and institutes other procedures designed to ensure that the supporting organization is responsive to it. Type III supporting organizations may provide financial support to their supported organization or they may directly carry out a program or function for it.

Simplified chart of the types of supporting organizations

The chart below is from a report published by the General Accountability Office, “Tax-Exempt Organizations: Collecting More Data on Donor-Advised Funds and Supporting Organizations Could Help Address Compliance Challenges,” GAO-06-799 (July 2006).

The PPA modified the rules for type III supporting organizations organized as trusts subsequent to the publication of the GAO report. The diagram below states the old rule that a supporting organization that is a charitable trust can qualify for type III status if the supported organization is a named beneficiary of the trust and has the power to enforce the trust and compel an accounting. Under the new rules, the power to enforce the trust will not be sufficient to meet the responsiveness test required for type III supporting organizations.

Note that the PPA modified the rules for type III supporting organizations organized as trusts subsequent to the publication of the GAO report. The diagram below states the old rule that a supporting organization that is a charitable trust can qualify for type III status if the supported organization is a named beneficiary of the trust and has the power to enforce the trust and compel an accounting. Under the new rules, the power to enforce the trust will not be sufficient to meet the responsiveness test required for type III supporting organizations.

What is a functionally integrated type III supporting organization?

The PPA includes a subcategory of type III supporting organizations that are considered to be functionally integrated with their supported organizations, and exempts them from several of the additional rules imposed on regular type III supporting organizations.
In general, supporting organizations must meet the “responsiveness” and the “integral part” tests to qualify for type III status. The responsiveness test is meant to guarantee that the supported organization will have the ability to influence the supporting organization’s activities.

The integral part test is intended to demonstrate that the supporting organization is an integral part of the organization it supports. The integral part test can be met one of two ways:

The supporting organization performs functions of, or carries out purposes of, the supported organization that, but for the supporting organization, the supported organization would engage in directly. For example, a type III supporting organization that operates a printing press for a university would meet this “but for” test if otherwise the university would carry out the activity directly.
The supporting organization provides funding or other benefits for the supported organization at a level sufficient to ensure that the supported organization will pay significant attention to the operations of the supporting organization. This is called the “attentiveness” test, and it has several other requirements that must be satisfied.

Under the PPA, an organization that satisfies the integral part requirement under the “but for” test is functionally integrated. Organizations that meet the integral part test simply through payments to the supporting organization will not be considered functionally integrated.

Are there requirements under the PPA for qualifying as a type I supporting organization?

Yes, the PPA includes one requirement applicable to type I supporting organizations. An organization will fail to qualify for type I status (and will be converted to private foundation status) if it accepts a gift from a person who directly or indirectly controls the supported organization. In addition, charitable contributions to type I supporting organizations where the donor or advisor controls a supported organization will not be tax-deductible.

Persons who directly or indirectly control the supported organization include:

Persons (including supporting organizations, but not other publicly-supported charities) who directly or indirectly control, either alone or together with persons described in (2) and (3) below, the governing body of the supported organization
Family members of an individual described above (spouse, siblings, spouses of siblings, ancestors, lineal descendants, and spouses of lineal descendants)
Corporations, partnerships, trusts, or estates in which a person described above owns more than 35% of the voting power, profits interest, or beneficial interest

Are there PPA requirements for qualifying as a type II supporting organization?

No.

Are there PPA requirements for qualifying as a type III supporting organization?

Yes, there are several such requirements. First, an organization will fail to qualify for type III status if it accepts a gift from a person who directly or indirectly controls the supported organization (see discussion of changes for type I organizations above). Second, type III supporting organizations must provide such information as the Secretary of the Treasury requires to each supported organization to ensure that the supporting organization is responsive to the needs or demands of the supported organization. Third, type III supporting organizations may not support foreign organizations (existing organizations have three years to comply with this requirement). Finally, under the old rules, a supporting organization that was a charitable trust could qualify for type III status if the supported organization was a named beneficiary of the trust and had the power to enforce the trust and compel an accounting. Under the new rules, the power to enforce the trust will not be sufficient to meet the responsiveness test required for type III supporting organizations. This requirement is effect on date of enactment for new organizations and one year after date of enactment for trusts in existence on date of enactment. The delayed effective date for charitable trusts is to allow the Treasury Department time to promulgate new regulations defining what charitable trusts must do to meet the responsiveness test.

Are the requirements listed above all of the provisions of the Act affecting supporting organizations?

No. The requirements listed above only reflect the provisions that affect how an organization can qualify as a supporting organization. Other provisions affect the operations of supporting organizations. A chart of these other requirements, titled “Provisions Affecting Supporting Organizations,” provides an overview of all changes.

How can I tell if a charity is a supporting organization? How can I tell what type a supporting organization is? How do I determine whether a type III is functionally integrated?

The Council Summary of IRS Interim Guidance on Supporting Organizations and Donor-Advised Funds provides answers to these questions.

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February 2023 National Standards Zoom Call

ashley.tobon@cof.org — Thu, 05 Jan 2023 18:42:33 +0000

February 2023 National Standards Zoom Call ashley.tobon@cof.org Thu, 01/05/2023 - 13:42

Webinar

February 2023 National Standards Zoom Call

This monthly call is for community foundations staff to connect with the National Standards staff and to ask questions related to the National Standards program.

CFNSB hosts a monthly call to offer community foundation staff the opportunity to learn what's new, or ask any questions related to the National Standards program. The input of community foundation staff is critical to the success of the program.

This event will take place the second Wednesday of each month at 1:00pm EST.

Email questions to submissions@cfstandards.org. We will do our best to respond as quickly as possible.

Speakers

Kevin van Bronkhorst
Director of National Standards
Council on Foundations

Ashley Tobon
Legal and National Standards Associate
Council on Foundations

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Webinar Recording: Lunch with Legal Counsel

kelsey.gerber@cof.org — Thu, 21 Jun 2018 14:27:45 +0000

Webinar Recording: Lunch with Legal Counsel kelsey.gerber@… Thu, 06/21/2018 - 10:27

Webinar Recording: Lunch with Legal Counsel

Private Foundations and DAFs

The administrative costs of operating a private foundation often prove too burdensome and can easily swamp the grantmaking activity of private foundations, especially the smaller ones. As such, a foundation may decide to transfer its assets to a Sponsoring Organization to take advantage of the administrative efficiencies of using a donor advised fund, all the while supporting its exempt purpose.

We invite you to our “Lunch with Legal Counsel” series with Bryan Del Rosario, Staff Counsel of Legal Affairs. Bryan will discuss the “tipping” issue in IRS Notice 2017-73 as well as ways private foundations can use donor advised funds to advance, enhance and effectuate their charitable missions.

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Supporting Organizations

council-webteam — Fri, 09 Jun 2017 19:29:17 +0000

Supporting Organizations council-webteam Fri, 06/09/2017 - 15:29

Supporting Organizations

A Chapter in Mastering Foundation Law:
The Council on Foundations Compendium of Legal Resources

This chapter discusses the federal tax laws governing supporting organizations. As a result of the Tax Reform Act of 1969, private foundations receive considerably less favorable treatment under tax law than public charities. Supporting organizations are a hybrid of private foundations and public charities that generally enjoy more favorable tax treatment than private foundations because they are exempt from many of the excise taxes imposed on private foundations. Supporting organizations are closely associated with one or more public charities but do not themselves meet the public support requirement or conduct activities allowing them to be treated as public charities.

This chapter is divided into six parts:

Summary and Background

Part One addresses the background of the law covering supporting organizations, including basic requirements and the advantages and disadvantages of classification as a supporting organization.

Organizational Test

Part Two describes the organizational test that organizations must pass to establish and maintain supporting organization status.

Operational Test

Part Three describes the operational tests organziations must pass to establish and maintain supporting organization status. These include reviewing permissable beneficiaries and permissable activities.

Relationship Test

Part Four describes the tests for categorizing supporting organizations as Type I, Type II, or Type III.

Control Test

Part Five describes the test used to determine whether disqualified persons are involved with the organization.

Common Pitfalls

Part Six warns of common pitfalls such as gifts from individuals or entities that control the supported organization, grantmaking and investment management by Type IIIs, and grants to non-supported organizations.

Accessing this Chapter

As a benefit of Council membership, members can download this chapter for free. Nonmembers of the Council can purchase this chapter of the Legal Compendium in our store for $199.

Members Download for Free

Nonmembers Purchase from Store

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Changing Supporting Organization Status

council-webteam — Tue, 12 Nov 2013 00:16:47 +0000

Changing Supporting Organization Status council-webteam Mon, 11/11/2013 - 19:16

Changing Supporting Organization Status

With tighter restrictions on grants to supporting organizations after the PPA, reclassifying into a public charity with fewer restrictions is an option worth considering.

Supporting organizations that meets the public support test can be reclassified as a public charity under section 509(a)(1) or (a)(2), rather than the more heavily regulated section 509(a)(3).

Learn more about the IRS Reclassification Process for Supporting Organizations.

This option will be of particular concern to community foundations with affiliate funds that are structured as supporting organizations and currently classified as such under section 509(a)(3). The Council strongly urges these foundations to seek reclassification for their 509(a)(3) affiliates (and for any other supporting organization that receives public support) because it will clarify that the affiliate can accept IRA Rollover gifts directly and will make it easier to get grants from private foundations. For affiliates that are Type III supporting organizations, reclassification will also permit the affiliate to continue to hold donor-advised funds. It is not necessary to change the affiliate's organizing documents -- it can continue to be a supporting organization for all other purposes.

The reclassification process is straightforward and requires only submission of evidence that the affiliate meets the public support test. Please note that this option does not apply to affiliates that are not separate corporate entities or to affiliates already classified as section 509(a)(1) public charities.

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Council Summary: Report to Congress on Supporting Organizations and Donor Advised Funds

council-webteam — Tue, 12 Nov 2013 00:02:36 +0000

Council Summary: Report to Congress on Supporting Organizations and Donor Advised Funds council-webteam Mon, 11/11/2013 - 19:02

Council Summary: Report to Congress on Supporting Organizations and Donor Advised Funds

The Treasury Department released its report on donor advised funds (DAFs) and supporting organizations (SOs) in December of 2011. This report, mandated by the Pension Protection Act of 2006, was due in August 2007.

The report is 109 pages, including appendices, and is divided into five chapters: an introduction and summary; a detailed discussion of the legal requirements for supporting organizations and donor advised funds; an analysis of available statistical information about DAFs and SOs, with most data drawn from the 2006 Form 990; a lengthy summary of the comments Treasury received in response to a request back in 2007; and a short final chapter titled "Answering Congressional Questions." The report does not recommend any new legislative changes to the operation of either supporting organizations or donor advised funds.

To begin with the last chapter, Congress asked Treasury to address four specific areas:

Whether existing rules for charitable deductions for gifts to DAFs and supporting organizations are appropriate or should be modified;
Whether DAFs should be subject to a payout requirement;
Whether a donor's advisory role with respect to investments or distributions is compatible with a completed gift having been made;
Whether the issues above apply to other forms of charity

The report concluded that no changes are needed with respect to the deductibility of gifts to donor advised funds and supporting organizations. The authors note the several reforms enacted in the PPA both with respect to DAFs and SOs, but also new requirements for gifts of certain types of property, such as historic conservation easements. Most significantly, the report found a clear distinction between gifts to private foundations, over which a donor may exert control, when compared with gifts to DAFs and SOs, where the donor must give up control. This is a key distinction that was too often overlooked or disregarded in the formulation of the PPA reforms. The second key point is the reports explicit recognition that any issues with respect to the timing of the deduction or with perceived donor influence over the liquidation of a gift arise for gifts to all public charities not just SOs and DAFs.

Finding that the average aggregate payout by DAFs was 9.3 percent in 2006, the report recommended waiting for more years of data before deciding whether there is a need for a payout requirement. By comparison, the report noted that private foundation payout over the years has averaged around 6 percent. The report does note that high payout by some funds may mask low, or no, payouts by others. Please note that the payout calculation used is "grants only." The formula used was based on dividing the sum of asset values at the end of the year plus grants made during the year by grants made. The DAF payout rate would generally be even higher if one used the considerably more complicated private foundation calculation as that includes, among other things, administrative expenses incurred for charitable purposes.

The report concluded that gifts to DAFs and SOs are completed when made (and, accordingly, immediately deductible). As in the discussion of the deduction generally, the authors cite the distinction between advice and control and the fact that many organizations, not just DAFs and SOs, feel pressure from donors to use gifts in particular ways. In particular, the report noted that high approval rates for DAF recommendations from donors is not evidence of excessive control as sponsoring organizations report that they have guidelines for acceptable grant recommendations and make those known to donors and may educate donors about community needs.

Chapter 3, addressing information about DAFs and SOs from the 2006 990s, is likely to be of interest to many grantmakers. The report cautions that 2006 was the first year for many of the reporting requirements for DAFs and that a review of returns filed indicated confusion and mistakes by some filers weakening the validity of the data (noting that this is common when new questions are added to any tax form). The authors also note that the IRS has cautioned against relying on the self-classification of supporting organizations as Type I, II, or III and with respect to the functional integration status of Type IIIs. Nonetheless, the data in the report represent the first comprehensive information about DAFs and that break down the operations of supporting organizations by type. We have rounded numbers for convenience.

Donor Advised Funds - Data from 2006

Number of organizations with advised funds	2,400
Number of individual funds	160,000
Total assets	$31.1 billion
Total gifts	$9 billion
Total grants	$5.6 billion

The 990 does not break DAF gifts down by whether the contributions were cash or property, so the report extrapolates this from total gifts to the organizations with DAFs and concludes that cash gifts were about 65 percent of total. We suspect this may under state non-cash support for DAFs to the extent that some other types of funds, especially agency endowments, may skew heavily toward cash. This is somewhat confirmed because the national DAFs, where virtually all gifts are to DAFs, report two-thirds of their support came from non-cash gifts.

Table 3.5 divides the sponsoring organizations of donor advised funds into seven discrete subcategories, including one for the commercial donor advised funds and another for community foundations. The report found 23 national commercial advised fund sponsors. While a small number, this group held almost half the 160,000 funds and 35 percent of the asset value of all funds. About two-thirds of gifts to these funds were non-cash. The report points out that while the commercial funds are efficient in the administration of DAFs, their expenses may be understated as some investment fees may have been netted against investment income. Interestingly, the report also notes that management expenses can be "too low" as well as "too high," with low expenses possibly indicating that donors are receiving little supervision, while high expense may reflect efforts by the sponsoring organization to match donors with potential donee organizations. According to the report, these educational efforts by sponsoring organizations "may be an important public service provided by DAF sponsoring organizations as part of their charitable mission."

Community foundations were the second-largest category of DAF sponsors, holding almost 30 percent of total funds and $41 billion in assets. The report included 607 organizations in the community foundation category, suggesting that they finally have a grasp on the number of community foundations in existence. Contributions to community foundation DAFs totaled$2.8 billion, about half of their total gifts. Only 27 percent of total community foundation gifts (all gifts, not just DAFs) were non-cash. This is surprisingly low as the assumption would be that gifts of publicly traded stock and other forms of property would play a much larger role. Community foundations paid out $2 billion in grants from DAFs in 2006.

The balance of the DAFs is divided among a small group of national donor advised funds that are not "commercial," and educational, health, religious, and "other" organizations. With the exception of the first, DAFs are not an important part of their overall resources.

The report presents aggregate DAF payout rates with great caution due to the authors' belief that many organizations may have made reporting errors as the more-detailed DAF questions were asked for the first time in the 2006 returns. Nonetheless, the report finds that the mean (average) payout was 9.3 percent for all DAFs at all sponsoring organization. The commercial advised funds had significantly higher payout rates with a mean of 14.2 percent, a median of 14.7 percent, and a range from 11.0 percent at the 25th percentile to 17.6 at the 75th. Community foundation payouts matched the 9.3% average with the median at 7 percent. The range for community foundations was from 1.9 percent at the 25th percentile to 12.3 percent at the 75th.

Table 3.8 offers a breakdown of non-cash gifts by type of sponsoring organization. Again, the numbers reported in this table, which uses data from Form 8283, are for all gifts, not just those to DAFs. Forty-one thousand of the approximately 49,000 gifts reported were gifts of corporate stock, with the 23 commercial advised funds and the 600+ community foundations each receiving nearly the same total value ($1.3 billion for the commercial funds and $1.2 billion by community foundations). Unsurprisingly, the commercial funds got more gifts (by value) of mutual funds than community foundations, but community foundations received almost all of the gifts of real property and non-publicly traded stock (approximately $100 million in each category). Please note that the numbers reported in Table 3.8 are for 2005, not 2006, so are not directly comparable with the other numbers in the report.

Supporting Organizations. Just under 22,000 organizations filed Form 990 in 2006 as supporting organizations. Collectively, these organizations held $371 billion in assets, with $214 billion of this held by the approximately 8,200 SOs that self-identified as Type I. In addition to the 8,200 Type Is, the report found about 3,200 Type II SOs and 9,400 Type IIIs, with 3,400 of the latter self-classified as "functionally integrated." Although acknowledging significant grantmaking by Type I SOs, the report found that the non-functionally integrated IIIs differed sharply from other forms of SOs in being primarily grantmakers. They also differed from the other types of SOs in that almost 80% of their support from gifts was in the form of non-cash, while the others received mainly cash.

As with DAFs, the report subdivides supporting organizations into groups that, in this case, are based on the primary function of their supported organizations. Community foundation supporting organizations were placed in a category called "community benefit." Unlike the DAF community foundation category, however, the community benefit SO subgroup also includes SOs that support community economic development organizations and "other regionally based organizations." There were just over 800 supporting organizations in this category including 365 Type I, 214 Type II, and 224 Type IIIs (of which 110 were functionally integrated). Supporting organizations in the community benefit category held $19 billion in assets and made about $250 million in grants. This figure includes $146 million from DAFs controlled by the supporting organization, presumably reflecting community foundation affiliates that are organized as supporting organizations.

One apparent anomaly in the reported data is that supporting organizations in the community benefit category reported receiving more than half their income ($1.25 billion) from fees for program services. It's unlikely that community foundation supporting organizations, with the possible exception of affiliates, receive substantial revenue from program services, so this may reflect the inclusion in community benefit of supporting organizations to economic development and similar regional organizations in the community benefit category. This is somewhat confirmed as these supporting organizations also reported substantial ($1.4 billion) program expenses, an amount that dwarfs grants by these SOs.

There is also a subcategory for "philanthropic" SOs, with the report stating that the 2,300 supporting organizations in this category were primarily grantmakers. Although community foundation SOs are described as being in the community benefit category, it is possible that some were placed in this category. Well over half (1,500) of the philanthropic SOs were Type III.

The report notes that data supplied by supporting organizations on Form 990 do enable analysts to identify some potentially problematic behavior by them. Thus, the report states that in the pre-PPA period, Congress had identified loans by SOs to officers, directors, trustees, and key employees as a potential abuse area. In fact, only 57 of the 21,000 SOs reported such loans and only three of these were loans to disqualified persons. The total amount of all loans was $137 million, with most loans small in the aggregate and representing a small share of the SO's assets. Community benefit SOs reported no loans in either category.

All in all, the report is balanced and fair and provides some interesting data on DAFs and supporting organizations.

Senator Grassley issued a press release on the report in which he called the report "disappointing and unresponsive." However, we believe that the report's findings will carry weight with other members of Congress and we'll continue our efforts to bring this matter to the attention of key legislators.

A related report from the Congressional Research Service examines data from Form 990, and some of the statistical information about donor-advised funds that was included in the 2011 Treasury report on DAFs. The CRS report takes strong issue with several of the findings of the Treasury report. View the Council’s summary of the CRS report.

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Treasury Report on Donor-Advised Funds and Supporting Organizations

council-webteam — Mon, 11 Nov 2013 23:56:29 +0000

Treasury Report on Donor-Advised Funds and Supporting Organizations council-webteam Mon, 11/11/2013 - 18:56

Treasury Report on Donor-Advised Funds and Supporting Organizations

In Notice 2007-21, the Treasury Department and IRS requested comments on issues relating to the organization and operation of donor-advised funds and supporting organizations, to be included in a study of these organizations. The resulting report includes a detailed discussion of the legal requirements for supporting organizations and donor-advised funds, an analysis of available statistical information about DAFs and SOs, and more.

Go to External Resource

Treasury Report on Donor-Advised Funds and Supporting Organizations

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Tax Reporting for Supporting Organizations

council-webteam — Mon, 11 Nov 2013 23:15:24 +0000

Tax Reporting for Supporting Organizations council-webteam Mon, 11/11/2013 - 18:15

Tax Reporting for Supporting Organizations

Affected transactions: Returns filed for taxable years ending after August 17, 2006.

Are all supporting organizations required to file Form 990?

Yes. Prior to the enactment of the Pension Protection Act of 2006, public charities that normally received less than $25,000 in annual gross receipts were not required to file Form 990. The Act requires all supporting organizations to file a Form 990 regardless of annual gross receipts.

What additional information must a supporting organization report on Form 990?

A supporting organization must report what type of supporting organization it is—type I, II or III. The organization must also identify its supported organizations. This information is already requested on the 2005 Form 990.

An organization must also certify that it is not controlled directly or indirectly by one or more disqualified persons unless such control is by either foundation managers or publicly supported charities. The legislative history suggests that such certification would include a certification that a majority of the organization’s governing body is comprised of individuals selected either (1) because of special knowledge or expertise in the field or discipline in which the supporting organization is operating or (2) because they represent the community that is served by the supported public charity.

Do type III supporting organizations have any additional reporting requirements?

Yes. Effective for each tax year beginning after August 17, 2006, a type III supporting organization must provide its supported organization information to ensure such organization is responsive to the needs or demands of the supported organization. While the Act leaves it to the Treasury Secretary to determine the information required to be provided by a type III to its supported organization, the legislative history suggests that such information could be “a copy of the supporting organization’s governing documents, any changes made to the governing documents, the organization’s annual information return filed with the Secretary (Form 990 series), any tax return (Form 990-T) filed with the Secretary, and an annual report (including a description of all of the support provided by the supporting organization, how such support was calculated, and a projection of the next year’s support.)

Disclaimer

The information provided in this resource is based on our continuing analysis of the Pension Protection Act. Every effort has been made to ensure the accuracy of this information. Due to the complexity of the PPA and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, this information is subject to change. Please check back here and on the IRS website (www.irs.gov) for updates. This information is not a substitute for expert legal, tax, or other professional advice and we strongly encourage grantmakers and donors to work with their counsel to determine the impact of the PPA and related guidance on their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

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Guidance for Donor Advised Funds, Supporting Organizations, and Employer Disaster Funds

council-webteam — Mon, 11 Nov 2013 23:11:11 +0000

Guidance for Donor Advised Funds, Supporting Organizations, and Employer Disaster Funds council-webteam Mon, 11/11/2013 - 18:11

Guidance for Donor Advised Funds, Supporting Organizations, and Employer Disaster Funds

This resource is a Council Summary of IRS Interim Guidance found in IRS Notice 2006-109, issued December 6, 2006, and explains steps for determining supporting organization status, and important information on the employer disaster relief fund exemption.

Responding to requests from the Council on Foundations and Independent Sector, the Internal Revenue Service on December 4, 2006 issued interim guidance on several of the donor advised fund and supporting organization issues arising from the Pension Protection Act of 2006. The notice is available at http://www.irs.gov/pub/irs-drop/n-06-109.pdf .

Determining Supporting Organization Status of Grantees
IRS guidance for private foundations and sponsoring organizations of donor advised funds on how to:

Determine whether a public charity is a supporting organization,
Determine which type it is, and
Determine whether a Type III supporting organization is "functionally integrated."

"Control Test" for Private Foundations
Provides guidance on the control test to be applied in determining whether a private foundation disqualified person or a donor/advisor controls an organization that the supporting organization supports.

Employer Disaster Relief Funds are not Donor-Advised
Certain employer-connected disaster relief (but not emergency hardship) funds are exempt from the definition of donor advised fund.

Supporting Organization Employment Contracts
Transition relief was provided for supporting organizations with preexisting contractual and employment relationships with the supporting organization’s substantial contributor or persons related to the contributor.

Scholarship Relief
Transition relief was provided for scholarships awarded prior to August 17, 2006.

Determining Supporting Organization Status of Grantees

Step 1: Obtain information from a reliable source to determine whether a public charity is a supporting organization.

According to IRS guidance, grantmakers may rely on any of the following sources:

Select Check, an online IRS tool using data from the IRS public charity list, known as IRS Publication 78,
IRS Business Master File (BMF)
Reliable third party such as Guidestar's Charity Check Service

the grantee’s name, Employer Identification Number, and public charity classification under Section 509(a)(1), (2), or (3)
a statement that the information is from the most currently available IRS monthly update to the BMF, along with the IRS BMF revision date
the date and time of the grantmaker’s search

The grantmaker must retain the report in electronic or hard-copy form.

"Control Test" for Private Foundations

The IRS will use the definition of control found in the regulations under section 4942 in deciding whether a private foundation disqualified person or a donor advisor (and related parties) controls a supporting organization or an organization that a supporting organization supports. The notice suggests that grantmakers may need to obtain lists of the supported organizations from potential supporting organization grantees. The section 4942 regulations provide that an organization is controlled if disqualified persons can, by aggregating their votes or positions of authority, require the supported organization to make an expenditure or refrain from making one.

Employer Disaster Relief Funds are not Donor-Advised

The IRS provided only part of the relief that the Council requested under the PPA. The Council’s letter to Treasury asked whether employer-connected disaster relief and emergency hardship funds would be treated as donor-advised. The IRS did not provide guidance on this issue. However, the IRS did exercise its authority under the PPA to declare that if such funds are donor advised funds that provide assistance only in the case of "qualified disasters," they can qualify for exemption from the prohibition on payments to individuals.

To be eligible for exemption funds must:

Have as their sole purpose providing relief in the case of a qualified disaster. A disaster is qualified if it: 1) results from terroristic or military action; 2) is the result of an accident involving a common carrier; or 3) has been declared by the President or the Secretary of the Treasury to be a disaster.
Serve a charitable class
Select recipients based on objective determinations of need
Use either an independent selection committee or one that is independent (a majority of its members are not in a position to exercise substantial influence over the affairs of the employer)
Make no payment to anyone who is a director, officer, or trustee of the sponsoring organization or to any member of the selection committee, and
Maintain adequate records demonstrating the recipients’ need for the relief provided

The relief granted does not extend to payments for cases of individual hardship or disasters that are declared by state or local authorities. IRS officials told us that they need more information about how emergency hardship funds operate in order to make a decision about whether such funds should be exempted from the definition of donor-advised. Call one of the lawyers on COF's Legal Team if you have such a fund so that we can gather information about its operations. Foundation managers should keep in mind, though, that the IRS has not ruled that these funds are donor-advised.

Supporting Organization Employment Contracts

Transition Relief for Supporting Organization Payments to Substantial Contributors and Related Parties

The Pension Protection Act prohibits most payments from a supporting organization to the organization’s substantial contributor and parties related to him or her. The PPA stated that this provision applied to transactions occurring after July 25, 2006, leaving open whether supporting organizations could continue to honor contracts entered into prior to that date and could continue to pay compensation to persons employed at will. The IRS addressed these problems by providing the following transition rules:

Provided the contract is not modified in any way, payments could continue until August 17, 2007 under written contracts that were binding on August 17, 2006.
Supporting organizations could continue other arrangements, including at will employment, through December 31, 2006. All goods and services were to be provided by that date and final payment had to be complete by August 17, 2007. As above, the arrangements could not be modified or they would lose the benefit of the transition rule.

The relief in the transition rule extended only to the automatic excess benefit penalties. Payments that exceed the fair market value of the goods and services received remain subject to penalties.

While these transition rules came too late for those foundations that have already acted to terminate contracts and employees, they allowed foundations that elected to ease transitions by making payments from other resources to obtain reimbursement from the supporting organization.

Scholarship Relief

The IRS granted the relief the Council requested, exempting payments on educational grants awarded prior to August 17, 2006 from the PPA’s ban on distributions to individuals from donor advised funds. Scholarships are eligible for the special treatment if:

The award was made on an objective and nondiscriminatory basis and is reasonable in amount in light of the purposes of the scholarship.
The recipient is not the fund’s donor, donor advisor or someone related to them.
On or before August 17, 2006 the sponsoring charity had records, or copies of correspondence with the recipient, showing:
- The name of the recipient
- The nature of the grant (e.g., scholarship)
- The amount
- The date on which the grant was awarded
- The grant period

Records were to be kept for at least three years following the close of the taxable year in which the last payment was made. There could be no material change in the amount or conditions of the award or it would have become ineligible for the exemption. The notice states that a material change includes "a required reapplication for the grant." We do not believe that the process of checking that a student continues to meet the eligibility requirements for a scholarship would have been a "required reapplication." Provided the scholarship met the requirements outlined above, there was no deadline by which payments had to be complete.

The guidance in IRS Notice 2006-109 was released December 6, 2006.

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Supporting Organizations

Supporting Organizations

Determining Supporting Organization Status

Determining Supporting Organization Status

Step 1: Obtain information from a reliable source to determine whether a public charity is a supporting organization.

Step 2: Determine the supporting organization’s type.

Step 3: Determine if there is a presence of control that would trigger expenditure responsibility.

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Are there PPA requirements for qualifying as a type III supporting organization?

Are the requirements listed above all of the provisions of the Act affecting supporting organizations?

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