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.