Section 509(a)(3) Supporting Organizations
Supporting organizations are charities that carry out their exempt purposes by supporting other exempt organizations, usually other public charities. The classification is important because it is one means by which a charity can avoid classification as a private foundation, a status that is subject to a much more restrictive regulatory regime. The key feature of a supporting organization is a strong relationship with an organization it supports. The strong relationship enables the supported organization to oversee the operations of the supporting organization. Therefore, the supporting organization is classified as a public charity, even though it may be funded by a small number of persons in a manner similar to a private foundation.
Examples: University endowment funds and organizations that provide essential services for hospital systems.
Like all charitable organizations, a supporting organization must be organized and operated exclusively for purposes described in section 501(c)(3). A supporting organization must also be organized and operated exclusively to support specified supported organizations. Moreover, a supporting organization must have one of three relationships with the supported organizations, all of which are intended to ensure that the supporting organization is responsive to the needs or demands of the supported organization and intimately involved in its operations and that the public charity is motivated to be attentive to the operations of the supporting organization. Type I supporting organizations are operated, supervised, or controlled by the supported organization. Type II supporting organizations are supervised or controlled in connection with the supported organization. Type III supporting organizations are operated in connection with the supported organization. Because Type III relationships are less formal than a Type I or Type II relationship, Type III organizations must meet a responsiveness test and an integral part test. These tests are designed to ensure that the supporting organization is responsive to needs of a public charity and that the public charity oversees the operations of the supporting organization. Finally, the supporting organization must not be controlled directly or indirectly by disqualified persons.
Some promoters have encouraged individuals to establish and operate supporting organizations described in section 509(a)(3) for their own benefit. A common theme of such abusive transactions is a charitable donation of an amount to the supporting organization, and a return of the donated amounts to the donor, often in the form of a loan. To disguise the abuse, the transaction may be routed through more intermediary organizations controlled by the promoter. Because of these abuses, Congress imposes additional restrictions on certain supporting organizations.
Organizations that operate for the personal benefit of their founders are not operated exclusively for purposes described in section 501(c)(3). Where part of an organization’s net earnings inures to the benefit of private persons or where more than an insubstantial part of its activities benefits private interests, the organization will fail to qualify. In addition, excise taxes may be imposed on its disqualified persons and organization managers. Even where the organization does not operate for the personal benefit of its founder, it may not qualify for section 509(a)(3) classification because--
- It is controlled by disqualified persons.
- It is not sufficiently responsive to the needs or demands of a supported public charity.
- It does not maintain a significant involvement in the affairs of a specified publicly supported charity.
- A specified public charity might not be motivated to be attentive to its operations.
Loss of section 509(a)(3) classification means that the organization would be classified as a private foundation, subject to private foundation excise taxes .