7.26.5  Private Foundations Defined— IRC 509(a)(3) Exclusion

7.26.5.1  (03-30-1999)
Overview

  1. IRC 509(a)(3) provides for classification as a public charity on the basis of an organization’s supporting relationship (see IRM 7.26.5.1.2) to one or more IRC 509(a)(1) or (2) organizations. For the rest of this section, the term "supporting organization" will mean an organization or organizations described under IRC 509(a)(3); the term "supported organization" will mean one or more organizations described under IRC 509(a)(1) or (2). A supported organization may be a foreign organization. Rev. Rul. 74–229, 1974–1 C.B. 142.

  2. IRC 509(a)(3) assumes that regulation as a private foundation is not needed where the relationship between a supporting organization and one or more supported organizations ensures that the supported organization will exercise adequate oversight over the organization supporting it. An organization that would otherwise be a private foundation may qualify for other than private foundation status if it meets

    • one of three relationship requirements provided under IRC 509(a)(3), and

    • the organizational requirements and operational requirements that apply to the particular relationship.

  3. For organizations created before January 1, 1970, organizational and operational rules apply as of January 1, 1970.

  4. IRC 509(a)(3) provides that a supporting organization must meet all three of the following tests:

    1. Organizational and operational tests under IRC 509(a)(3)(A). The organization must be organized (see IRM 7.26.5.3) and operated (see IRM 7.26.5.5) exclusively for the benefit of, and to perform the functions of, one or more specified organizations described in IRC 509(a)(1) or (2);

    2. Nature of relationship test under IRC 509(a)(3)(B). The organization must be operated, supervised, or controlled by, or in connection with, one or more organizations described in IRC 509(a)(1) or (2); and

    3. Lack of outside control test under IRC 509(a)(3)(C). The organization cannot be controlled directly or indirectly by one or more disqualified persons, as defined in IRC 4946, other than foundation managers or one or more organizations described in IRC 509(a)(1) or (2) (see IRM 7.26.5.6).

  5. Exhibit 7.26.5–1, Flow Chart for Supporting Organizations, provides a systematic diagram for making determinations concerning classification under IRC 509(a)(3).

7.26.5.1.1  (03-30-1999)
Statute

  1. IRC 509(a)(3) excludes from the definition of "private foundation" an organization which:

    1. is organized, and at all times thereafter is operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in IRC 509(a)(1) or IRC 509(a)(2);

    2. is operated, supervised, or controlled by or in connection with one or more organizations described in IRC 509(a)(1) or IRC 509(a)(2); and

    3. is not controlled directly or indirectly by one or more disqualified persons (as defined in IRC 4946) other than foundation managers and other than one or more organizations described in IRC 509(a)(1) and 509(a)(2).

7.26.5.1.2  (03-30-1999)
Relationship Test

  1. Of the tests set out in the statute, the relationship test of IRC 509(a)(3)(B) is the most important. Determining whether there is a proper relationship should be the first step in determining whether an organization qualifies under IRC 509(a)(3).

  2. A supporting organization must establish that at least one of the three relationships listed below describe its relationship to one or more supported organizations. A supporting organization must be:

    1. operated, supervised, or controlled by one or more supported organizations;

    2. supervised or controlled in connection with one or more supported organizations; or

    3. operated in connection with one or more supported organizations. Reg. 1.509(a)–4(f)(2).

  3. The "operated, supervised, or controlled by" and "supervised or controlled in connection with" tests depend, as their names suggest, on the existence of supervision or control. The "operated in connection with" test is a more difficult factual determination to make, and is subject to more complicated rules.

7.26.5.2  (03-30-1999)
"Operated Supervised or Controlled By" Relationship

  1. The distinguishing feature of the "operated, supervised or controlled by" relationship is a substantial degree of direction over the policies, programs and activities of a supporting organization by one or more supported organizations. The relationship is comparable to that of parent and subsidiary. Reg. 1.509(a)–4(g)(1)(i).

7.26.5.2.1  (03-30-1999)
Requirements to Establish Relationship

  1. The "operated, supervised or controlled by" relationship is established if the majority of the officers, directors, or trustees of the supporting organization are appointed or elected by the governing body, members of the governing body, officers acting in their official capacity, or the membership of one or more publicly supported organizations. Reg. 1.509(a)–4(g)(1)(i).

  2. It is not necessary for the governing bodies of both organizations to have the same persons. Reg. 1.509(a)–4(g)(1)(ii).

  3. A supporting organization may establish that it meets the "operated, supervised, or controlled by" relationship even if it is controlled by one or more publicly supported organizations but operated for the benefit of other publicly supported organizations, if the purposes of the controlling publicly supported organizations are carried out by benefiting the other publicly supported organizations. Reg. 1.509(a)–4(g)(1)(ii).

  4. Examples of organizations that satisfy the "operated, supervised, or controlled by" relationship are as follows:

    1. A university press operated to perform a university’s printing and publishing that is controlled by a board of governors appointed by the universities board of trustees. Reg. 1.509(a)–4(g)(2) Example (1).

    2. A scientific study council organized under the joint sponsorship of several independent, publicly supported scientific organizations. Reg. 1.509(a)–4(g)(2) Example (2).

    3. A medical research organization set up by a university that also appoints the organization’s trustees, that pays all its income from medical research to designated hospitals that allow the university’s faculty members to use hospital research facilities. Reg. 1.509(a)–4(g)(2) Example (3).

    4. A trust established to grant scholarships to students graduating from a city’s public high schools that is trusteed by members of the city council and managed by the city’s treasurer. Rev. Rul. 75–436, 1975–2 C.B. 217.

    5. A community trust described in Reg. 1.170A–9(e)(11) of the regulations that was created by a publicly supported community chest to hold permanently endowed charitable funds for use in the community through grants to publicly supported charitable organizations in the community. A majority of the community trust’s trustees are appointed by the community chest’s governing body. Rev. Rul. 81–43, 1981–1 C.B. 350.

7.26.5.2.2  (03-30-1999)
Supervised or Controlled in Connection With Relationship

  1. The distinguishing feature of the "supervised or controlled in connection with" relationship is the presence of common supervision or control among the governing bodies of the supporting and supported organization. This is often described as a "brother-sister" relationship, as distinguished from the "parent-subsidiary" relationship required for "operated, supervised, or controlled by" organizations. This is to ensure that the supporting organization will be responsive to the needs of the supported organization. Reg. 1.509(a)–4(h)(i).

7.26.5.2.2.1  (03-30-1999)
Requirements to Establish Relationship

  1. Control or management of the supporting organization must be vested in the same persons that control or manage the publicly supported organizations. Reg. 1.509–(a)(4)(h)(1).

  2. A supporting relationship will not be established merely because an organization makes mandatory or discretionary payments to one or more IRC 509(a)(1) or (2) organizations. This is true even if the payment obligation is legally enforceable and the organization’s governing instrument contains provisions requiring the distribution. Reg. 1.509(a)–4(h)(2). See examples in Reg. 1.509(a)-4(h)(3).

  3. In determining whether a parent hospital holding company is "supervised or controlled in connection with" its publicly supported subsidiaries, G.C.M. 39508 dated May 27, 1986, viewed the test in the context of whether control or management of the supporting holding company is "vested in the same persons" that perform those functions for each publicly supported subsidiary. Note: The use of G.C.M.s in the IRM is for illustrative purposes only. G.C.M.s are not precedential guidance.

    1. In G.C.M. 39508, Chief Counsel applied a "rule of thumb" that no less than a majority of the persons who control or manage the supporting organizations must have a "requisite commonality" with the persons performing the same functions for each and every publicly supported beneficiary. The "rule of thumb" does not require that the "same persons" hold identical positions in each and every publicly supported organization. For example, if the chief operating officer of the hospital sat on the board of the holding company, that person would be considered a person vested with control or management of both organizations even though he or she held different positions in each.

    2. G.C.M. 39508 states that "same persons" does not mean representatives or appointees.

    3. Whether the "rule of thumb" discussed in (a), above, is satisfied may be determined from the supporting organization’s (the holding company’s) governing documents. For example, the "rule of thumb" would be satisfied if the holding company’s articles or bylaws require that a majority of the persons who control it must perform the same functions for each publicly supported organization (the subsidiaries) it benefits. Mere present identity of officials, without documentation that it is required by governing instruments, would be insufficient to satisfy the "rule of thumb," as there would be no guarantee that the relationships will continue.

    4. If fewer than a majority of the persons have the "requisite commonality" to satisfy the "rule of thumb," other facts and circumstances, including the purpose of the reorganization, the number of publicly supported beneficiaries, agreements among the various organizations, and the nature of each organization’s activities, must be considered. These facts and circumstances must clearly demonstrate that the supporting organization can and will be responsive to the needs or demands of each publicly supported organization and can and will be an integral part of, or maintain a significant involvement in, the operations of each supported organization. This burden will generally become increasingly difficult to meet as the number of supported organizations increases.

7.26.5.2.3  (03-30-1999)
Operated in Connection With Relationship

  1. The "operated in connection with" relationship, the most complex of the three relationship tests, rests upon findings that the supporting organization is responsive to the needs or demands of the supported organizations, and maintains an integral or significant involvement in the supported organization’s affairs. Reg. 509(a)–4(i). In addition to meeting the organizational requirements (discussed in IRM 7.26.5.3) and operational requirements (discussed in IRM 7.26.5.5) required of each of the three different relationships, a supporting organization must meet, (a) a responsiveness test (discussed in IRM 7.26.5.2.3.1), and (b) an integral part test (discussed in IRM 7.26.5.2.4), two tests applicable exclusively to the "operated in connection with" relationship. Finally, the supporting organization must not be controlled by a disqualified person or persons, a requirement also applicable to the other two relationship tests. See IRM 7.26.5.6.

  2. In Windsor Foundation v. United States, 77–2 U.S.T.C. ¶ 9709 (E.D. Va. 1977), the District Court applied the tests literally in rejecting the organization’s argument that it should be considered to meet the "operated in connection with" test. The court found that the Windsor Foundation satisfied none of the requirements because no suitable charitable beneficiary was named in either the creating will or the organization’s articles; no historical relationship between the organization and publicly supported beneficiaries was shown in the record; no beneficiary had control or involvement in investment decisions; there was no indication of other than minimal feedback from beneficiaries to the organization; and the possible beneficiaries included organizations that might not be publicly supported.

7.26.5.2.3.1  (03-30-1999)
Responsiveness Test

  1. An organization must establish compliance with the responsiveness test by satisfying one of two tests set out in Reg. 1.509(a)–4(i)(2). The first test, set out in Reg. 1.509(a)–4(i)(2)(ii) and described in IRM 7.26.5.2.3.1.1, applies to all IRC 501(c)(3) organizations. The second test, set out in Reg. 1.509(a)–4(i)(2)(iii) and described in IRM 7.26.5.2.3.1.2, applies to certain charitable trusts including other types of nonprofit organizations treated the same as trusts under state law. Additional facts and circumstances that must be considered for certain relationships in existence before November 20, 1970, are discussed in IRM 7.26.5.2.3.1.3.

7.26.5.2.3.1.1  (03-30-1999)
First Test— Interrelationship Test

  1. The first responsiveness test, an interrelationship test, set out in Reg. 1.509(a)–4(i)(2)(ii), is met if the officers, directors or trustees of the supported organization have a significant voice in the investment policies of the supporting organization, the timing of grants, the manner of making them, the selection of grantees, and in otherwise directing the use of the assets of the supporting organization because:

    1. one or more officers, directors, or trustees of the supporting organization are elected or appointed by the officers, directors, trustees, or membership of the publicly supported organizations, or;

    2. one or more members of the governing bodies of the supported organization are also officers, directors or trustee of, or hold other important offices in the supporting organization, or;

    3. the supporting organization’s officers, directors, or trustees maintain a close and continuous working relationship with the officers, directors or trustees of the supported organization. Reg. 1–509(a)–4(i)(2)(ii).

  2. Once the relationship described in (1) is shown, the organization must demonstrate that, because of the relationship, the officers, directors, or trustees of the publicly supported organization have a significant voice in:

    1. the investment policies of the supporting organization;

    2. the timing of grants;

    3. the manner of making grants; and

    4. otherwise directing the use of the supporting organization’s income or assets.

  3. In an application of this test, the Service ruled that representation on an organization’s selection committee for making grants is not sufficient to meet the responsiveness test if an independent trustee has sole and complete authority over all other aspects of administration of the trust. Rev. Rul. 75–437, 1975–2 C.B. 218.

7.26.5.2.3.1.2  (03-30-1999)
Alternate Test— Accountability Test

  1. The alternate responsiveness test of Reg. 1.509(a)–4(i)(2)(iii), an accountability test, is met if:

    1. the supporting organization is a charitable trust under state law;

    2. each specified publicly supported organization is a named beneficiary under such charitable trust’s governing instrument; and

    3. each beneficiary has the power under state law to enforce the trust and compel an accounting. This power is assumed if the beneficiaries each receive fixed shares of the trust income, but in all other cases, the supporting organization must show authority under state law that the supported organizations have such powers.

  2. The "named beneficiary" requirement has caused controversy. The Tax Court considered whether a trust met the named beneficiary requirement of the responsiveness test. In Nellie Callahan Scholarship Fund v. Commissioner, 73 T.C. 626 (1980), nonacquiescence, 1980–2 C.B. 2, the governing instrument required that income from the trust be used to "finance or aid in financing the education of pupil, or pupils selected from the Winterset Community High School in Winterset, Iowa." Because the Winterset Community High School was not the named beneficiary, but was simply descriptive of the class of students eligible for aid, the Service ruled that the trust did not satisfy the responsiveness test. The Tax Court held, however, that the named beneficiary requirement was satisfied because it considered the municipality, of which the Winterset Community High School was an integral part, to be the beneficiary. A similar result was reached in the case of Roe Foundation Charitable Trust v. Commissioner, T.C. Memo 1989–566 (1989).

7.26.5.2.3.1.3  (03-30-1999)
Historic Relationship

  1. If before November 20, 1970, an organization was supporting or benefiting an organization described in IRC 509(a)(1) or (2), additional facts and circumstances, such as a historic and continuing relationship, may be taken into account to determine if the responsiveness test is met. Reg. 1.509(a)–4(i)(1)(ii).

7.26.5.2.4  (03-30-1999)
Integral Part Test

  1. There are two ways to meet the integral part test. One, discussed in paragraph (1) of IRM 7.26.5.2.4.1, is based on the nature of the activities the supporting organization engages in to support the supported organization. The alternate, the more complex and frequently utilized test, discussed in paragraph (1) of IRM 7.26.5.2.4.2, is based on the financial support the supporting organization provides the supported organization. Transitional rules for organizations created before November 20, 1970, are discussed in Reg. 1.509(a)–(4)(i)(4). Several examples of the integral part test are provided in Reg. 1.509(a)–4(i)(5).

7.26.5.2.4.1  (03-30-1999)
Integral Part–Functional Support Test

  1. The first integral part test is met if the supporting organization engages in activities to perform the functions of, or carry out the purposes of one or more supported organizations that the supported organization would otherwise have to perform but for the supporting organization. Reg. 1.509(a)–4(i)(3)(ii). This test only applies in situations where the supporting organization engages in activities (for example, performing publishing or printing functions for a college) as opposed to simply making grants. In other words, the test is met where, if the supporting organization discontinued the activities, they would be assumed by the supported organization.

  2. A supporting organization may carry on an activity on behalf of a supported organization by making grants to members of a charitable class benefited by the supported organization where the activities of the supported organization, a community trust described in Reg. 1.170A–9(e)(11), include making grants. This position was taken by Chief Counsel in G.C.M. 38417, dated June 20, 1980.

  3. The Service does not agree with a Court of Claims decision holding that a supporting organization could carry out activities on behalf of an IRC 509(a)(2) organization and a private foundation. The Service contended that the private foundation status of one or two supported organizations prevented the supporting organization from meeting the requirement of Reg. 1.509(a)–4(i)(3)(ii). The court, in reasoning with which the Service does not agree, concluded that an organization is not limited to supporting exclusively public charities. Change–All Souls Housing Corporation v. United States, 671 F.2d 463 (Ct. Cl. 1982), A.O.D. (March 22, 1984).

7.26.5.2.4.2  (03-30-1999)
Alternative Integral Part–Financial Support Test

  1. The alternative integral part test is met if the amount of income the supporting organization provides to the supported organization is sufficient to ensure that the supported organization is attentive to the operations of the supporting organization, and the income provided is substantially all the income of the supporting organization as well as a substantial part of the supported organization’s total support. Reg. 1.509(a)–4(i)(3)(iii).

  2. Thus, the integral part test is comprised of 3 subtests, described in the following paragraphs.

7.26.5.2.4.2.1  (03-30-1999)
Subtest 1— Substantially All of Its Income

  1. The supporting organization must make payments of substantially all of its income to or for the use of one or more publicly supported organizations. Reg. 1.509(a)–4(i)(3)(i).

  2. Rev. Rul. 76–208, 1976–1 C.B. 161, defines "substantially all" for purpose of the integral part test as at least 85 percent and prohibits counting accumulated income even if it must be paid to the supported organization. Rev. Rul. 76–208 relied on Reg. 53.4942(b)–1(c) for the definition of "substantially all" as 85 percent. This does not mean that the "substantially all" requirement cannot be met where there are relatively minor payout delays. For example, in a case where income was accumulated for a limited period for a specific purpose at the request of the supported organization, Chief Counsel concluded that the trust was not prevented from meeting the "substantially all" test. GCM 36523, dated December 18, 1975.

  3. Long term capital gains may be excluded from "income" for purposes of the substantially all test, but short term gains must be included. Authority for this position is based on Reg. 53.4942(a)–2(d)(2)(ii) which excludes long term capital gain but not short term gain in the computation of "adjusted net income." A number of rules relating to the taxation of long term and short term capital gains were changed as a result of the Taxpayer Relief Act of 1997.

  4. The substantially all subtest is a prerequisite to all parts of the integral part test. See GCM 36523.

7.26.5.2.4.2.2  (03-30-1999)
Subtest 2— The Attentiveness Test

  1. Except as provided in Reg. 1.509(a)–1(i)(3)(iii)(b), the amount of support received by a publicly supported organization must represent a sufficient part of the organization’s total support so as to ensure such attentiveness. Reg. 1.509(a)–4(i)(3)(iii)(a).

  2. The regulations do not specify what percentage of a supported organization’s support must be received from a supporting organization to meet the integral part test. The requirement is that facts and circumstances show that the support is "sufficient" to ensure that the supported organization is attentive to the operations of the supporting organization. Reg. 1.509(a)–4(i)(3)(iii). However, in one case Chief Counsel opined that less than 10 percent would be unlikely by itself to ensure attentiveness. G.C.M. 36379, dated August 15, 1975.

  3. In one case, Chief Counsel determined that an organization that provided only two to six percent of the support of each of four supported organizations met the integral part test. Although the percentage would normally not be enough to conclude there would be attentiveness, the substantial size of individual grants, which ranged from $200,000 to $600,000, a history of over 20 years of grant making, and the fact that various annual financial and tax reports were provided, to the supported organizations, established that the supported organizations would exercise requisite attentiveness. GCM 36379, dated August 15, 1975.

  4. If payments are to support a particular department or school of a university, hospital or church, Reg. 1.509(a)–4(i)(3)(iii)(a) provides that the total support of the department or school shall be substituted for the total support of the benefited organization.

  5. Reg. 1.509(a)–4(i)(3)(iii)(b) provides that a supporting organization can meet the attentiveness requirement, even if it does not provide a sufficient amount of the beneficiary’s total support, if the support is earmarked for a particular program or activity of the public charity. In such a situation, the test is whether the publicly supported organization will be attentive to the operations of the supporting organization to avoid interruption of the particular earmarked function or activity. Important factors in cases in which this provision has applied are:

    1. the supporting organization pays over all its income;

    2. the supporting organization provides all the funds; and

    3. the expenses of conducting the program are substantial. see examples of this discussion in Reg. 1.509(a)-4(i)(3)(iii)(c).

  6. GCM 36523, supra, provides an example of "attentiveness" achieved under the "all pertinent factors" test. The facts indicate that the organization, a trust, was making grants to a zoo, a part of the city government, for the purpose of aiding the zoo in animal acquisition and housing. The GCM held that there was actual attentiveness as well as a number of factors suggesting qualification under Reg. 1.509(a)–4(i)(iii)(d). One important factor was that the zoo was historically a component part of the city government, and that the trust was only one of two nongovernmental organizations to support the zoo.

  7. Where a supported organization is not dependent upon the supporting organization for a sufficient amount of support, the integral part test is not met merely because the supported organization has enforceable rights under state law. Reg. 1.509(a)–4(a)(e)(3)(iii)(e).

  8. Even if a supporting organization has not provided its supported organization with enough support for the current tax year to ensure attentiveness, it will satisfy the integral part test under Reg. 1.509(a)–4(i)(3)(iii), if it met the test for any five-year period, and has had a "historic and continuing" relationship of support with the supporting organization between the end of the five-year period and the taxable year in question. Reg. 1.509(a)–4(i)(1)(iii).

7.26.5.2.4.2.3  (03-30-1999)
Subtest Three – Substantial Amount

  1. A substantial amount of the total support of the supporting organization must go to those publicly supported organizations which meet the attentiveness requirement. GCM 36326, supra, found that a supporting organization met the "substantial amount requirement" when the supporting organization paid all of its income equally to three supported charities and any one of the supported charities met the attentiveness requirement. Thus, one third of the total support paid to an attentive charity would seem to establish an acceptable level for purposes of this requirement.

  2. The guidelines discussed in the GCMs above, while helpful in resolving these issues, cannot be relied on as precedential guidance.

7.26.5.3  (03-30-1999)
Organizational Requirements

  1. A supporting organization must be organized exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified supported public charities. Reg. 1.509(a)–4(b)(1). For these purposes, government entities are eligible public charities. IRC 170(b)(1)(A)(v). See also G.C.M. 36523, supra, and Rev. Rul. 81–217, 1981–2 C.B. 217, and Rev. Rul. 75–436, 1975–2 C.B. 215.

  2. Under Reg. 1.509(a)–4(c)(1), a supporting organization’s governing instrument must meet the following requirements:

    1. It must limit the organization’s purposes to one or more purposes set forth in IRC 509(a)(3)(A);

    2. It must not expressly empower the organization to engage in activities that are not in furtherance of the authorized purposes;

    3. It must state the specified publicly supported organizations on whose behalf the organization is to be operated; and

    4. It cannot expressly empower the organization to support or benefit any organization other than the specified publicly supported organizations.

  3. The limiting language must be contained in the supporting organization’s creating instrument. Reg. 1.509(a)–4(c)(1). In one case, an organization did not meet the organizational test because the Tax Court concluded, due to lack of proof otherwise, that two of the three possible beneficiaries designated in the trust’s creating instrument were not IRC 509(a)(1) or (2) organizations. Thus the court found that the trust instrument expressly empowered the trust to benefit organizations other than "specified" publicly supported organizations. Trust Under the Will of Bella Mabury v. Commissioner, 80 T.C. 718 (1983).

7.26.5.3.1  (03-30-1999)
Purposes

  1. A supporting organization’s creating instrument must limit its purposes to supporting one or more supported organizations, and may not contain any provisions inconsistent with these purposes. Reg. 1.509(a)–4(c)(1).

  2. Stated purposes may be as broad as those in IRC 509(a)(3)(A). For example, "This organization is formed for the benefit of X University." Stated purposes may be more specific than those in IRC 509(a)(3)(A). For example, "This organization is formed to perform the publishing functions of X University." Reg. 1.509(a)–4(c)(2).

  3. If a supporting organization is "operated, supervised, or controlled by" or "supervised or controlled in connection with" its supported organization, its purposes may be similar to, but no broader than, the purposes set forth in the articles of the supported organization. If, however, the supported organization is exempt under IRC 501(c)(4), (5), or (6), the supporting organization’s purposes may require it to carry on charitable, etc., activities within the meaning of IRC 501(c)(3). Reg. 1.509(a)–4(c)(2). See IRM 7.26.5.7 for a discussion of IRC 501(c) (4), (5), or (6) organizations.

  4. The organizational test is not met if an organization’s creating instrument allows it to operate, support, or benefit any organization which is not an IRC 509(a)(1) or (2) organization specified in its creating instrument. The fact that the organization’s actual operations have supported or benefitted other organization’s which are IRC 509(a)(1) or (2) organizations specified in its creating instrument will does not matter. Reg. 1.509(a)–4(c)(3). The Service has ruled that an organization does not meet the organizational test if its articles provide it must pay its income to specified IRC 509(a)(1) and (2) organizations that appoint a majority of its directors until a stated amount has been paid, at which time the organization will dissolve and distribute its assets to such IRC 509(a)(1) or (2) organizations as are selected by a contributor named in the organization’s creating instrument. Rev. Rul. 79–197, 1979–2 C.B. 204. See also, Trust Under the Will of Bella Mabury v. Commissioner, 80 T.C. 718 (1983).

7.26.5.4  (03-30-1999)
Designation of Supported Organizations

  1. IRC 509(a)(3)(A) requires a supporting organization to support one or more "specified" publicly supported organizations. How a supporting organization must designate a supported organization depends on its relationship with the supported organization. Reg. 1.509(a)–4(d)(1). A special rule discussed in IRM 7.26.5.4.3 obviates the designation requirement if a historical relationship exists.

7.26.5.4.1  (03-30-1999)
Designation Requirements for Organizations that are "Operated, Supervised Or Controlled By" or "Supervised or Controlled In Connection With" a Publicly Supported Organization

  1. If the supporting organization is "operated, supervised or controlled by" or "supervised or controlled in connection with" its supported organizations, it may specify the supported organizations either by name or by class or purpose. Reg. 1.509–4(d)(2). Examples of the application of this rule are:

    1. an organization described in IRC 501(c)(3) that operates for the benefit of institutions of higher learning in a particular state. The institutions, all of which are described in IRC 509(a)(1), control the organization, though its articles do not name each institution. Example (1) of Reg. 1.509(a)–4(d)(2)(iii) provides that this organization satisfies the organizational test. Further, it provides that the organization’s articles would meet the organizational test if its articles provided for giving scholarships to enable students to attend institutions of higher learning, but only in the designated state.

    2. an organization described in IRC 501(c)(3) that was organized and is operated by representatives of a church to operate a home for the aged. The organization is controlled by the church, an IRC 509(a)(1) organization. Because the care of the sick and the aged are long-standing temporal functions and purposes of organized religion, the organization, by operating the home for the aged, is operating to support or benefit the church in carrying out one of its temporal functions. Example (2) of Reg. 1.509(a)–4(d)(2)(iii) provides that the organization’s articles satisfy the organizational test if they require it to care for the aged, even if they do not specify the church by name, because by operating the home for the aged the organization is supporting one of the church’s purposes.

    3. a community trust described in Reg. 1.170A–9(e)(11) that was created by a "community chest" described in IRC 170(b)(1)(A)(vi) and IRC 509(a)(1) to hold permanently endowed charitable funds and distribute the income. The trust’s governing instrument requires it to distribute its income to support publicly supported IRC 501(c)(3) organizations located in the area served by the charitable trust. The trust is "operated, supervised, or controlled" by the publicly supported community chest because a majority of its trustees are appointed by the community chest’s governing body. Rev. Rul 81–43, 1981–1 C.B. 350, held that the organization satisfies the organizational test, even though the publicly supported organizations are not specified by name, because the controlling community chest is specified by class or purpose in a manner that satisfies the conditions of Reg. 1.509(a)–4(d)(2).

    4. a trust described in IRC 501(c)(3) created to grant scholarships to graduates of a high school of a particular city. Its trust instrument provides that its sole trustee is the city council, and its funds are managed by the city treasurer or by a commission created by the city. The public school system in the city is not separately incorporated, but is an integral part of the city government in furtherance of a stated city purpose to provide for the education of its citizens. In Rev. Rul. 75–436, 1975–2 C.B. 217, the Service concluded that the trust satisfied the organizational test because it was "operated, supervised, or controlled by" the city, and it benefited individual members of the charitable class benefited by the city through its school system.

  2. The organizational test was not met where IRC 509(a)(1) or (2) organizations (the school systems in the county) had the power to select scholarship recipients, but where there was an independent trustee with sole responsibility for administration and operation of the trust. In Rev. Rul. 75–437, 1975–2 C.B. 218, the trust was created to provide college scholarships to graduates of high schools in a particular county. However, because the independent trustee prevented it from being "operating, supervised, or controlled by" or "supervised or controlled in connection with" the publicly supported schools and governmental units, the trust’s governing instrument did not sufficiently specify the charitable purposes.

  3. The organizational test was not met where the organizational document provides that the supporting organization will pay out its future income for specifically named charities until a sum certain has been paid out, and, thereafter, the organization will terminate by paying out its assets to public charities selected by a contributor to the organization. Revenue Ruling 79–197, 1979–1 C.B. 204, holds that the organization fails because it is not supporting organizations designated by name, class, or purpose after it has paid out the specific amount.

  4. If organizational requirements are otherwise met, Reg. 1.509(a)–4(d)(3) provides that the creating instrument may permit a supporting organization to:

    1. substitute one or more supported organizations in a designated class for another organization in the same or a different designated class;

    2. operate for the benefit of new or additional supported organizations of the same or a different class designated in the articles; or

    3. vary the amount of its support among different supported organizations within the class or classes of organizations designated in the creating instrument.

  5. Reg. 1.509(a)–4(d)(3) provides an example of the ability to substitute beneficiaries by describing an organization that operates for the benefit of private colleges in a particular state. The example provides that if the organization is controlled by the designated colleges, which are all IRC 509(a)(1) organizations, its articles will meet the organizational test even if they permit the organization to operate for the benefit of any new colleges created in the state in addition to the existing colleges or in lieu of one that has ceased to operate, or if they permit the organization to vary its support among the colleges in any particular year.

7.26.5.4.2  (03-30-1999)
Designation Requirement for Organizations "Operated In Connection With" a Publicly Supported Organization

  1. If the supporting organization is operated in connection with its supported organizations, its creating instrument must specify the supported organization by name. Reg. 1.509(a)–4(d)(4)(i).

  2. The position of the Service has been that the creating instrument must actually state that the organization is organized exclusively for the benefit of, to perform the functions of or to carry out the purposes of the specified supported organization. In the decision in Warren M. Goodspeed Scholarship Fund, 70 T.C. 515 (1970), the Tax Court held that a creating instrument requiring that the net income be used "for the purpose of paying for . . . the education . . . at Yale College of such graduates of Duxbury, Massachusetts, High School or bona fide residents of Duxbury" met the organizational test. See also Nellie Callahan Scholarship Fund v. Commissioner, 73 T.C. 626 (1980).

7.26.5.4.2.1  (03-30-1999)
Specifically Designated Supported Organizations

  1. If the supporting organization’s creating instrument specifically designates the organizations it supports, it will not fail the organizational test if its creating instrument permits a publicly supported organization designated by class or purpose, rather than by name, to be substituted for the publicly supported organization or organizations designated in the articles, so long as the substitution is conditioned upon the occurrence of an event beyond the control of the supporting organization, such as loss of exemption, substantial failure or abandonment of operations, or dissolution of the supported organizations. Regs. 1.509(a)–4(d)(4)(i)(a).

    1. Mere exercise of judgement by a trustee that payments to a specified organization are no longer necessary is not "an event beyond the organization’s control."

    2. In Quarrie Charitable Fund v. Commissioner, 603 F.2d 1274 (7th. Cir. 1979), affirming 70 T.C. 182 (1978), the courts concluded that the nature of events specified in the articles (the specified uses become "unnecessary, undesirable, impracticable, impossible, or nor longer adapted to the needs of public," ) combined with the fact that the trustee’s judgment determined if the events occurred, brought the contingencies within the trustee’s control.

  2. If the supporting organization’s creating instrument specifically designates the organizations it supports, it will not fail the organizational test if its creating instrument permits the supporting organization to support an organization that is not described under IRC 509(a)(1) or (2), so long as the supporting organization is currently operating for the benefit of an IRC 509(a)(1) or (2) organization and the possibility is a remote contingency. Reg. 1–509(a)–4(d)(4)(i)(b).

    1. If the contingency ever materialized, however, the supporting organization would no longer qualify under IRC 501(a)(3) if it operated for a benefit of an organization not described in IRC 509(a)(1) or (2). Reg. 1.509(a)–4(d)(4)(i)(b).

    2. An example of this provision is contained in 1.509(a)–4(d)(4)(iii), which describes a charitable trust required to pay all its income to a designated university medical school, an IRC 509(a)(1) organization. The trust instrument designated a second IRC 509(a)(1) medical school to receive the income in the event the first organization was unable or unwilling to apply the funds for the specified purposes, but also authorized the trustees to choose a similar organization in the event the second designated organization is unwilling or unable to apply the funds for the specified purposes. In the years the trust operated, it paid all its income to the first designated organization. Accordingly, though it is possible that the trustees could choose a "similar organization" that is not publicly supported, the possibility is a remote contingency and does not preclude the trust from being considered operated for the benefit of a specified publicly supported organization.

  3. If the supporting organization’s creating instrument specifically designates the organizations it supports, it will not fail the organizational test if its creating instrument provides that the supporting organization can vary the amount of its support between designated organizations, so long as it meets the requirements of the integral part test set forth with respect to at least one supporting organization. Reg. 1.509–4(d)(4)(i)(c).

7.26.5.4.3  (03-30-1999)
Historic Relationship

  1. Reg. 1.509(a)–4(d)(2)(iv) provides that a supporting organization will be deemed to meet the organizational requirements even if its articles do not designate each of the "specified" organizations by name if:

    1. the supporting organization has had a historic and continuing relationship with its supported organizations; and

    2. the relationship has resulted in a substantial identity of interest between it and the supported organizations.

  2. Chief Counsel has noted that this provision should be applied only in exceptional cases where the relationship between the supporting and supported organizations has continued for many years and is well known to the public. In concluding that a charitable trust that provided scholarships to graduates of high schools in a particular county did not fit within the exception of Reg. 1.509(a)–4(d)(2)(iv), Counsel, in GCM 36050, dated October 9, 1984, stated that the provision should apply only where the relationship between the organizations is so well known that there is no need to name the publicly supported organization or organizations.

  3. In Cockerline Memorial Fund v. Commissioner, 86 T.C. 53 (1986), the Tax Court found that a trust to furnish scholarships for residents of Oregon who attend colleges and universities in Oregon, with preference to be given to students attending Northwest Christian College, had maintained a historic and continuing relationship with the colleges and universities in Oregon that resulted in a substantial identity of interests between it and the supported organizations, which were all IRC 509(a)(1) organizations. Facts the court considered significant in making this determination were:

    1. Since its inception the trust, in accordance with the creator’s will, had distributed all its funds directly to colleges and universities in Oregon;

    2. Funds were returned if the student on whose behalf they were provided failed to enroll full-time or if a 2.50 grade point average was not maintained;

    3. The trust established a scholarship committee to recommend worthy students attending colleges or universities in Oregon;

    4. The trust and Northwest Christian College, one member of the class of benefitted publicly supported organizations, maintained a particularly close working relationship; and

    5. The trust and the beneficiaries had a common ultimate goal in educating students in Oregon.

7.26.5.5  (03-30-1999)
Operational Requirements

  1. A supporting organization must be operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified supported organizations (Reg. 1.509(a)–4(b)(1)). The focus of the operational test is on permissible beneficiaries and permissible activities.

  2. "Exclusively" means that all the supporting organization’s activities must be to support or benefit the organizations it is organized to support. Reg. 1.509(a)–4(e)(1).

  3. If a supporting organization provides any support or benefit to an organization which is not one of its supported organizations, it will have failed the operational test.

7.26.5.5.1  (03-30-1999)
Permissible Activities

  1. Supporting organizations usually disburse income to supported organizations. Support, however, can take other forms and often does. A supporting organization may use its income to carry on an independent activities or program that supports or benefits the supported organization. In fact, one basis for meeting the integral part test for organizations "operated in connection with" a supported organization is that they carry on activities or functions that the supported organization would otherwise have to perform. A supporting organization may also engage in fund raising activities such as solicitations, fund raising dinners, and unrelated trade or business, among other activities to raise funds. Reg. 1.509(a)–4(e)(2).

  2. Support provided by a supporting organization to its supported organization may be indirect. For example, it may make payments to, or provide facilities for, individual members of the charitable class benefited by its supported organizations. It could also make payments through an unrelated organization to members of a charitable class benefitted by the organizations it supports, but such payments must constitute grants to individuals rather than a grants to an organization. (Reg. 53.4945–4(a)(4) defines "grant to an individual" ). Similarly, it could support or benefit an organization, other than a private foundation, described in either IRC 511(a)(2)(B) or IRC 501(c)(3) and operated, supervised, or controlled directly by or in connection with the organization it supports. In other words, an organization can be a supporting organization by supporting other supporting organizations. Reg. 1.509(a)–4(e)(1). See also issue 2, G.C.M. 39508, May 27, 1986.

7.26.5.6  (03-30-1999)
Control by Disqualified Persons

  1. A supporting organization cannot be directly or indirectly controlled by a disqualified person. For this purpose, disqualified person means anyone who is a disqualified person under IRC 4946 except IRC 509(a)(1) or (2) organizations and a manager of the supporting organization who is not a disqualified person for another reason.

  2. If a person is a disqualified person with respect to a supporting organization, he or she will continue to be a disqualified person even if a supported organization appoints or elects that person to be a director, trustee, or officer of the supporting organization. Reg. 1.509(a)–4(j)(1).

7.26.5.6.1  (03-30-1999)
Direct Control

  1. To determine whether a supporting organization is controlled by disqualified persons, it is necessary to determine whether disqualified persons may, by aggregating their votes or positions of authority, require the supporting organization to engage, or decline to engage, in an act that significantly affects its operations.

  2. Unless the supporting organization shows sufficient proof of actual control by non-disqualified persons as discussed in IRM 7.26.5.6.3, below, an organization will be considered controlled by disqualified persons if:

    1. disqualified persons have 50 percent or more of the voting power of the supporting organization’s governing board or if by aggregating their votes disqualified persons may significantly affect a supporting organization’s actions, or if one or more such persons can exercise veto power;

    2. a substantial contributor or the spouse of one has the right to annually designate the recipients of the income attributable to the substantial contributor’s contribution to the supporting organization.

7.26.5.6.2  (03-30-1999)
Indirect Control

  1. Even if an organization appears not to be controlled by disqualified persons, all pertinent facts and circumstances will be taken into consideration in determining whether a disqualified person does in fact indirectly control an organization. Pertinent facts include:

    1. the nature, diversity, and income yield of an organization’s holdings;

    2. the length of time particular stocks, securities, or other assets are retained; and

    3. the manner of exercising voting rights with respect to stocks in which members of the organization’s governing body also have some interest.

  2. For example, if two of five directors are disqualified persons, that fact alone will not disqualify the organization from IRC 509(a)(3) status. But, it may not be conclusive either, as other factors, such as the presence of veto power over board decisions, as well as other facts and circumstances listed in (1), above, may indicate that a disqualified person indirectly controls the organization. Reg. 1.509(a)–4(j)(1).

  3. In Rev. Rul. 80–207, 1980–2 C.B. 193, two employees of a corporation, which was a disqualified person, were considered as providing control (of a supporting organization) to a disqualified person who held over 35 percent of the voting stock of such corporation. The disqualified person through the corporation was deemed to be in a position to influence the votes of the two employees.

7.26.5.6.3  (03-30-1999)
Evidence of "Actual" Control

  1. An organization is always allowed to establish that disqualified persons do not, in fact, directly or indirectly control it.

  2. For example, in the case of religious organization operated in connection with a church, the fact that the majority of its body is composed of lay persons who are substantial contributors to it will not disqualify it as a supporting organization if a representative of the church, such as a bishop or other official, has control over the policies and decisions. Reg. 1.509(a)–4(j)(2).

7.26.5.7  (03-30-1999)
Other Issues— Supporting Other Than IRC 501(c)(3) Organizations

  1. Under certain circumstances a supporting organization may support exempt organizations other than those described under IRC 501(c)(3). The supported organization must be described in IRC 501(c)(4), (5), or (6) and meet the same public support requirements that IRC 509(a)(2) provides for IRC 501(c)(3) organizations. Reg. 1.509–4(k). This allows separately incorporated funds, and trusts set up to support charitable programs (as opposed to lobbying programs for example) of organizations such as social welfare organizations, labor unions, and business leagues to avoid private foundation status.

7.26.5.7.1  (03-30-1999)
Non-exempt Charitable Trusts and IRC 509(a)(3)

  1. Pursuant to Rev. Proc. 72–50, 1972–2 C.B. 830, as superseded in minor part by Rev. Proc. 76–34, 1976–2 C.B. 657, a charitable trust classified as an IRC 4947(a)(1) trust may request a determination from the Internal Revenue Service as to the status of the trust under IRC 509(a)(3) even though the trust has neither obtained nor seeks exemption under IRC 501(c)(3). Exemption per se may not be relevant since IRC 4947(a)(1) trusts are exempted from the notice requirements of IRC 508(a). See Reg. 1.508-1(b)(7)(iv). A determination letter issued by the Service that the requesting IRC 4947(a)(1) trust qualifies under IRC 509(a)(3) will allow such organization to avoid retroactively the imposition of the private foundation rules. See section 5.01 of Rev. Proc. 72–50. However, the delinquent trust could still be subject to late filing penalties and interest charges.

7.26.5.8  (03-30-1999)
Digests of Published Rulings

  1. Rev. Proc. 72–50, 1972–2 C.B. 830, provides procedures to be used by nonexempt charitable trusts described in IRC 4947(a)(1) to obtain determinations of their foundation status under IRC 509(a)(3).

  2. Support or Benefit of a Foreign Organization. The fact that a supported organization is a foreign nongovernment organization, rather than a domestic organization, does not prevent it from being an IRC 509(a)(1) or (2) organization for purposes of IRC 509(a)(3). Rev. Rul. 74–229, 1974–1 C.B. 142. See also Rev. Proc. 92–94, 1992–2 C.B. 490.

  3. Operated, Supervised or Controlled By; Scholarships. An organization is described in IRC 509(a)(3) where its activities consist of providing scholarships to graduates of a high school of a city, its sole trustee is the city council of that city and its funds are managed by the city treasurer of that city. Rev. Rul. 75–436, 1975–2 C.B. 215.

  4. Trust Granting Scholarships; Independent Trustee except for Control of the Selection Committee by an IRC 509(a)(1) or (2) Organization. A trust cannot be described in IRC 509(a)(3) where IRC 509(a)(1) or (2) organizations have the power to determine the scholarship recipients and where an independent trustee controls all other aspects of the administration of the trust. Because of the authority of the independent trustee, the organization has not established any of the following relationships: "operated, supervised or controlled by," "supervised or controlled in connection with" or "operated in connection with." Rev. Rul. 75–437, 1975–2 C.B. 218.

  5. Operated in Connection With; Integral Part Test. Reports of the type described in Regs. 1.509(a)–4(i)(3)(iii)(d), submitted by the trustee to each of the beneficiaries of a charitable trust, will not alone satisfy the attentiveness requirements of the "integral part test." Rev. Rul. 76–32, 1976–1 C.B. 160.

  6. Operated in Connection With; Integral Part Test. The "substantially all" requirement of the "integral part test" is not met where 75 percent of the trust income is distributed annually to a church and the remaining 25 percent is to be accumulated until the original corpus doubles, at which time the entire annual income is to be distributed to the church. Rev. Rul. 76–208, 1976–1 C.B. 161.

  7. Operated, Supervised or Controlled By; Scholarships. An exempt charitable trust qualifies as an IRC 509(a)(3) organization where its sole purpose is to grant scholarships to students graduating from both public and private high schools in a city and whose trustees consist of two officers of a local civic league exempt under IRC 501(c)(4) and five trustees elected by the membership of the local civic league. Rev. Rul. 76–401, 1076–42 I.R.B. 9.

  8. Supporting Designated Organizations— Organizational Test: An organization does not pass the organizational test where its creating instrument provides that after certain amounts are paid to specified IRC 509(a)(1) and (2) organizations, it will dissolve and distribute assets to IRC 509(a)(1) and (2) organizations which a contributor, who is named in the creating instrument, selects. Rev. Rul. 79–197, 1979–2 C.B. 204.

  9. Control by Disqualified Persons: An organization is controlled by disqualified persons where out of four directors one is a disqualified person and two are employees of a corporation in which the disqualified person owns over 35 percent of the stock. Rev. Rul. 80–207, 1980–2 C.B. 193.

  10. Control by Disqualified Persons: A trust described in IRC 170(b)(D)(iii) is controlled by disqualified persons where each individual donor to the trust has the right to designate charitable recipients of the income and corpus of the trust attributable to the donor’s contribution. Rev. Rul. 80–305, 1980–2 C.B. 71.

  11. Designated Beneficiaries—Organizational Test: A community trust described in Reg. 170(A)–9(e)(ii) to hold permanently endowed charitable funds and to distribute income to support local charitable organizations that are public charities is a supporting organization under IRC 509(a)(3) and is not a private foundation, even if the publicly supported charities are not specified by name. Rev. Rul. 81–43, 1981–1 C.B. 350.

Exhibit 7.26.5-1  (03-30-1999)
Flow Chart for Support Organizations

This image is too large to be displayed in the current screen. Please click the link to view the image.

More Internal Revenue Manual