January 2007

Note: The following discussion is provided for informational purposes only and is not intended to serve as legal or tax advice. For specific information about supporting organizations and the provisions of the Pension Protection Act of 2006 affecting them, consult your attorney or tax advisor.

What Is a Supporting Organization?

A supporting organization is a specific type of public charity. All 501(c)(3) organizations are considered private foundations unless they qualify as public charities. It can be to a nonprofit's advantage to be a public charity; private foundations are more closely scrutinized, regulated, and taxed than public charities. The thinking that underpins this regulatory framework is that the donating public will "discipline" public charities far more efficiently than government oversight can. (For more information on the differences between public charities and private foundations, see "Just What Are Public Charities and Private Foundations, Anyway?")

To qualify as a public charity, an organization must pass what is called the "public support test." Whereas most public charities qualify for this designation by receiving direct support from the public, supporting organizations qualify as public charities because they support either another public charity or the charitable activities of a 501(c)(4), (5), or (6) organization. (The organization that receives the support is referred to as a supported organization.)

There are three types of supporting organizations:

• Type I–a supporting organization that is under direct control of the supported organization
• Type II–a supporting organization that is under common control with the supported organization (also known as "brother/sister" organizations)
• Type III–a supporting organization that is not necessarily related to the supported organization(s)

How Do You Know if a Charity Is a Supporting Organization?

If you subscribe to GuideStar Charity Check, look at the "reason for non-private foundation status" line. If the reason reads, "Section 509(a)(3) organization," the charity is a supporting organization. You will need to contact the charity or the IRS to determine if the nonprofit is a Type I, Type II, or Type III supporting organization.

If you are not a Charity Check subscriber, you will need to contact the organization or the IRS to determine if it is a supporting organization. The charity's letter of determination, which is a public document, will note that it is not a private foundation because it is a section 509(a)(3) organization.

Supporting Organizations and the Pension Protection Act of 2006

The Pension Protection Act of 2006 mandates that every supporting organization must indicate on its Form 990 which type of supporting organization it is and which organization (or organizations) it supports. The organization must also provide certification regarding controlling individuals.

The act also prohibits any supporting organization from providing grants, loans, or compensation to substantial contributors, their families, or other entities significantly controlled by them.

Private foundations may not make qualifying distributions to supporting organizations that are directly or indirectly controlled by significant persons at the private foundation.

Supporting organizations may not receive contributions from a person who directly or indirectly controls a supported organization.

An IRA rollover to a supporting organization will be considered income for the IRA holder. (For more information on charitable contributions made from IRAs, see "The 2006 Giving Season and the Pension Protection Act of 2006.")

The law contains several provisions specific to Type III supporting organizations:

• A minimum annual payout will be required of every Type III supporting organization unless it is "functionally integrated" with the supported organization. The Treasury Department will be issuing regulations imposing the payout and defining "functionally integrated."
• Every Type III supporting organization will be required to provide information annually to its supported organization(s). The Treasury Department will be defining what that information will be.
• Type III supporting organizations are no longer allowed to support nonprofits organized outside the United States.

Procedures for Requesting Reclassification

Charities currently classified as supporting organizations may wish to request reclassification from section 509(a)(3) organizations to section 509(a)(1) or (2) organizations, which are eligible to receive qualifying distributions and IRA payouts that are not counted as income for the IRA holder. The procedures for requesting reclassification are outlined in IRS Announcement 2006-93.

More Information

• The IRS has issued "Interim Guidance Regarding Supporting Organizations and Donor Advised Funds".
• Pages 40-44 of IRS Publication 557, discuss supporting organizations and the regulations governing them before August 17, 2006.
• The IRS Web site links to the text of the Pension Protection Act and to summaries prepared by the Joint Committee on Taxation and the House Committee on Ways and Means. Scroll to the bottom of to find the links.
• The Council on Foundations has posted resources on the Pension Protection Act of 2006, including information on supporting organizations.
• A number of firms that provide services to nonprofits have posted summaries of the provisions affecting charitable organizations. Try entering "pension protection act 2006 supporting organizations" into an Internet search engine to find them.
• For organizations that provide free or discounted legal or accounting services to nonprofits, see "Nonprofits That Help Nonprofits" and "Pro Bono and More: On-line Legal Resources for Nonprofits."

Chuck McLean, Dan Moore, and Suzanne E. Coffman, January 2007
© 2007, Philanthropic Research, Inc. (GuideStar)

Chas. E. McLean is GuideStar's vice president for research and data quality. Dan Moore is GuideStar's vice president for public affairs. Suz. E. Coffman is GuideStar's director of communications and editor of the Newsletter.