Most 501(c)(3) public charities are characterized as such because they receive most of their funding from donations from the general public, government grants, or from other 501(c)(3) public charities. However, some public charities are characterized as such because they support other public charities. These organizations are appropriately called supporting organizations.
Unlike other public charities who comply with either Section 509(a)(1) or 509(a)(2) of the Internal Revenue Code in order to receive their public charity status, supporting organizations are governed by Section 509(a)(3). This provision has proven itself to be complex and difficult in both interpretation and application. Section 509(a)(3) allows for determination as a 501(c)(3) public charity if the organization can meet an organization test, an operation test, a control test, and a relationship test.
We will discuss the organizational test, the operational test, and the control test in this blog post. The next blog post will discuss the relationship test and the different types of supporting organizations one can form.
The Organizational Test
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 public charities that have obtained their public charity status under Section 509(a)(1) and (a)(2). This means that the organization’s articles of incorporation must specify which public charities are being supported. If the organization will be a Type I or Type II supporting organization under the relationship test, then the supported organization can be specified by class or purpose. If the organization will be a type III supporting organization under the relationship test, then the name of the supported organization must be specified. Finally, the articles of incorporation must not expressly empower the organization to engage in activities not in furtherance of these purposes or to support any organization not specified in the articles of incorporation.
A supporting organization must engage solely in activities that support or benefit its supported organization(s). While this sounds like a fairly straightforward requirement, the IRS has also allowed supporting organizations to make the following distributions or provision of services or facilities so long as such distributions or provisions benefit the supported organization in some way.
- To individual members of a charitable class benefited by the supported class
- To another supporting organization also supporting the supported organization
- A state college or university described in Internal Revenue Code section 511(a)(2)(B) (colleges or universities which are government instrumentalities)
Disqualified persons may not control a supporting organization, whether directly or indirectly. The definition of disqualified person is complex and can be found here. Foundation managers (who do usually fall under the definition of disqualified persons) are not disqualified persons for purposes of supporting organization if they are only disqualified as a result of being a foundation manager.
Furthermore, for purposes of supporting organizations, “control” means the practical ability to require the organization to perform any act which significantly affects its operations, or to prevent any such act.
In this blog post we have discussed the basic premise of supporting organizations and have discussed the first three tests to determine whether an organization is a supporting organization: the organizational test, the operational test, and the control test. In the next blog post, we will discuss the final test: the “relationship test.”
The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Jacob Ferrari at firstname.lastname@example.org.