The Relationship Test
In our last blog post we discussed Supporting Organizations and the first three tests for how to determine if a 501(c)(3) public charity is a supporting organization. In the second part of this two part series, we’ll discuss the fourth and final test of supporting organizations: the Relationship Test.
Depending on the type of relationship it has with its supported organization(s), a supporting organization is classified as a Type I, Type II or Type III. Furthermore, Type III supporting organizations are further sub-categorized in one of two ways: functionally integrated supported organizations or non-functionally integrated supported organizations.
A Type I supporting organization must be operated, supervised or controlled by its supported organization(s). This is usually seen through the supported organization having the power to elect a majority of the supporting organizations board of directors. This type is often thought of as the parent-subsidiary relationship.
A Type II supporting organization must be supervised or controlled in connection with its supported organization(s). This is typically seen as a majority of the board of the supporting organization overlapping with a majority of the board of the supported organizations. This type is often thought of as the brother-sister relationship.
A Type III supporting organization must be operated in connection with one or more publicly supported organizations. Because of the lack of an element of control as seen in the prior two types, Type III supporting organizations are subject to three separate sub-requirements/tests: a notification requirements, a responsiveness test, and an integral part test.
A Type III supporting organization must provide the following documents annually to each of its supported organizations: (1) description and accounting of support provided by the supporting organization to the supported organization; (2) a copy of the supporting organizations Form 990; and a copy of the supporting organizations governing documents.
This information must be postmarked or electronically transmitted by the last day of the fifth month following the close of the taxable year to which the information pertains.
A Type III supporting organization must be responsive to the needs or demands of a supported organization by: (1) having the supported organization being adequately represented on the board of the supporting organization (usually by having the power to appoint an officer or director or having at least one overlapping officer or director); and (2) having the supported organization having a significant voice in how the supporting organization manages and uses its assets.
Integral Part Test
A Type III supporting organization may be functionally integrated (FISO) or non-functionally integrated (non-FISO) depending on the manner in which it meets the integral part test. Type III FISOs are subject to fewer limitations than non-FISOs. For example, a private foundation cannot include a distribution to a non-FISO as a qualifying distribution under section 4942. Additionally, non-FISOs are subject to excess business holding rules under section 4943.
A Type III functionally integrated organization must satisfy one of three alternative integral part tests: (1) a supporting organization’s activities must directly further the activities of the supported organization and the activities must be those, but for the supporting organization’s involvement, that the supported organization would normally conduct; (2) the supporting organization must have the ability to appoint a majority of the supported organization’s board of directors; or (3) the supporting organization supports a government entity.
A Type III non-FISO must adhere to two requirements: (1) a distribution requirement a distributable amount (defined under the regulations) to its supported organizations; and (2) an attentiveness requirement which requires that the distributions to supported organizations must be sufficiently important to the supported organization to ensure that the supported organization has sufficient reason to pay attention to the supporting organization’s role in its operations.
More information on supporting organizations and specific requirements of Type III supporting organization can be found at the IRS website.
If you would like assistance or have any questions regarding supporting organizations, then we would be happy to set up a free consultation with you to discuss.
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.