This year, as supporting organizations gear up for the May 15 Form 990 filing due date, they may need to build in a bit more time to complete the form. Schedule A of the Form 990, where 501(c)(3) organizations demonstrate their public charity classification, now asks a number of additional questions about supporting organizations, with the amount of questions varying depending on organizational structure.
Background on Supporting Organizations
In the world of 501(c)(3) organizations, there are two main categories: public charities and private foundations. Public charities are subject to less regulation and oversight than private foundations, and contributions to them are eligible for more generous deductions. Public charities can include “institutional” charities like hospitals, churches and schools, as well as “publicly supported” charities that receive contributions from a diverse variety of sources (e.g., organizations like the Red Cross and most humane societies) or that rely on their exempt function income for support (e.g., museums).
Public charities also include “supporting organizations,” which are generally organized and operated to support another public charity (or perhaps multiple public charities), referred to as the “supported organization.”
Supporting organizations are classified as Type I, Type II or Type III, depending on the terms of their relationship with their supported organizations. Type I supporting organizations have a parent-subsidiary relationship with their supported organizations (i.e., the supported organization appoints at least a majority of the directors of the supporting organization). Type II supporting organizations have a brother-sister relationship with their supported organizations (i.e., there is a majority overlap between the officers and directors of each organization). Type III supporting organizations have the most tenuous connection with their supported organizations.
Type III supporting organizations were the subject of significant scrutiny leading up to the adoption of the Pension Protection Act (“PPA”) in 2006. Because of their tenuous connection to their supported organizations, they could operate much like private foundations, but with the more generous deduction limits of a public charity, and without the additional regulation and oversight of a private foundation. As is often the case with a good thing, this structure attracted a number of bad actors, who used the Type III structure to circumvent the tax rules and commit taxpayer abuse. The charitable reform provisions of the PPA were designed to shut down these abuses. In 2012, following proposed regulations in 2009, final and temporary regulations were published that made significant changes for Type III supporting organizations, specifically going to whether an organization will be considered functionally integrated or non-functionally integrated (the latter being the most heavily regulated type of supporting organization).
New Supporting Organization Reporting
The 2014 Schedule A of Form 990 includes new Parts IV and V that focus on supporting organizations. Much of these two new parts are a result of heightened regulation put in place by the PPA and subsequent regulations and notices. We’ll highlight each section below:
- Part IV, Section A must be completed by all supporting organizations. It focuses largely on the identity of the supporting organization’s supported organization; potential benefits to or relationships with substantial contributors or disqualified persons; and the potential application of the excess business holding rules.
- Part IV, Section B must be completed by Type I supporting organizations. It focuses on the control of the supporting organization by the supported organization, and potential operation for the benefit of an organization other than its supported organization.
- Part IV, Section C must be completed by Type II supporting organizations. It asks about the relationship between the supporting and supported organizations.
- Part IV, Section D must be completed by all Type III supporting organizations. It inquires about compliance with notification requirements, and the relationship between the supporting and supported organizations.
- Part IV, Section E must be completed by Type III functionally integrated supporting organizations. This requires organizations to show that they qualify as functionally integrated by satisfying the activities test, being the parent of each of its supported organizations, or supporting a governmental entity. To satisfy the activities test, the organization must demonstrate that substantially all of its activities directly furthered the exempt purposes of the supported organization, and that those activities are ones that, but for the supporting organization’s involvement, would be engaged in by the supported organization. The 2012 final regulations contain definitions that are key to this test, including that fundraising, managing and investing non-exempt use property, and making grants (except for a fairly narrow exception) are not activities that directly further the supported organization’s exempt purposes. Further, there is no hard-fast amount that counts as substantially all; rather, all pertinent facts and circumstances are taken into account.
- Part V must be completed by Type III non-functionally integrated supporting organizations. These organizations now must meet a payout requirement to their supported organizations that is similar to that in place for private non-operating foundations, and must distribute annually the higher of (i) 85 percent of adjusted net income or (ii) 3.5 percent of the fair market value of the supporting organization’s non-exempt use assets. Further, the supporting organization must distribute at least one-third of that distributable amount to supported organizations that are attentive to the operations of the supporting organization. Type III supporting organizations that cannot meet the payout requirements (or satisfy the functional integration test) will be reclassified as private foundations.
If you have any questions on these new reporting requirements, please contact email@example.com or firstname.lastname@example.org.