Ordinarily, charitable organizations have been classified by the IRS as either Private Foundations or as Public Charities. The difference in tax benefits, not to mention regulatory requirements and burdens, have been enormous.
However, Internal Revenue Code Section 509(a)(3) has designated a third group of charitable entity - the Supporting Organization.
For those entities fortunate enough to meet the elaborate IRS requirements for compliance with Section 509(a)(3), the reward is that they are treated as public charities which are not subject to the administrative and compliance purgatory that Private Foundations are routinely subjected to.
As described in the IRS-approved 230+ page magnum opus entitled, Public Charity vs. Private Foundation Status:
"Unlike the other non-private foundations denominated in IRC 509, IRC 509(a)(3) organizations neither have broadly based support nor do they engage in an inherently public or charitable activity...IRC 509(a)(3) excludes organizations from private foundation classification by reason of their close relationship to those public charities classified as IRC 509(a)(1) or (a)(2)."
In plain English: Supporting Organizations must maintain a close and legally-defined relationship with the Public Charities they support. In exchange, the IRS will treat them as Public Charities, which enjoy numerous economic and administrative advantages over Private Foundations.
Type III Supporting Organizations - "Operated in Connection With"
For purposes of our discussion, we will be focusing on one certain kind of Supporting Organization, which is becoming more and more widely seen in estate planning and planned giving circles.
A "Type III Supporting Organization" is an organization that is "operated in connection with" an IRS-approved supported organization. By virtue of its connection with the Supported Organization, the IRS treats the Type III Supporting Organization as a Public Charity.
Therefore, a Type III is a Supporting Organization that often looks and feels like a Private Foundation, but maintains all of the benefits of a Public Charity.
How is this blessed state achieved?
Ah, there's the rub!
Technical Requirements for Achieving Supporting Organization Status
In order to qualify for Supporting Organization status, an organization must go through an elaborate gauntlet of technical and regulatory requirements that are almost as Byzantine as the rules for Private Foundations themselves.
As the U.S. Tax Court itself famously observed:
"The IRS has drafted fantastically intricate and detailed regulations to thwart the fantastically intricate and detailed efforts of taxpayers to obtain private benefits from foundations while evading the imposition of taxes."
- Windsor Foundation v. United States, 77-2 U.S.T.C. 9709 (E.D. Va. 1977)
The IRS has designed a battery of tests to ensure that the Type III Supporting Organization is not a vehicle for many of the abuses perceived in the Private Foundation arena.
Such tests include:
- the Relationship Test
- the Responsiveness Test
- the Integral Part Test
- the Operational Test, and
- the Control Test
just to name a few.
Key Advantages of Supporting Organization Status
So why would any Donor willingly subject himself to complying with this barrage of compliance rules?
Simply put, the economic and other benefits of Public Charity status far outweigh the comparatively meager benefits bestowed upon Private Foundations.
A brief glance at these differences reveals the following advantages:
(1) A Donor may deduct a greater amount of his donation to a Public Charity than to a Private Foundation
a. Gifts of cash may be deducted up to 50% of Donor¦s Adjusted Gross Income (versus 30% for the Private Foundation)
b. Gifts of appreciated assets may be deducted up to 30% of Donor¦s Adjusted Gross Income (versus 20% for the Private Foundation)
(2) A Donor may deduct the full Fair Market Value of appreciated assets that are donated to a Public Charity (including any untaxed appreciation)
a. If given to a Private Foundation, the Donor may only deduct his or her Tax Basis in the property
(3) A Public Charity is not subject to the Private Foundation Excise Tax;
(4) A Supporting Organization has a much lower requirement for Distributing its Assets to Supported Organizations than a Private Foundation.
Conclusion
While the Type III Supporting Organization has it's own regulatory and administrative burdens, and requires that the Donor exercise less control than he or she would in a Private Foundation, it still is an option that may be worth exploring in greater detail.
Especially for those Donors who wish to contribute appreciated assets like stock or real estate, a Type III Supporting Organization may help them achieve their philanthropic goals and objectives better than a Private Foundation.
We welcome the opportunity to meet with you in person to further discuss these charitable planning opportunities.
