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, can be substantial.
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 same 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.
For purposes of our discussion, we will be focusing on the Type III Supporting Organization, which is becoming more and more widely seen in estate planning and planned giving circles.