Under the Internal Revenue Code (the “Code”), all organizations described in section 501(c)(3) are considered private foundations, unless one of four exceptions set forth in section 509 apply. Section 509(a)(3) is an exception to private foundation status, and organizations organized pursuant to section 509(a)(3) are commonly referred to as “supporting organizations.”
Section 509(a)(3) describes an organization which:
- is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2) [of section 509(a)],
- is—
- operated, supervised, or controlled by one or more organizations described in paragraph (1) or (2) [of section 509(a)],
- supervised or controlled in connection with one or more such organizations, or
- operated in connection with one or more such organizations, and
- is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2) [of section 509(a)][.]
26 U.S.C. § 509(a)(3)-(a)(3)(C).
For any of these relationships, the arrangement must insure that: (i) the supporting organization will be responsive to the needs of demands of the publicly supported organization; and (ii) the supporting organization will constitute an integral part of, or maintain a significant involvement in, the operations of the publicly supported organizations.
In order for an organization described in section 501(c)(3) of the Code to be a supporting organization and thus avoid private foundation status, the organization must have a specific relationship (as described above) with an organization described in section 509(a)(1) or section 509(a)(2). This relationship should be set forth in the supporting organization’s articles of organization, such as articles of incorporation or certificate of formation, as well as in other key governance documents.
To meet the description in section 509(a)(1), the supported organization must be an organization that is described in section 170(b)(1)(A). Section 170(b)(1)(A) describes a laundry list of organizations, including churches, qualified educational organizations, medical or health care organizations, publicly-supported organizations that are organized exclusively to administer property and to make expenditures to or for the benefit of qualified colleges or universities, governmental units, certain private foundations, and a few others.
To meet the description in section 509(a)(2), the supported organization must be an organization which:
(A) normally receives more than one-third of its support in each taxable year from any combination of –
(i) gifts, grants, contributions, or membership fees . . .
(ii) [receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity that is not an unrelated business]
from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and
(B) normally receives not more than one-third of its support in each taxable year from the sum of –
(i) gross investment income (as defined in subsection (e)) and
(ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511[.]
Section 4946 defines “disqualified persons” as a person who is –
(A) a substantial contributor to the foundation,
[For this purpose, the term “substantial contributor” means a person who contributed an aggregate amount of more than $5,000 to the foundation, if such amount is more than 2% of the total contributions received by the foundation before the close of the taxable year of the foundation in which the contribution is received from such person.]
(B) a foundation manager,
[For this purpose, the term “foundation manager” means an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation).]
(C) an owner of more than 20 percent of –
(i) the total combined voting power of a corporation,
(ii) the profits interest of a partnership, or
- the beneficial interest of a trust or unincorporated enterprise,
which is a substantial contributor to the foundation, [or]
(D) a member of the family . . . of any individual described in subparagraph (A), (B), or (C) [above] [.]
[The family of any individual includes only his or her spouse, ancestors, children, grandchildren, great-grandchildren, and the spouses of children, grandchildren, and great-grandchildren.]
These are but a few of the considerations and requirements to evaluate when forming or advancing a supporting organization model pursuant to section 509(a)(3) of the Code. Forming and operating a supporting organization requires careful consideration of the philanthropic objectives of the supporting organization’s founders and of the supported organization. To enjoy the privilege of tax-exemption under section 501(c)(3) and to avoid the onerous regulations that apply to private foundations, those in management positions of a supporting organization should appreciate the additional oversight and administration necessary to remain in the supporting organization guardrails.
Mission alignment with the supported organization is critical and essentially required by the Code, and the supporting organization is wise to craft its governing documents in a manner that, where possible, allows for some flexibility in the event a mission-pivot or succession plan be necessary to continue the life or goals of the supporting organization.
