Supporting Organizations

By Laura Kalick and Mike Sorrells

The Pension Protection Act of 2006 has also imposed restrictions on the ability of individuals and entities to make contributions to supporting organizations. Supporting organizations are a type of public charity with the purpose of providing financial or program assistance to another public charity or group of charities (for example, universities often maintain their endowments in such an organization).

Under the Pension Protection Act of 2006, distributions from IRAs to supporting organizations, as described in section 509(a)(3), are not excludable from the IRA holder’s income. In addition, distributions from private foundations to certain supporting organizations described in section 509(a)(3) are not qualifying distributions and may be taxable expenditures for the private foundation. Also, excise taxes on excess business holdings may apply as well as intermediate sanctions for making loans to related parties. For these reasons, organizations currently classified as supporting organizations, as described in section 509(a)(3), may wish to seek reclassification under section 509(a)(1) or (2).

A section 501(c)(3) tax-exempt organization seeking to change its public charity classification for reasons related to changes made by the Pension Protection Act has to submit a written request for reclassification from section 509(a)(3) to the Internal Revenue Service pursuant to Revenue Procedure 2006-4, 2006-1 I.R.B. 135. Cases are handled on an expedited basis.

Where a supporting organization cannot be reclassified under 509(a)(1) or (2), the organization should establish its classification as a Type I, Type II or Type III supporting organization. Private foundations can make gifts to Type I or II organizations or to Type III organizations that are functionally related, and the gift will be considered a qualifying distribution to the private foundation. This classification involves determining the relationship between the supporting organization and the supported organization(s) as one that is either: (1) operated, supervised, or controlled by a publicly supported organization (“Type I”); (2) supervised or controlled in connection with a publicly supported organization (“Type II”); or (3) operated in connection with a publicly supported organization (“Type III”).

Laura Kalick is a senior manager in the Nonprofit Tax practice in BDO Seidman’s Greater Washington, D.C. office. She can be reached at lkalick@bdo.com. Mike Sorrells is the director of the Nonprofit Tax practice in BDO Seidman’s Greater Washington, D.C. office. He can be reached at rsorrells@bdo.com.

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