The Council opposes any policy proposal that would eliminate types of supporting organizations and reduce the variety and flexibility of charitable giving tools available to foundations and donors alike.
Supporting organizations are important charitable tools that donors can use to achieve their specific philanthropic goals. Many of the Council’s members utilize supporting organizations to maximize their impact. Often, a supporting organization manages fundraising or investments for the supported organization to allow it to focus on its core charitable mission, whether grantmaking or providing direct services.
Under current law, three types of supporting organizations are classified as public charities. “Type I” supporting organizations are akin to a subsidiary of the supported organization in that the supported organization—generally a 501(c)(3) organization—exercises a substantial degree of direction over the policies, programs, and activities of the supporting organization. “Type II” supporting organizations, where persons supervising or controlling the supported organization exercise supervision or control over the supporting organization, are more akin to a brother-sister organization of the supported 501(c)(3). Finally, “Type III” organizations are operated in connection with one or more 501(c)(3) organizations, and must satisfy a notification requirement, a “responsiveness test,” and an “integral part test.” These rigorous standards reflect prior lawmaker attention, particularly during the Pension Protection Act of 2006 debates, ensuring that each type of supporting organization serves a valid charitable purpose.
In 2014, former House Ways and Means Chairman Dave Camp proposed eliminating Type II and Type III supporting organizations in his Tax Reform Act of 2014 (H.R. 1). This would mean that organizations that support public charities would need to qualify as a supporting organization that is operated, supervised, or controlled by a publicly supported organization (i.e., a Type I supporting organization), or they would be treated as private foundations. Any new entities seeking to organize as supporting organizations would need to qualify as Type I supporting organizations to be eligible for tax-exempt status.
While H.R. 1 is not currently being considered, the proposals it contains will be a starting point for future tax reform and it is important for foundations to remain vigilant and be aware of what could be on the table.
Council Comments & Analysis:
- 2016 Council Comments on Supporting Organization Regulations
- Summary of Requirements for Type I and Type III Supporting Organizations - A Proposed Rule by the Internal Revenue Service on Feb. 19, 2016
- 2015 Senate Finance Committee Working Groups Comments
- Analysis of Type III Supporting Organization Regulations Issued Dec. 28, 2012