In response to comments received from the field, including from GuideStar and the Council on Foundations, on March 27, 2007, in the 2007-8 issue of EO Update, the IRS clarified the provision of Notice 2006-109 that provides guidance to private foundations and to sponsoring organizations of donor-advised funds concerning how they may identify public charities that are supporting organizations. See the Council’s summary of Notice 2006-109.
Determining whether a grantee is a supporting organization is important to both private foundations and community foundations because the Pension Protection Act of 2006 imposes new requirements on distributions from private foundations and donor-advised funds to certain supporting organizations.
Requirements when relying on a third-party
Section 3.01 of Notice 2006-109 provides that grantmakers may rely on either information from the IRS Business Master File (this is not the same as Publication 78) or on the grantee’s IRS determination letter to determine whether a public charity is or is not a supporting organization. The IRS has now clarified that a grantmaker may use a third-party to obtain information from the IRS Business Master File to determine whether or not a charity is a supporting organization, provided that the grantmaker obtains a report from the third-party that includes:
- the grantee’s name, Employer Identification Number, and public charity classification under section 509(a)(1), (2) or (3);
- a statement that the information is from the most-currently available IRS monthly update to the BMF, along with the IRS BMF revision date; and
- the date and time of the grantmaker’s search.
The grantmaker must retain the report in electronic or hard-copy form.
An example of a third party that provides information from the IRS BMF in full compliance with the IRS guidance is GuideStar’s Charity Check Service.
What the new guidelines from the IRS do not cover
The new guidelines from the IRS do not change the requirements in Section 3.01 of Notice 2006-109 that address steps grantmakers must take to determine whether a supporting organization is a Type I, II, or III and, if a Type III whether or not it is “functionally integrated” with its supported organization. The IRS also has not responded to the Council’s request that grantmakers be allowed to rely on information reported by supporting organizations on their Form 990 that, beginning with the 2005 Form 990, must include their classification (Type I, II, or III).