Supporting Organization FAQs

What is a supporting organization?
What are the different classifications of supporting organization?
How can I tell if a grantee is a supporting organization?
How can you tell what type a supporting organization is?
When is a type III supporting organization functionally integrated?
How do I determine whether a type III is functionally integrated?
What is “expenditure responsibility”?

What is a supporting organization?

To oversimplify, a supporting organization is a 501(c)(3) that qualifies as a public charity (and not a private foundation) because it has a close relationship with another publicly supported 501(c)(3). Usually, in order to qualify as a public charity, an organization must receive at least one-third (or in special cases as little as ten percent) of its support each year from gifts, grants and contributions from a variety of sources. A “supporting organization” is not required to meet this “public support test” on its own if it provides meaningful support (financial, programmatic or both) and gives some degree of structural and operational control to another organization that is already classified as a public charity, rather than a private foundation. Based upon the relationship of the supporting organization to the public charity it supports, a supporting organization will be classified as a type I, II or III. A supporting organization may not be controlled by someone who is a disqualified person with respect to the supporting organization.

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What are the different classifications of supporting organization?

As a general overview, supporting organizations fall into three categories: type I, type II and type III. The type refers to the nature of the relationship between the supporting organization and the charity being supported.

Type I: By far the most common, is often described as a parent-subsidiary relationship and generally involves the charity appointing a majority of the board of the supporting organization.
Type II: The least common of the three, there is usually an overlapping board relationship where at least a majority of the members of the supporting organization board are also members of the supported charity’s board.
Type III: These operate with a greater degree of independence from the organization they support. Typically the supported organization appoints one member of the governing board of the supporting organization and institutes other procedures designed to ensure that the supporting organization is responsive to it. Type III supporting organizations may provide financial support to their supported organization or they may directly carry out a program or function for it.

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How can I tell if a grantee is a supporting organization?

While neither IRS Publication 78nor Guidestarcurrently indicate whether an organization is a supporting organization, it is likely that either or both of these resources will eventually be modified to provide that information. In the meantime, there are several documents you can check to see if an organization is a supporting organization.

Determination Letter: The letter from the Internal Revenue Service that confirms that the organization is tax exempt will say something similar to “you are not a private foundation within the meaning of section 509(a) of the Code, because you are an organization described in section 509(a)(3).” Section 509(a)(3) is the section of the code that covers supporting organizations and this specific reference should appear in the letter.
Form 990: Part IV of Schedule A to the 990 requires each organization to check a box explaining why it is not a private foundation. Supporting organizations are required to check box 13 to indicate that is the basis of their public charity status.
IRS Master File: While you can't casually browse or search it, the IRS maintains a cumulative database of information on all exempt organizations contained its Business Master File (BMF). For foundations with the software and staff capacity, that information can be downloaded from the IRS. Organizations that are tagged as Foundation Code 17 in the Exempt Organization Master Listing are supporting organizations.

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How can you tell what type a supporting organization is?

That may be difficult. Until recently, the IRS neither requested the information be reported on Form 990 nor tracked the information in its data files. Form 990 for the 2005 tax year now includes check boxes under part IV of Schedule A that require a charity to indicate which type of supporting organization it is. If a grantee has not yet filed its 2005 Form 990, you can ask it what type of supporting organization it is. If you can’t ask or they don’t know (which happens), you can review the governing instruments and Application for Exempt Status (Form 1023) that the organization filed with the IRS. Admittedly, such a review may only be helpful to someone with a firm understanding of the technical aspects of supporting organization status.

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When is a type III supporting organization functionally integrated?

One of the tests required for Type III status is a demonstration that the supporting organization is an “integral part” of that organization it supports. There are two options for meeting this test, one of which is that the supporting organization performs the functions of or carries out the purposes of the supported organization and, but for the supporting organization, the supported organization would normally engage in those activities directly. For example, a Type III supporting organization that operated a printing press for a university would meet this “but for” test because otherwise the university would carry on the activity directly. An organization that satisfies the “integral part” requirement under this “but for” test is “functionally integrated”. Organizations that meet the “integral part” test simply through payments to the supporting organization will not be considered “functionally integrated”.
Functionally integrated type III organizations which are controlled by a disqualified person of the private foundation or that support an organization controlled by the private foundation lose the benefit of that special status. Accordingly, grants from the private foundation to such a controlled type III will not count towards the private foundation’s qualifying distribution requirement and must be made in accordance with the expenditure responsibility rules.

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How do I determine whether a type III is functionally integrated?

Only a careful review of the facts and circumstances of a particular organization will allow you to conclude whether a type III is functionally integrated or not. As a practical matter, only the potential grantee is in a good position to make such a determination. While it may be reasonable to require potential grantees to certify that they are functionally integrated, it is unclear whether reliance on such certification would be sufficient to protect the private foundation from penalties. Until regulations or other guidance from the IRS clarifying what is acceptable due diligence, private foundations should consult with legal counsel to determine what procedures to follow in awarding grants to type III supporting organizations.

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What is “expenditure responsibility”?

Expenditure responsibility is designed to ensure that a grant is used for charitable purpose and that the private foundation maintains appropriate oversight and documentation of the grant. Expenditure responsibility consists of five steps:

Conducting a pre-grant inquiry including a reasonable investigation of the grantee to ensure that the proposed activity is charitable and that the grantee is able to perform the proposed activity.
Executing a written agreement with the grantee that specifies the charitable purposes of the grant and includes provisions that prohibit use of the funds for lobbying activities and require the grantee to return any funds not used for the designated purposes.
Requiring the grantee to maintain the grant funds in a separate fund so that charitable funds are segregated from non-charitable funds.
Requiring the grantee to provide regular reports on the use of the funds and the charitable activity support by the grant.
Including a report on Form 990-PF about the grant including a brief description of the grant, the amount, the charitable purpose and the current status of the grant.

More details about the expenditure responsibility process and sample forms can be found in Expenditure Responsibility Step by Step by John Edie.

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