The Nonprofit FAQ

What's a 'supporting organization'?
Congressional inquiries about nonprofits in 2004 and 2005 included suggestions that some "supporting organizations" have been set up in ways that stretch -- if they do not break -- the boundaries of appropriate financial planning by donors.



H.R. 4 -- The Pension Protection Act -- imposed new limits on Type III Supporting Organizations, donor advised funds, and other non-operating exempt organizations. One of the new limits forbids private foundations from making grants to Type III Supporting Organizations. Since the distinctions among types of supporting organizations had not previously been significant from a management point of view, many organizations had been classified as Type III unnecessarily.

IRS Announcement 2009-62 provides guidance for organizations that wish to be reclassified from "509(a)(3)" to "509(a)(1)" or "509(a)(2)". See http://www.irs.gov/pub/irs-drop/a-09-62.pdf This announcement also ends the practice of providing "expedited" reclassification that had been in effect since the publication of Announcement 2006-93, shortly after the passage of the Pension Protection Act of 2006.

Here are the definitions of the three typs of Supporting Organizations from the appendix to the "Final Report" of the Panel on the Nonprofit Sector (http://www.nonprofitpanel.org/final/Panel_Final_Report.pdf):

    Type I Supporting Organization

    A public charity organized and operated exclusively
    for the benefit of one or more other public charities
    and that is controlled by the public charity or charities
    it supports, usually through the appointment of a
    majority of the directors or trustees of the supporting
    organization.
    Type II Supporting Organization

    A public charity organized and operated exclusively
    for the benefit of one or more other public charities
    of which the majority of directors or trustees also
    serve as directors, trustees, or officers of the
    supported organization.
    Type III Supporting Organization

    A public charity organized and operated exclusively
    for the benefit of one or more other public charities,
    which has a close relationship with one or more of
    the supported organizations through an overlapping
    officer, director, or trustee (or a close and continuous
    working relationship between its officers, directors,
    or trustees and those of one or more of the supported
    organizations), and which provides sufficient support
    to one or more of the supported organizations to
    ensure their attentiveness to the supporting
    organization’s activities.



Congressional investigations suggested that some Type III organizations were amassing very large endowments without transferring any funds to operating charities and engaging in other questionable practices. The "Final Report" (on pages 45 and 46) recommends that Congress and the IRS adopt stricter limits on the activities of Type III organizations -- designed to assure that this option is not used simply to evade the restrictions on self-dealing and the payout requirements that apply to private foundations.

The Urban Institute -- drawing on public data from 990s -- has prepared a research report on "The Scope and Activities of 501(c)(3) Supporting Organizations". The report is available onine at http://www.urban.org/url.cfm?ID=411175.



Posted 6/28/05, information about H.R. 4 added 5/17/07 -- PB