All Internal Revenue Code (“IRC”) Section 509(a)(3) supporting organizations derive public charity status from their relationship with one or more IRC section 509(a)(1) or (a)(2) public charities:

  • Type I supporting organizations are operated, supervised, or controlled by their supported organization(s) (“parent/subsidiary” relationship);
  • Type II supporting organizations are under common control with their supported organization(s) (“sibling” relationship);
  • Type III supporting organizations are “operated in connection with” one or more of their supported organizations.

In the 2006 Pension Protection Act, in response to perceived abuses of Type III status, Congress established two sub-categories: “functionally integrated” Type III supporting organizations, which carry out the functions of their supported organizations, and “non-functionally integrated” Type III supporting organizations, which typically make grants to their supported organizations. Congress imposed additional requirements on the supporting organizations described below, and on private foundations and donor-advised funds making grants to them. It also provided that Type I and Type III supporting organizations may not receive gifts from persons who control the governing body of a supported organization, or from certain related individuals or entities.

A Type III non-functionally integrated supporting organization must distribute each year the greater of (a) 85% of the organization’s adjusted net income for the prior taxable year and (b) 3.5% of the aggregate fair market value of the organization’s non-exempt use assets, with certain adjustments, to one or more of its supported organizations. Certain excess amounts may reduce the distributable amount in subsequent years (for up to five years after the excess amount is generated).

Those distributions must also be sufficiently important to the supported organization to ensure that the supported organization has reason to pay attention to the supporting organization’s role in its operations. Distributions to a particular supported organization are deemed to meet this standard if the amount of support:

  • Equaled at least 10% of the supported organization’s total support for the prior year;
  • Was necessary to avoid interruption of a particular substantial activity of the supported organization;or
  • Based on all facts and circumstances (including actual evidence of attentiveness), was sufficient to ensure attentiveness.

At least one-third of the supporting organization’s distributable amount must be distributed to supported organizations (1) that meet this attentiveness requirement and (2) to which the supporting organization is responsive.