Today, the IRS and Treasury Department issued proposed regulations regarding the prohibition on certain contributions to Type I and Type III supporting organizations and additional requirements for Type III supporting organizations. The regulations are intended to reflect changes to the law made by the Pension Protection Act of 2006. The IRS has already issued guidance on supporting organizations and this guidance generally focuses on narrow issues applicable to a limited number of supporting organizations.
In general, an organization described in section 501(c)(3) may be classified as a public charity (as opposed to a private foundation) if it is described in one of the paragraphs of section 509(a). Organizations described in section 509(a)(3), called “supporting organizations,” achieve their public charity status by supporting one or more other public charities described in sections 509(a)(1) or (2). Among the tests that a supporting organization must satisfy is a relationship test, which requires that the supporting organization is (i) operated, supervised, or controlled by one or more organizations described in sections 509(a)(1) or (2); (ii) supervised or controlled in connection with one or more such organizations; or (iii) operated in connection with one or more such organizations. Organizations meeting clauses (i), (ii), and (iii) of this relationship test are referred to as Type I, Type II, and Type III supporting organizations, respectively.
The proposed regulations define the term “control” for purposes of section 509(f)(2), which prohibits Type I and Type III supporting organizations from accepting a gift or contribution from a person who, alone or together with certain related persons, directly or indirectly controls the governing body of a supported organization of the Type I or Type III supporting organization, or from persons related to a person possessing such control. In general, under the proposed regulations, the governing body of a supported organization is considered “controlled” by a person if that person, alone or by aggregating his or her votes or positions of authority with certain related persons, may require the governing body of the supported organization to perform any act that significantly affects its operations or may prevent the governing body of the supported organization from performing any such act.
The proposed regulations also set forth additional rules on the requirements for Type III supporting organizations, including:
- An additional requirement that a Type III supporting organization must be responsive to the needs of each of its supported organizations to meet the responsiveness test under Treas. Reg. § 1.509(a)-4(i)(3)(i) (and additional examples of how such test can be met)
- Additional rules regarding the qualification of an organization as a “functionally integrated” Type III supporting organization under Treas. Reg. § 1.509(a)-4(i)(4), including a narrower definition of the circumstances in which a supporting organization will be considered to be the “parent” of its supported organization(s) and provisions for supporting organizations that support governmental entities
- Additional rules regarding the required annual distributions under Treas. Reg. § 1.509(a)-4(i)(5) by a non-functionally integrated Type III supporting organization
- A clarification of the due date for notices required to be given by Type III supporting organizations to each supported organization under Treas. Reg. § 1.509(a)-4(i)(2)
Treasury and the IRS are soliciting comments on the proposed regulations, which must be received by May 19, 2016