Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 1997

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 1997

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 2009

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 1997

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 2026

So What’s Left of SOs? – The Pension Protection Act of 2006 and Its Impact on Supporting Organizations

Trusts & Estates

Originally Published in Trusts & Estates.


Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 1997

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 1997

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 2009

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 1997

Warning: Illegal string offset 'status_txt' in /home/treacy/public_html/cms/wp-content/plugins/share-and-follow/share-and-follow.php on line 2026

After 37 years virtually without change, the provisions of the Internal Revenue Code of 1986 (“Code”) governing supporting organizations (“SOs”) were revised and expanded in spectacular fashion by the Pension Protection Act of 2006 (“Act”), signed into law on August 17, 2006. Longstanding rules relating to an SO’s requisite “responsiveness” to its supported charities, its ability to support foreign charities, its freedom from the private foundation excise taxes relating to excess business holdings and taxable expenditures, its ability to receive grants from private foundations, even its ability to maintain its existence if it receives certain contributions, have been altered so dramatically as to raise the question whether there is anything left of SOs. The good news is that SOs continue to constitute a viable, attractive alternative to private foundations and other charitable organizational formats; the bad news is that they are probably somewhat less attractive than they were the day before the Act became law, at least in certain key ways.

Supporting Organizations

The changes for SOs wrought by the Act have been characterized as reforms, and generally appropriately so, and hence some background is helpful.1 Briefly, an SO is a type of public charity qualifying under Code Section 509(a)(3) for special benefits and advantageous treatment not available to private foundations or indeed to some other forms of public charities. Contributions to an SO qualify for the highest federal income tax deductibility thresholds for inliiduals under Code Section 170(b)(1)(A)(viii) – 50% of adjusted gross income (AGI) for contributions of cash, and 30% of AGI for gifts of appreciated assets, with no harsh “reduce to basis” rule that makes noncash, nonstock gifts to private foundations so unattractive. Before the Act, SOs were not subject to any of the private foundation excise taxes under Code Sections 4940-4945 on net investment income, self-dealing, failure to make qualifying distributions, excess business holdings, jeopardy investments, and taxable expenditures. This combination of high deductibility and low tax exposure made SOs strongly attractive to inliidual and business donors, as well as to the public charities they supported.

Types I, II, and III

The Treasury Regulations relating to SOs, most of them promulgated in the years immediately following the initial legislation regarding SOs in the Tax Reform Act of 1969, establish three main categories of SOs, distinguished from one another primarily in how the governing body is selected and composed, and in the level of complexity required in establishing the “support” relationship with the supported charities. Using the terminology first suggested by the author in a 1997 article,2 these are commonly referred to as Type I, Type II, and Type III SOs, and this language is incorporated into the new Act as well.3 A Type I SO is one which is “operated, supervised, or controlled by” one or more supported public charities; the existence of the Type I relationship is most frequently manifested in the ability of the supported charity or charities to appoint or elect a majority of the members of the governing body of the SO, though there are alternative ways of establishing a Type I relationship. Supported public charities tend to be fond of this Type I relationship, in that it affords them considerable influence over the SO. Type II SOs are probably the least common, in terms of their use by inliiduals and businesses, but are often handy for an existing public charity which wishes to spin off its fundraising arm for greater autonomy or greater liability protection. A Type II relationship is one in which the SO is “supervised or controlled in connection with” one or more public charities, and is manifested by the common supervision or control of both the SO and the supported charities, in which board members are often composed of the same inliiduals for both the SO and the supported charity.

Type III Requirements Under the Regulations

A Type III SO, probably the most popular form of SO for inliidual and family donors, is characterized by being “operated in connection with” one or more public charities. No doubt a key factor in the popularity of Type III SOs is that, instead of the supported charities selecting the board, the founder typically makes the selection. Because the relationship with the supported charity is more attenuated in a Type III SO, the Treasury Regulations and subsequent rulings set forth a considerably more complicated set of requirements for a Type III SO than for its Type I and II counterparts. Briefly to summarize, a Type III SO has been required to meet the following tests and subtests (with those elements affected by the Act italics):

  • “responsiveness” test: a Type III SO is required to establish that it is responsive to the needs of the supported charities named in its governing instrument; this test was typically met “automatically” under the second alternative prong of the “responsiveness” test4, under which if the SO constituted a “charitable trust” under State law (a status which often applied to nonprofit corporation SOs as well as to SOs organized as trusts), if the SO’s governing document expressly named the supported charities, and if the supported charities enjoyed the power to enforce the trust and compel an accounting, the test was deemed satisfied;
  • “integral part” test: in addition to the “responsiveness” test, a Type III SO is required to satisfy the “integral part” test, establishing that the SO maintains a significant involvement in the operations of the supported charities; this test is considerably more complicated than the “responsiveness” test, and can be satisfied in either of two broad ways:
    • the “but for” method, under which, instead of making grants to the supported charities, the SO carries on its own direct charitable activities which, but for the SO’s involvement, at least one of the supported charities would normally be engaged in itself; and
    • the more common “grantmaking” method, under which the SO would need to meet the following requirements, again briefly stated:
      • the SO must distribute at least 85% of its net income to the supported charities;
      • at least 1/3 of this amount must be granted to a supported charity which is “attentive” to the SO (i.e., is receiving sufficient support from the SO as to make it worthwhile to pay attention to the SO);
      • if the grant is made to the “attentive” charity with no restriction on its use for a particular program or project, the SO must pay at least 10% (and ideally more) of the supported charity’s overall budget for that year, not always an easy threshold to meet for larger supported charities; or
      • if the grant is made to the “attentive” charity to support a particular program or project, the following subtests should be met:
        • the grant should constitute at least 50% of the budget for the particular program or project (usually easier to meet than a grant of 10% or more of the supported charity’s overall budget);
        • the program or projected supported should be a “major function” of the supported charity and should be an “important and substantial” one for the supported charity;
        • ideally it should be the case that, without the SO’s support, the program or project would be discontinued or never commenced; and
        • the amount granted to the “attentive” charity should constitute at least 1% of that charity’s overall budget for that year (again, an easier threshold to meet than the 10% standard noted above for unrestricted grants).

Control Test

In addition to these differing requirements for the various types of SOs, every SO, no matter what its Type, must meet the “control” test under Code Section 509(a)(3(C), under which no SO is permitted to be controlled, directly or indirectly, by one or more disqualified persons as defined in Code Section 4946, other than foundation managers or, of course, the supported charities.

Publicity and Reform Proposals

That is how things stood before August 17, 2006. Despite the rather rigorous (and certainly complicated) tests and subtests by which the IRS determined whether an organization qualified as an SO, objections that SOs were a form of tax “giveaway” to rich people suddenly surfaced in a front page “expose” article in the Wall Street Journal in 1998. No association of SOs had yet been formed, and so there was no coordinated response on the part of SOs, despite the fact that there were well over 30,000 in existence at that time. Legislation aimed at the outright elimination of SOs was seriously considered briefly. A more recent wave of concern has now coalesced into the new SO provisions in the Act.

Balance Struck by Act

Are the new SO provisions, then, a “reform in search of an abuse,” as has been suggested by some observers? No doubt there were abuses in the SO realm, as there have been in charitable remainder trusts, donor advised funds, and other tax-planning tools; particularly the SO’s historic freedom from the private foundation excise tax provisions seems to have encouraged a few more aggressive planners and their clients to reach somewhat dubious positions, and hence the new legislation is welcome, to the author at least, as a means, potentially, of restoring and revitalizing the SO as an attractive planning tool and of freeing up large amounts of support for charities, support which would likely not have been donated were the SO format less attractive for donors. Does the Act go a bit too far in reforming SOs, or does it strike a sound balance between reform and recognition of the value and importance of SOs to charities and to the national community as a whole? With this question in mind, we’ll turn to an examination of the Act’s SO provisions in detail.

New: Treasury Study

The first shot fired across the bow of SOs in the Act provisions is its Section 1226, which directs the Treasury Department to conduct a study of the organization and operation of SOs (and of donor advised funds), to be submitted to Congress by August 17, 2007,5 and which is specifically to consider whether the income, gift and estate tax charitable deductions should continue to be available for contributions to SOs in light of the use of the contributed assets, including the type, extent, and timing of such use, or the use of the SO’s assets to benefit the contributor or a related party.6 Will this Act provision cause a “chilling effect” on new contributions to SOs? There is no reason to believe that Treasury will recommend a retroactive elimination of the various charitable deductions for contributions to SOs to, say, August 17, 2006, but that seems a remote possibility. Certainly an SO’s planning for future anticipated contributions, as well as its budgeting process and the continued viability of its current support programs, may be placed under something of a cloud by this provision. The considerations cited in the provision – the use of the contributed assets, and the use of SO assets to benefit the donor – suggest that the recommendation may not move far beyond these issues. However, probably the most conservative course for the practitioner is to consider cautioning potential donors that, until the Treasury study is complete and Congress acts on it or declines to do so, their contributions to SOs conceivably may not be deductible. If this is how this opening provision is to be interpreted, it may not bode particularly well for the ongoing viability of any SOs, as this Act provision does not distinguish among Type I, II, and III SOs.

New: Statutory Recognition of Types I, II, and III SOs

Section 1241(a) gives statutory recognition to the three Types of SOs by amending Code Section 509(a)(3) to incorporate the Type I, II, and III definitions from the Treasury Regulations. This amendment does not change the law, but was necessary to permit Congress to distinguish among the three Types of SOs in the subsequent provisions of the Act. This change is effectively immediately, under Section 1241((e)(1) of the Act.

New: Type III SOs – “Responsiveness” Test and Grants to Foreign Charities

Section 1241(b) of the Act adds a new subsection (f) to Code Section 509. Under new Code Section 509(f)(1)(A), a Type III SO is required to provide to each of the supported charities such information as Treasury may require, to ensure the SO is responsive to the needs or demands of the supported organization. This provision is effective for taxable years of an SO beginning after August 17, 2006 (i.e., beginning in 2007 for calendar-year SOs). The lag time in effective date is necessary to permit the IRS to formulate the information requirements.

New Code Section 509(f)(1)(B)(i) provides that a Type III SO is not “operated in connection with” any supported organization not organized in the U.S. This effectively bars Type III SOs from supporting foreign charities, even if they also support domestic charities. Under the transition rule of new Code Section 509(f)(1)(B)(ii), Type III SOs which support foreign charities as of August 17, 2006 will not be subject to the prohibition against supporting non-domestic charities until the first day of the third taxable year of the SO beginning after the date of enactment. Presumably, Type III SOs will either be permitted to ask any foreign charities to resign as supported organizations, or to remove foreign organizations from the list of supported charities. Perhaps these and other alternatives can be clarified an announcement or ruling by the Service. In any event, no new Type III SO should name a foreign charity, as the prohibition is immediately effective for Type III SOs created August 17, 2006 or later.

New: Contributions from Donors in Control of Supported Charity

Section 1241(b) of the Act also adds new Code Section 509(f)(2), which applies to Type I SOs as well as Type III SOs. Under this provision, a Type I or III SO does not qualify as an SO if it accepts any gift or contribution from any person who controls a supported charity. Under new Code Section 509(f)(2)(B)(i), the prohibited contributor is defined as a person (other than a public charity qualifying under Code Section 509(a)(1) or (2) or a testing for public safety organization qualifying under Code Section 509(a)(4)) who directly or indirectly controls, either alone or with other specified persons, the governing body of the SO’s supported charity. These “other specified persons” are set forth in new Code Section 509(f)(2)(B)(ii) and (iii) as a member of such person’s family, determined under Code Section 4958(f)(4), and a 35% controlled entity as defined in Code Section 4958(f)(3) by substituting ‘persons described in clause (i) or (ii) of section 509(f)(2)(B)’ for ‘persons described in subparagraph (A) or (B) of paragraph (1)’ in Code Section 4958(f)(3)(A)(i). This somewhat awkward drafting means that Type I and Type III SOs must be extremely vigilant about not accepting contributions from a person in direct or indirect control of a supported organization. As it is not often easy, even for the Service, to determine who may be in “indirect control” of a supported organization, the most conservative course is probably for the Type I or III SO to adopt a bar against acceptance of any contributions or gifts from anyone in a control or shared control position at any of the SO’s supported charities. Considering that accepting such a gift will apparently result in the instantaneous disqualification of the Type I or Type III SO, the stakes are sufficiently high as to support such a thoroughgoing bar. A less safe alternative would be for the SO to ask the would-be contributor affiliated with the supported charity to submit an opinion of counsel attesting to the fact that the contributor does not fall within the definition of new Code Section 509(f)(2) – a determination not always easy or reliably to be made. New Code Section 509(f)(3) defines “supported organization” to include not only the charity for whose benefit the SO is organized and operated, but also a charity with respect to which the SO performs the functions or carries out the purposes of such organization.

These changes are effective immediately, under Section 1241(e)(1) of the Act.

New: Charitable Trust SOs

Under Section 1241(c) of the Act, an entity organized as a trust does not qualify as a Type III SO solely because it is a charitable trust under state law and the supported charity has the power to enforce the trust and compel an accounting. Careful readers will recognize in this provision an allusion to the second alternative prong of the “responsiveness” test as set forth in the Treasury Regulations and discussed above. The main thrust of this provision appears to be to preclude a Type III SO organized as a trust to meet the “responsiveness” test via this prong; in this, the provision reflects Section 1241(b) of the Act noted earlier. However, the new provision does not seem to address situations in which the SO is organized as a nonprofit corporation under state law, but is also treated as a “charitable trust” under state law for purposes of oversight of charitable trusts by the State Attorney General’s Office. Presumably, technical corrections legislation will address this lacuna and apply Section 1241(c) of the Act to such nonprofit corporations as well as to trusts. Note, too, that even before this new provision, an organization could not qualify as a Type III SO “solely” because it was a charitable trust under state law and the supported charities had the power to enforce the trust and compel an accounting – it had to meet a good number of other tests, as well – so this provision may well need some revision.

The effective dates for these changes are as follows, under Section 1241(e)(2) of the Act: (1) in the case of Type III SOs which are trusts on August 17, 2006, the effective date is August 17, 2007; (2) in the case of “any other trust,” the effective date is August 17, 2006. This rule is apparently intended to provide existing Type III trust SOs with a year to comply. How does such an SO comply? In the absence of any clear guidance in the Act, presumably it does so by satisfying the other alternative prong of the “responsiveness” test as set forth in the Treasury Regulations. This prong is satisfied if:

  • one or more of the officers, directors, or trustees of the SO are elected or appointed by the officers, directors, trustees, or membership of the supported charities (a sort of variant on Type I board constitution); or
  • one or more members of the governing bodies of the supported charities are also officers, directors, or trustees of, or hold other important offices in, the SO (a variant on Type II board constitution); or
  • the SO’s officers, directors or trustees maintain a close continuous working relationship with the officers, directors, or trustees of the supported charities;

and, in addition to one of these three conditions, it should be true that, by reason of this connection, the supported charities have a significant voice in the investment policies of the SO, the timing of grants and the manner of making them, and the selection of grant recipients, as well as otherwise directing the use of the SO’s income or assets.7

New: Payout Requirements

Section 1241(d) of the Act directs Treasury to promulgate new regulations on payments required by Type III SOs which are grantmaking SOs rather than SOs which carry on their own activities on behalf of the supported charities (these latter are now termed “functionally integrated type III supporting organizations” in the Act). These regulations are to require grantmaking Type III SOs to make distributions of a percentage of either income or assets to the supported charities, to ensure that a “significant amount” is paid to them. As noted above, under pre-Act rules, grantmaking Type III SOs were in fact required to distribute at least 85% of their net income to the supported charities, and so there already is a required distribution “of a percentage of either income or assets,” to use the language of the Act provision. Does this new provision, then, suggest that 85% of net income is not a sufficient payout? Private foundations are generally required to distribute at least 5% of the value of their investment assets, with credit given for various administrative expenses; will this rule be applied to grantmaking Type III SOs? If so, will credit be given SOs for administrative expenses against this requirement? Note that it may well be that imposing a 5% of investment value distribution requirement to Type III SOs could in fact lessen, rather than add to, the SO’s distribution requirements – under pre-Act law, a Type III SO is required not merely to distribute 85% of its net income, but a sufficient amount to ensure the “attentiveness” of a supported charity. Many Type III SOs are no doubt distributing considerably more than 5% of the value of their investment assets under these pre-Act standards.

Note, too, that the distinction between grantmaking Type III SOs and what is now termed “functionally integrated” Type III SOs is not as clear cut as the Act suggests, or at least has not been historically. Many Type III SOs are permitted in their governing instruments to vary the nature of their support to the supported charities, in some years making grants when that best serves the supported charity’s needs, and in other years carrying on activities directly if that best serves those needs. Presumably whatever distribution rules ultimately emerge will recognize this ambidextrous nature of many Type III SOs and apply the payout requirements only in such years as the SO is in fact acting as a grantmaking SO. In the alternative, it may be that the new regulations will require a Type III SO to decide, once and for all, whether it will always be a grantmaking SO, or whether it will always be a “functionally integrated” SO – to the likely disadvantage of the supported charities, who may prefer the earlier flexibility.

New: Excess Benefit Transactions

A key reform provision, Section 1242 of the Act, provides for the special application to SOs of the excise tax on excess benefit transactions under Code Section 4958. Section 1242(a) of the Act amends Code Section 4958(f)(1) to reference all three Types of SOs (apparently), effective immediately. Section 1242(b) of the Act amends Code Section 4958(c) by inserting a new paragraph (3), under which the term “excess benefit transaction” includes, in the case of “any” SO (i.e., Type I, II or III), any grant, loan, compensation or other similar payment provided by the SO to a specified person, as well as any loan provided by the SO to a disqualified person (other than a public charity or testing for public safety organization under Code Sections 509(a)(1), (2), or (4)). The term “excess benefit” includes with respect any such transaction, the amount involved in the grant, loan, compensation, or other similar payment. The specified person category (termed the “person described” in the legislation) consists of: (1) a substantial contributor to the SO (which in turn is defined as a donor of more than $5,000 to the SO if that amount is more than 2% of the total contributions and bequests received by the SO in the taxable year of the contribution – and in the case of an SO organized as a trust, this category also includes the trustor or grantor); (2) a member of such person’s family (as determined under Code Section 4958(f)(4); or (3) a 35% controlled entity (as defined in Code Section 4958(f)(3), with appropriate changes noted in the Act provision). Excluded from the category of “person described,” once again, are Code Section 509(a)(1) or (2) public charities and Code Section 509(a)(4) testing for public safety organizations.

These “excess benefit transaction” provisions of Section 1242(b) of the Act are given retroactive effect, to July 25, 2006, under Section 1242(c)(2) of the Act, catching transactions which have occurred in the interim.8

In light of these provisions, all SOs – Types I, II and III – should scrupulously avoid making any grants or loans to substantial contributors (including trustors or grantors) or related parties, or even providing compensation or similar payments (including “disguised” forms of compensation, presumably).

New: Excess Business Holdings

Another key reform provision, Section 1243(a) of the Act, amends Code Section 4943 by adding new subsection (f), which applies the excise tax on excess business holdings to certain SOs, with the proviso that Treasury may exempt the excess business holdings of an SO if it determines that the holdings are “consistent with” the SO’s exempt purpose. These amendments apply to grantmaking Type III SOs, and not to “functionally integrated” Type III SOs, under new Code Section 4943(f)(3)(A). The amendments also apply to Type II SOs, but only if they accept any gift or contribution from any person described in new Code Section 509(f)(2)(B), one in direct or indirect control of a supported charity, as discussed above. Apparently it was not felt necessary to include Type I SOs in the extension of the excess business holdings rules. For purposes of the new SO applications of these rules, a “disqualified person” means: (1) any person who was, at any time during the previous 5 years, “in a position to exercise substantial influence over the affairs” of the SO; (2) any member of such person’s family, as defined in Code Section 4958(f)(4); (3) any 35% controlled entity, as defined in Code Section 4958(f)(3) with appropriate changes set forth in the legislation; (4) any person described in new Code Section 4958(c)(3)(B); and (5) any organization which is effectively controlled, directly or indirectly, by the same persons who control the SO, or substantially all the contributions to which were made, directly or indirectly, by the same persons or a member of the family of such a person. In turn, as to (4) above, a person is described in new Code Section 4943(f)(4)(B) if such person is: (i) a substantial contributor; (ii) an officer, director, or trustee (or an inliidual with similar powers or responsibilities); or (iii) an owner of more than 20% of a business which is a substantial contributor. These changes are effective in the taxable years of affected SOs beginning after August 17, 2006.

A special rule, one of limited application, is provided in new Code Section 4943(f)(6), under which an exception is made for the excess business holdings of a Type III SO if, as of November 18, 2005, the holdings were held (and at all times thereafter are held) for the benefit of the community pursuant to the direction of a State Attorney General or similar functionary.

New Code Section 4943(f)(7) provides transition and liestiture rules for existing holdings of SOs which are subject to the excise tax on excess business holdings under these provisions; these rules are similar to the Code Section 4943(c)(4), (5) and (6) provisions, except that their date references are to be updated accordingly.

Grantmaking Type III SOs, and any Type II SOs which are subject to the excess business holdings provisions, may wish to ensure that they are within the safe harbor of Code Section 4943(c)(2)(c), under which an organization may safely hold no more than 2% of the voting stock and not more than 2% in value of all outstanding classes of stock.9 These new rules will be particularly troublesome for Type III SOs holding significant interests in a founder’s business, which are well advised to plan ahead for a liestiture down to the 2% safe harbor or otherwise within permissible, nontaxable limits.

New: Grants to SOs from Private Foundations

Section 1244 of the Act amends Code Section 4942(g), relating to the excise tax on failure to distribute income applicable to private foundations, by placing new limits on grants to SOs from private (nonoperating) foundations (“PFs”). Under new Code Section 4942(g)(4)(A), PFs are no longer given “credit” towards their required qualifying distributions for grants they make to grantmaking Type III SOs (but not to “functionally integrated” Type III SOs). This restriction is extended in new Code Section 4942(g)(4)(A)(ii) to Type I and Type II SOs if: (1) a disqualified person of the PF directly or indirectly controls the SO or a supported charity of the SO; or (ii) Treasury determines by regulations that a distribution to another type of SO is “inappropriate.”

This amendment, which applies to distributions and expenditures made by PFs after August 17, 2006, will doubtless shrink, or cut off altogether, the grants Type III SOs, and some Type I and II SOs, receive from PFs. For SOs which depend heavily on contributions from PFs, this will be burdensome, as it will be for their supported charities, and other, unaffected sources of funding will need to be identified if such SOs are to continue in operation.

A related provision, Section 1244(b) of the Act, amends Code Section 4945(d)(4)(A), to bring into the province of taxable expenditures grants made by PFs to grantmaking Type III SOs as well as to those Type I and Type II SOs covered by new Code Section 4942(g)(4)(A)(ii), discussed two paragraphs above. This change means that PFs will not only lose credit for such grants to these SOs, but must also exercise “expenditure responsibility” for such grants, an added hassle and expense which will further disincline PFs to make these grants.

New: SO Returns

Finally, Section 1245 provides amendments to Code Section 6033 requiring all SOs filing annual returns (Form 990) to: (1) list the supported charities; (2) indicate which Type the SO falls within, Type I, II, or III; and (3) “certify” that the SO meets the “control” test of Code Section 509(a)(3)(C). This provision is effective as to returns filed for taxable years ending after August 17, 2006 (which provides time for the Service to draft new Forms 990).

This is certainly a sensible requirement, and a sound addition to the rules governing SOs. It remains to be seen what sort of “certification” is required as to compliance with the “control” test, as this test applies both to direct and indirect control. Will an attorney’s opinion or CPA’s memorandum attached to the Form 990 be required? These and other details may well be addressed in the Instructions to the revised annual return form.

Conclusion

Any legislation which inhibits an SO from receiving funds or fulfilling its support mission does not affect merely the SO and its management, of course – it has a corresponding impact on the public charities which depend on the support of SOs, and all of those who in turn rely on the support of these public charities. There is little doubt that some of the new provisions will have a limiting effect on SOs and those who enjoy their support. This seems particularly true of the new uncertainty as to the future deductibility of contributions to SOs, and the limitations on grants SOs can receive from PFs. Many of the other new provisions seem to hold promise of fulfilling their reform ends, particularly the new rules on excess business holdings and excess benefit transactions. Perhaps the most important aspect of the new legislation is what it does not do – it does not eliminate SOs, and far from it. SOs still enjoy relative freedom from the PF excise tax rules, and contributors to SOs will continue to be able to deduct their contributions at the highest, public charity, thresholds. While important details will certainly need to be worked out in regulations and technical corrections legislation, the Act may well mark a new era for SOs and for the untold millions they help to support.

Footnotes

  • 1For a more complete summary of the law relating to SOs, see Treacy, 871-2nd T.M., Supporting Organizations.
  • 2G. Treacy, “Supporting Organizations: A Good Alternative to Private Foundations,” 24 Estate Planning No. 1, 17 (Jan.)
  • 3See, e.g., Act Section 1241(b).
  • 4Treas. Reg. §1.509(a)-4(i)(2)(iii).
  • 5Act, Section 1226(b).
  • 6Act, Section 1226(a)(1).
  • 7Treas. Reg. §1.509(a)-4(i)(2)(ii).
  • 8There is an apparent typographical error in Section 1242(c)(2) of the Act as reported, the heading of which (properly) references Section 1242(b), but the text of which references Section 1242(a).
  • 9See also Code Sections 4943(c)(3) (for interests in unincorporated business entities).

IRS Circular 230 Disclosure: To the extent this message contains tax advice, the U.S. Treasury Department requires me to inform you that any such advice, whether in the body of the message or in any attachment, is not intended or written by my firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Advice from my firm relating to tax matters may not be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer.

Publications and Articles by Topic

Business Succession Planning
Savvy Business Owners Look For Creative Plans
Charitable Planning
The Very Versatile Disclaimer: A Guide to Its Use in Charitable Planning
Charitable Trusts
De-UBIT-izing CRTs: Recent Rulings
Community Property
BNA Tax Management Portfolio – Community Property
Planning for Community Property:
A Primer for the Other 40½ States
Planning to Preserve the Advantages of Community Property
Corporate Charitable Giving
Alternative Corporate Giving Formats
Another Way to Reach the Family Business Owner
Donor Advised Funds
Cold Snap for Donor Advised Funds: The New DAF Rules
Estate Planning
Savvy Business Owners Look For Creative Plans
Guardianships
Washington Guardianship Law: Administration and Litigation, Third Edition
Patents
Surviving and Thriving In the Tax Patent Era
Private Foundations
Rulings Go Beyond ‘Plain Vanilla’ Foundations
A Taxonomy of Tax-Exempt Organizations
Probate
Probate Primer for PGOs
Public Charities
Becoming “SO-Friendly”: The Advantages of Courting Supporting Organization Relationships
A Taxonomy of Tax-Exempt Organizations
Part of the Truth About Attorneys
Accelerate Your Charity’s CRT Interest
What’s Wrong With This Gift?
The Perilous Quest for Bequests
Three Hazards for PGOs
Probate Primer for PGOs
Supporting Organizations
Hangover for Type III SOs – Treasury Issues Final Regulations for Supporting Organizations
New Regulations for Type III SOs
BNA Tax Management Portfolio – Supporting Organizations
Not SO Bad – Proposed Regulations for Type III Supporting Organizations
New ‘Guide Sheets’ on Supporting Organizations
Aftershocks: Update on Supporting Organizations
Supporting Organizations After the Pension Protection Act
So What’s Left of SOs? – The Pension Protection Act of 2006 and Its Impact on Supporting Organizations
A Wake-Up Call for “Type III” Supporting Organizations
SO Much Better?: Supporting organizations may offer the perfect balance of tax benefits and donor control for some planned giving prospects

Sign up for our newsletter!